A Review: The Bre-X Scandal

The Peak
It was touted by media and banks as the “richest gold deposit ever”
In December 1996, Lehman Brothers Inc. strongly recommended a buy on “the gold discovery of the century.”

Bre-X’s salted samples were never checked by a third party, people wanted to believe so they never questioned the rising price of the stock. Do not ignore the warning signs.

Patience is paying off in http://csinvesting.org/2017/05/12/a-tontine/

27 responses to “A Review: The Bre-X Scandal

  1. Watch the movie “GOLD” available in netflix that is based on this company…

  2. Hi John,
    I thought the movie was enjoyable but is true that it would have been better had they focused more on the details.
    Talking about gold, it looks like your gold predictions are coming true. It has inspired me to invest in it.
    I saw a write up on vic of Brio Gold but I didn’t think the valuation was very deep so I decided to try this: http://csinvesting.org/2017/01/31/mini-course-on-analyzing-goldsilver-stocks-gsa/
    I estimated the values for ABX and AUY as follows:
    Market cap/oz production ABX: 3786. AUY: 3266
    Market cap/p+p reserves ABX: 243. AUY: 204
    Market cap / CFO ABX: 7.6 AUY: 5.2
    Compare the values above to BRIO Gold. Production for the last 6 months were 94700. Say 190000 for a year gives a market cap (US$164 m)/oz production of 863. They are starting production at a new mine next year and estimated output is between 377 and 397k oz for 2019. Assume they hit at least 350k that gives a m.c/production of 469.
    Market cap / p+p reserves (2,971k oz) gives Brio a number of only 55.
    Cash flow for the last 6 months of 2017 before changes in working capital were $19.7 m and for $34.9 m for 2016. To be conservative, using the 2017 to get $40 m for the year you have a multiple of only 4. That is without considering the boost of the new mine opening Q2 2018.
    AISC oz for brio going forward: Pilar – $940-960; Fazenda Brasileiro – $910-930;
    RDM – $920-940; Santa Luz – $808.
    LT debt is $47.7 m and decommissioning, restoration and similar liabilities $38.6 m.
    Yamana AISC for the last 6 months was $869. It is lower but does it warrant such a premium over Brio? Of course, if gold prices are increasing a lot, betting on a high cost producer is better. AUY also have considerably higher debt ($1,578 m net debt).
    I’d love to hear your thoughts!

    • I don’t think of gold as an investment but as a store of wealth that can’t be debased. Be careful on this rally–could be in for some volatility/consolidation/pullback.

      That said, the miners are better value. AUY is more leveraged to gold if gold goes over $1,400.
      Never invest in one miner. There are developers, royalty companies, and exploration/prospect generators. I would avoid the big miners like ABX, GG, etc. since they will have a tough time replacing reserves–another big reason to invest in quality developers.
      I tend to focus on the developers like Sandstorm, Sabina Gold, NGD, VNNHF, etc.
      Mining is VERY risky, so focus on management and jurisdiction.

      You could look at SGDM or SGDJ and see why they choose those companies.
      Read the letters of Gabelli Gold Fund.
      Ditto Tocqueville. See Van Eck. Look up Adrian Day.
      Don Durett on seeking alpha and youtube.com

      Read on Sprott.com about Rick Rule. See recent interviews on youtube.
      In other words, get to know this industry and the players.

      A great resource is http://www.ceo.ca to see discussion on names. You see who is knowledgeable.

      See discussion on $SSL (Sandstorm).

      Look up Myrmikancapital.com download recent letters.

      go to seeking alpha and note analysis on several companies.

      Just be very careful and know your risk tolerance. My portfolio has risen and fallen 15% in one day!

      I construct a portfolio of royalty, developers and growth golds in gold and silver. About 18 stocks.

      I don’t like the mining business but I see no other choice given the values, non-values elsewhere, and massive growing debt.


  3. Thank you very much for getting back to me so quickly and with so many resources!

    • I think it’s smart to view gold as a place to store wealth. If you think of it along supply and demand things start to make more sense. Gold becomes valuable because of its limited supply, it’s similar to the reason you see bitcoin on its exponential rise. There are limited supplies of both bitcoin and gold. The dangers with bitcoin are numerous with one big problem being threat of substitutes not to mention potential government interference. China just made initial coin offering problematic and it won’t be long before countries around the world squash the threat to their respective fiat currencies. Think of all the fiat money being created out of thin air, in a coordinated effort, by the world’s central banks. Interest rates can be viewed as the cost of money, and what negative interest rates are indicating is that fiat money isn’t worth much these days. Removing the gold standard has the beginning of the end. It really feels like capitalism is being brought to knees. It’s interesting that Canada decided to bump up rates today, perhaps the spigot is slowly being turned off. I guess the biggest question is can the never ending flow be shut off slowly enough to not cause problems? It’s hard to make an investment in something where supply can be created so easily.

