THE NOT-SO-RED FLAGS AT BUSANG

In the Spring of 1997, exposure of the salting fraud at the Busang deposit in Kalimantan Province on Borneo prompted major changes in the mining investing and exploration communities whose effects are still felt. When the fraud was exposed, about C$5 million in market capital was lost and investment in junior mining companies was severely curtailed for several years.

Strathcona Mineral Services Ltd., led by Graham Farquharson, exposed the fraud. Farquharson subsequently discussed this work in Reflections on the Bre-X Saga, which was videotaped and offered for sale by the SEG in 2001. In his talk, Farquharson describes over 20 red flags of fraud. Although Farquharson correctly concluded that a salting fraud had occurred, many of the red flags were pink at best and some were not red flags at all. For example, red flag #1 was the absence of a surface geochemical anomaly and red flag #2 was that the surface gold had been leached; doesn't #2 lead to #1? Gold-rich rims of gold grains were observed in metallurgical samples (red flag #16), an increasingly recognized result of gold leaching in the surficial environment. The rounded character of gold grains allegedly demonstrated its alluvial origin, but the core had been crushed prior to sample collection and any mill operator will tell you that crushing and grinding rapidly alters the shape of native gold grains. Perhaps the best-known red flag was the assertion that assaying of the whole core, leaving only 10 cm “skeletons,” prevented discovery of the fraud. In fact, when assays from 135 “skeleton” cores when paired statistically with the primary core assays, the probability of the paired samples coming from the same distribution was 10^-40.

This paper reviews many of the red flags, their weaknesses and mutual contradictions, and expresses skepticism about the ability of subsequent regulatory changes in the reporting of estimated mineral resources and reserves to prevent future mining frauds. First one must suspect that fraud has occurred, a generally uncommon viewpoint. Then one must prove that one's suspicions are true, which may be very difficult. New international regulations on the reporting of estimated mineral resources and reserves, like Canadian National Instrument 43-101, may not be as effective in preventing fraud as hoped.