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magazineStock market scandal heads to the cinema
A stock market scandal is heading for the silver screen next month in the UK. If you’ve any interest in mining stocks, I’d highly recommend you check out the film.
Elements of its story may sound familiar to investors who’ve dabbled in natural resources companies or listened to presentations by miners insisting they’ve found the biggest discovery for many years. I will certainly be making a trip to the cinema to see it.
Inspired by real events
Matthew McConaughey’s movie Gold is inspired by the Bre-X investment fraud.
Two decades ago, a Toronto-listed small cap mining business claimed it had found an enormous gold deposit.
Bre-X Minerals was a struggling business until it bought a property in the Borneo jungle. It declared the project was outstanding and the estimated amount of gold in the ground grew from 2m ounces to 70m ounces in less than five years. At that point the company was valued at more than $4bn.
In reality the gold wasn’t there and the fraud was uncovered
in 1997.
One of the company’s geologists committed suicide and a prospective mining partner subsequently said its analysis of Bre-X’s drill core samples didn’t find any significant amounts of gold. An independent company found some of the samples to include shavings from gold jewellery.
Bre-X went bust and investors lost everything.
The Canadian 43-101 reporting standard was created in response to this fraud to protect investors from unsubstantiated mineral project disclosures. It is similar to the JORC reporting standard used by UK-quoted mining companies.
Hype merchants
Sadly neither 43-101 nor JORC will protect you from losing money with mining stocks. The industry is still tainted by some small cap promoters eager to over-hype projects, particularly those without enough information to produce a 43-101 or JORC-compliant resource statement.
I’ve lost count of the hot air being produced by promoters in the 11 years I’ve been writing about the mining sector.
A promoter can give a compelling yarn, but you need to base your investment decisions on hard facts – be it metal grade, the ability to extract economically, geopolitical risk, accessibility and
so on.
Gold will no doubt be an entertaining few hours at the cinema; just remember not to get swept away by the investment excitement offered by a mining company until you see the evidence backing up their claims. (DC)
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