Paul Farrelly in London and John Aglionby in Jakarta
THE gold rush is over. The prospectors, tarnished by the Indonesian Bre-X gold hoax, have lost their sparkle.
Small mining firms panning in Indonesia and Africa have seen their shares slump as wary investors query the value of their prospects and plan an exodus from the Canadian stock exchanges to London.
After the false hopes of Bre-X, shareholders are determined not to be stung again. “There has been a correction across the the mining industry, in terms of the prices that people are prepared to pay for this kind of company,” said a mining analyst at Canadian broker, Yorkton.
In recent weeks, several exploration firms have pulled back from flotations and mergers and acquisitions. Since late March, when Freeport first hinted that “insignificant” amounts of gold existed in Bre-X’s Borneo deposit (the company claimed reserves of 16-billion), two junior mining firms, Yamana Resources and Caledonia Mining, have scrapped a planned takeover and dropped a financing, respectively.
The inability of small exploration firms to raise finance – vital for buying equipment and funding drilling – exposes them as cheap takeover targets. Established outfits, such as RTZ and Barrick, are said to be dusting off portfolios of promising juniors.
“There’s a lot of fallout from Bre-X in Vancouver. People are nervous. The good, but underfunded juniors will be looking to the majors for mergers,” said Don Nicholson, MD of Kensington Resources, a Vancouver-based diamond exploration firm. “If anyone was hesitant about a mining stock, this tipped them over. It’s an excuse to say no.”
The scale of the fraud and the fact that it was not exposed until some eight years after the company came to market, has sent jitters through the big fund managers. Many bought billions of shares in Bre-X, judging that the gold mine would make their clients rich.
They ended up losing millions of dollars as the share price slid from a high of Canadian $28 in May 1996 to only six cents last week.
Another casualty of the Bre-X scam are the analysts and brokers who plugged the stock and need to restore confidence to retain clients. The bankers argue that they were relying on company data.
“Analysts tend to take what’s given by a company as the truth,” said one. “It wasn’t easy to see this coming. But these guys have lost a lot of money for a lot of people. And once bitten, twice shy.”
Already mining companies are tightening procedures to win back market confidence. Several junior firms are trying to gain a listing on the London Stock Exchange, notorious for its strict standards.
London – the focus of past resentment for making miners jump through regulatory hoops – may be one of the few beneficiaries of the saga.
Many mining firms who flocked to Canada to raise cash now wish to return to the safer and stuffier regulatory framework of the old country.