      • That’s interesting. Seems like they created a mess when they removed the gold standard. Would like to understand more about those dynamics but not sure where to start.
        I understand that it is a way to store wealth but if you put money in a miner, doesn’t the purpose change?
        I’ve many times seen Buffett state that if he had invested in gold x years ago that would only be worth this and that in comparison to his company. I don’t think that’s a good comparison because he has been picking stocks and the gold approach is completely passive. More interesting would be to see how one would have performed had he followed a sensible investment strategy.

      • http://www.acting-man.com/?p=10251 Go read that article. Analyzing gold takes a bit more understanding. not consumed. I don’t believe a gold standard would help. Getting read of legal tender laws and defining the dollar or whatever as a fixed weight of gold or silver or whatever would allow the market to develop sound money. If money measures wealth then get it out of the hands of the government monopolies.

      • Roy, I can’t find your comment on interest being the cost of money. Disagree. Interest measures time preference (risk being part of time preference). Download the PDF Man, Economy, and State by Rothbard. Read pages 361 to 450. Now, what do you think? Your comment that interest is the cost of money is what 99.999999999999% of the population understands.


        • The term cost is an over simplification. There are many factors that go into the determination of interest rates. Risk, utility (which can vary greatly), inflation (unless we are talking about the real rate), supply and demand (time preference, do I consume today or at a later date). Supply and demand are manifestations of time preferences, but what happens when supply is exponentially increased. If there is an excess supply of anything, the price of that thing will drop. Demand is met at lower and lower prices. With an excess supply of money competing for returns, ultimately those returns are lowered as asset prices are bid increasingly higher. The point I’m trying to convey is that central banks around the world have greatly interfered with the markets. I don’t view today’s markets as free markets. Pulling forward demand today only hurts future demand. Borrowing and printing without limits will ultimately have a cost. And that’s what makes Gold a worthwhile investment as a place to store wealth. The attitude that we can continue to kick the can further and further down the road is absurd. I don’t believe real wealth is being created with the level central bank intervention that occurs. Holding rates artificially lower is only promoting poor allocation and in the end, prolonging the pain. Look at the Bank of Japan and how much of their countries treasuries are being held on it’s balance sheet. The BOJ own’s nearly 50% of the Japanese treasury market, a market that Norway’s wealth fund is considering divesting. Market prices are being grossly manipulated with central bank purchases, and price discovery is distorted. At what point due the central bankers get out of the markets? They’ve turned the equity markets into a giant leveraged buyout. Central bankers purchasing equities is akin to nationalization. Abandoning the gold standard allowed the government to spend freely without worrying about financial repercussions. Now they are proposing to eliminate the debt ceiling altogether. What next? Helicopter money! Inflation is supposed to be the check that balances this over supply, but surprisingly inflation doesn’t exist? If the central bankers and the government continue down this path, then Gold makes a lot of sense to me.

  4. No arguments from me. The marginal return on debt is declining rapidly. Dollars are backed by debt and ditto for other currencies, thus go where supply is constrained–precious metals.

    Miners, in general, are pretty good value, but you better sell when the boom rips because overall the industry destroys capital except for RGLD, FNV, GOLD, and a few others. Boy, do I miss franchise companies like Colgate, Moody’s, Paychex etc.

    I wonder if the US can have as much debt/GDP as Japan without the dollar getting crushed. I have been focused almost exclusively on the miners since the end of 2013. a L O N G Cycle asset.

    • You’re correct, mining is a capital intensive business. That’s where a good management team can make a difference. I’ve been reading some of Marathon’s theories on capital cycles. It would be interesting to see what capital investments have been made by the mining sector over the past 10-15 years. I wonder how tightly it correlates to the price of gold? I imagine it’s probably up there fairly high. Are you working with a gold price range and using that to project out? What are current returns on invested capital looking like for the industry? What do you think is an appropriate discount rate for the sector? How has the price appreciation in gold relative to inflation? I would be interested in hearing your thoughts. It’s definitely difficult finding value anywhere these days. Seems like risk is being priced too low, for my comfort anyway. I’ll have to dig into the miners and see if I can answer some of my questions. They hit the dollar pretty hard at the thought of removing the debt ceiling. It’s interesting to me that it would be a cause of concern at this point. I always viewed the ceiling as a foregone conclusion that it would be raised with little regard. How high will rates be permitted to go with debt levels as high as they are now? The debt servicing becomes problematic fairly quickly. Thanks for back and forth. Always enjoy hearing other viewpoints.

