In the mid 1990’s the hottest stock on the stock market was a gold company called Bre-X, its share price had risen from 28 cents or $280 for a thousand to $ 180 or $180,000 in less than 2 years. The premise was the company was sitting on the biggest gold mine in the world and the world was believing the story. Even if the mine was not the world’s largest it would be a working gold mine and the major mining companies were trying to get a piece of the action. It turned out the story was built on lies and salting of gold flakes, there might be gold but not enough to mine it. The stock collapse in price and the question was why did the price rise so much, if there was nothing there? Some of the questions are answered in the book Bre-X – The Inside Story by Diane Francis published by Key Porter Books, Toronto, 1997.

Part of the reason for the increase in price was some other very large proven mineral zones around the world had been found, places were people had looked but new and different ideas had found the minerals. Many of us have a belief that technology will benefit us in ways we have never used before and this is the same in the mining industry. We really do not know what is in the ground until drilling and looking at the ground which comes out. Every year, the major mining companies have a better idea of what is there and is not there, but they can not possibly drill everywhere. The chief prospector was suggesting the last company drilled in the wrong area, had they understood the geology of the area, they would have seen the gold was located in the southern section of the land.

Part of the reason was the internet, the internet played a bigger role in marketing the property or telling all the good things which was happening and often times the remarks accented the positive or stretched what was really happening. Now days we expect as much information to flow from the internet as possible, so those with a background in the field will be able to make their own conclusions and often either agree or disagree with what the company says or they are cynical enough to say what does that really mean?

Part of the reason for the success of the company, as the shares were rising in price people who had a long history in the mining industry were joining the company in senior roles which added to the attraction of the company. In many large organizations there are people on the Board who have seemingly direct access to decision makers in an industry or country where the assets of the company are. In the same vein, Bre-X was attracting senior people to its board who should have known. In addition, the industry group was giving the founders its highest awards. Similar to the sales conventions awards for making the company a lot of money, the industry was giving their awards and adding legitimacy.

We all depend on third parties to do their work and report. Part of the argument was there was an existing gold mine about 100 miles away and the geology is similar, there is no reason it might not be the same thing. With the price of the shares rising the larger companies wanted a piece of the action, including those that could help finance the building of the mine. The involvement of more senior firms in the industry leads to greater belief in the size of the underlying asset – it is a large deposit. As the senior firms emerge as players so do funds that try to stay away from small potential growth stocks and when they turn on the tap, money can flow into the stock price.

Linking to dividend paying stocks, there is a world trying to raise money for the next great thing, usually it does not happen which is why the risks are very high for 90% of the time money is lost or not made. It is the other 10% (although no one really knows what the 10% is) where the big money is made. For dividend buyers, we tend to stay away but if the company becomes a $25 stock rather than a 90 cent stock, it is worth investigating. At the point, it should had greater scrutiny from a wide variety of players and they bear watching. Bre-X paid no dividends but the size of the company put it on the stock indexes and that is where seemingly less risker investors would own some shares indirectly through the indexes. At the time of being included in the index, investors would believe more in the story and the price rose. It seemed the system failed and when it did all were affected.

There are more questions than answers, till the next time – to raising questions.