      • I went back and watched the GSA video again. Using those metrics presented is a good start and helps to narrow the field. It’s important to compare to the sector as whole. With commodity based companies the biggest key is to determine the low cost providers/producers. With gold it’s difficult to compete using differentiation.

        • I guess like anything else it comes down to risk tolerance. You can make a case for higher cost producers in certain markets. Insuring a margin of safety is key for any investment. My initial thoughts, after some brief research, is that mining is a tough business. Doesn’t mean it’s not worthwhile to research. The political environment definitely adds an interesting element. I like gold as store of wealth, but investing in miners does seem to increase risk significantly.

          • I have been studying the miners since late 2013/early 2014. If you use the search box on this blog you can type in Gold or gold miners or miners and read the posts. I think I posted the link or report: Why gold mining is a bad business. It took about two years to become comfortable with owning SOME miners. The only “small moats” are around the big royalty companies like RGLD or FNV due to core royalty assets, reputation, and expertise. Randgold (GOLD) has a great capital allocator. The royalty model is lower risk and diversified. Owning high cost miners would be the best strategy if gold goes over $1,600 (only 20% from today’s prices) if costs didn’t rise commensurately. But one is now in the realm of full speculation.

            What is clear is that depletion is far out-running discovery so high quality deposits will become very valuable over the next decade.

            I looked briefly at Brio because ALWAYS look at rights offerings since the RIGHTS can be sold off indiscriminately creating underpricing. That said, I couldn’t adequately value Brio so I passed. Good luck, but be careful

            Myrmikan Capital has the best sources on monetary policy and miners.

            If you are long gold spend much of your time understanding conflicting arguments. Gold is going to $500 because of deflation. Why? What happened to gold prices in the 1930s? Gold will go to $30,000 to back dollars with 100% gold (similar to when gold went to $800 in 1980). Is that probable? Why or why not. I don’t want to live in a world where gold is trading at $50,000.

  5. Question regarding the stock I wrote about above:
    Today the volume of the stock is 1,027,000 so far while average volume is 53,000. The price haven’t changed one but though. Does it mean that someone, maybe yamana, is selling off stocks at that price and only that is keeping the stock down? Is volume relevant at all?

    • Do you know if any Yamana executives exercised their rights to Brio? With spinoffs like these sometimes you can get a sense of what insiders think via their participation. I know that they publicly stated they believed Brio’s assets to be undervalued, but do the actions and words match? Do you happen to know who the top shareholders are aside from the 57% Yamana holds? I noticed that Brio is concentrated in Brazil and a declining US dollar has a negative impact. They do have a partial hedge against currency fluctuations. They have some substantial operating leverage, leverage isn’t necessary bad, it just amplifies the good and the bad. Leverage seems to be a common theme within the mining sector. Brio is looking at significantly increasing production with the new mine opening in 2018. Expected production is expected to be 114k ounces a year for ten years and they have stated that a current mine has been backloaded to the end of this year. The large change in volume without a corresponding change in price could be indicative of an important price level where resting limit orders (both buys and sells) are being met. It could be churning by unethical brokers. It’s interesting and could represent an infliction point in the stock. Personally, I think volume can give you insight into what the market is thinking/saying. However, I wouldn’t base my investment solely on one factor. That’s my opinion for what it’s worth.

  6. I see that Yamana held 85% of Brio shares outstanding when the rights closed on December 23, 2016. As of August 1, 2017 that had been reduced to around 57%. Yamana has sold off around 28% of shares outstanding in under a year.

    • I see that reduction was part of a secondary offering at 3/share

      • I briefly read through the Brio 2Q financials and it looks like they are going to need a cash infusion relatively soon. They have 25 mil remaining on a revolving LOC and were only able to obtain an additional 6 mil in funding. The decrease in the US dollar is pushing up costs and the planned capital expenditures for opening the new mine are in jeopardy. It looks like current production is falling short of prior estimates and depletion is happening faster than expected. If they are unable to find a source of capital, I could see the opening of the new mine being pushed back, if opened at all. The debt service is going to place additional pressure on cash flow. I wonder if Yamana would be so bold as to buyback Brio for substantially less then they received for the rights offering?

        • Thanks for the reply on my question regarding volume and I appreciate you sharing your thoughts on Brio Gold. I see that you clearly better understanding of the business than I do.
          That would be quite bold if they did. It’s a good point that it would be helpful knowing if the people from yamana are holding. I suppose that they are no longer considered insiders so they wouldn’t need to report?
          I don’t know who the other shareholders are.

  7. There’s some life in this stock now. There’s been some insider buying and the stock did well yesterday even though gold did badly.

  8. Visit the Colorado 2017 Precious Metals Summit
    Plenty of companies there.

    AXU seems to be interesting due to their jurisdiction, management and quality of deposit.

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