Busang River of Gold

Bre-X is a notorious case of fraud in the mining industry, which makes this case all the more interesting. Set in the mid-90s, years before the fraud was uncovered, the case (also written before the fraud was uncovered) focuses on the strategic options that the CEO of Bre-X, David Walsh, has in dealing with a crisis at the company. Bre-X claimed that they had a property in Borneo that contained the world’s largest gold deposit. In 1995, the reserves were believed to be around 10 million ounces, and the amount only increased from there. The ability of the company to exploit this claim was constrained by two key factors. The first is that the company lacked the capital to exploit a deposit this big. According to Walsh, the principals at Bre-X were convinced that they would be taken over by a major producer in order to exploit the claim. Yet, no such producer had materialized and Bre-X was running out of money. A further constraint was that relations with the local government and people were poor. The confluence of these issues was that the Indonesian government was threatening Bre-X’s control over the field, and this was being done with the backing of international gold mining concerns, who at this point were hesitant to pay the asking price for a stake in Bre-X. Indonesia was now offering a deal — rival Barrick Gold (also a Canadian firm) would take controlling interest in the stake, and the Indonesian government was also receive equity. This was clearly going to infringe upon Bre-X’s ability to monetize the claim.

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Underpinning this situation is the reality that the Indonesian government has a high corruption rate. The nation is relatively new to free market capitalism, and (even today) is one of the more corrupt regimes in the region. Corruption creates a distortion in the market economy, which hampers private sector development. In this situation, the Indonesian government, by apparently accepting influence from Barrick to bring about this ultimatum, is sending a clear signal to other mining exploration companies that their claims will not be honored. A natural result will be that small companies without bargaining power will not explore in the country. If the claim was smaller, neither Barrick nor Indonesia would have gone this route, such is the destructive nature of this sort of overt corruption. The price, in this case, was deemed worth paying.

Bre-X is in this situation because of two factors. One is money — they don’t have any — and the other is that they have created a big stink about having all this gold but have not cultivated a good relationship with the local government. It is always recommended to be friendly with the people who have the power to deny you your right to exploit the claim. Bre-X seemingly made an error there, whereas Barrick had the contacts. Barrick’s behavior, unethical in Canada, is within the norms of doing business in Indonesia, and for better or worse Bre-X should have accepted that. Now, history tells us that there is a reason Bre-X wasn’t paying attention to the normal rules of the game in the mining business — they weren’t really in the mining business — but that is another matter altogether.

The Options

There are two main strategic options — to take the deal or not to take the deal. The first option, accepting the deal, or at least trying to rework it to something slightly less awful, has a few advantages. First, there is a tacit recognition on the part of Bre-X that it has very little bargaining power. It might have a claim, but it requires Indonesia to honor that claim. There is significant risk that Bre-X could lose everything if it calls here. So the biggest advantage is that Bre-X would get something back on its investment. It would not get fair market value, but it would likely make enough on its remaining stake to allow the company’s principles, Walsh included, to retire quite comfortably. In effect, they will be able to follow through on some variation of their pre-existing exit strategy. The gold will be extracted under this scenario as well, something that benefits all parties.

There are downsides to accepting this deal, quite a few of them actually. The most obvious downside is that the deal cuts the value of Bre-X considerably. This is not a good deal with the company, or it wouldn’t be the first deal on the table. The mining minister may be corrupt, but he has heard of negotiation. This offer may sound a bit like an ultimatum, but Barrick is also a Canadian company, and there are rules against such open corruption. They played their cards here, and they have good cards, but the con to taking the deal is simple — the deal is worse than the BATNA. The best alternative to a negotiated agreement is that the rule of law prevails and Bre-X keeps its claim. The offer on the table is just that, a starting point for a negotiation that will bring the issue to a resolution that allows all parties to gain their interest. Remember that the mining minister wants a cut for the country, not for himself, so there is state interest here that cannot be ignored. Ultimately, taking the deal means missing out on the probability of negotiating something significantly better, and meeting Bre-X’s interest a little better.

The second option is to walk away from the deal. Walking away has some advantages. The first is that Bre-X can — and this is hard to write without laughing — claim the moral high ground. The company knows there are laws against corruption, and it knows that Barrick is bound to those laws. Bre-X has a legal claim that will probably stand up even in a kangaroo Indonesian court. Walking away gives Bre-X some leverage, and shows both counterparties that it is aware of its rights, and the value of its claim, and will not be cowed by corruption and dishonest business practices. Bre-X can be seen as taking a stand against corruption, sticking up for the Indonesian economy and all that is right and good in the world. Moreover, walking away buys the company at least a little bit of time to find a partner who can develop this claim, negating Indonesia’s need for Barrick.

The downside to walking away, of course, is that as a negotiating ploy it is basically a bluff. Indonesia holds the most important position of power in this situation, as it can essentially nationalize the entire claim and turn it over to whomever for development. Bre-X has to, no matter what legal ground it thinks it has, satisfy the Indonesian government. The fact that Bre-X cannot develop this claim is the only reason anybody else is involved. Bre-X would risk all the work it has done, and the entire claim itself, by walking away from the offer. At least that is the theory, if the offer is truly an ultimatum.


It is recommended that Bre-X uses this ultimatum as a springboard to negotiations. The three parties have been brought together by mutual interest. Bre-X should take the implicit threat of nationalization seriously, but also recognize that it has its own power. It has a Canadian company, Barrick, complicit in if not outright committing bribery and corruption. That will not play well in Parliament. Barrick’s claim is highly-publicized, so everybody in the mining world knows about this situation. Thus, there is tremendous risk to Indonesia to squeeze Bre-X, as it would damage the government’s credibility and remove any incentive for small exploration companies to explore in Indonesia. It is worth remembering the structure of the mining industry — small companies do exploration work and are often then bought by large companies seeking to exploit the resource. Many large companies barely do any exploring. It is important for Indonesia to maintain credibility in this deal, which is precisely why it has called Bre-X to the table — it actually needs an agreement from Bre-X.

So the recommendation is to take this opportunity to leverage whatever bargaining power Bre-X has in order to get the best deal possible. All three parties need each other, so this play should be seen more as a strongarm than anything else. Bre-X should not cave too easily, but it has to recognize the balance of bargaining power. In that, it needs to identify its BATNA and get to work bargaining the best deal it can for its shareholders, and then walk away.


The above analysis, of course, is predicated on the Bre-X claim being legitimate. It was not — the core samples were fraudulent. There was never any gold. Bre-X knew that a partner was going to discover this. They would perform their own due diligence, and the valuation of the deal — and the deal itself — were going to be contingent on the claims being verified. Bre-X had, as recommended, rejected the Barrick deal in order to pursue their own deal, and brought in an American company. The move was, in retrospect, a stall. Walsh’s entire play for the past couple of years was to stall on developing the “claim,” while rumors about the size of the claim kept getting larger, pushing the company’s share price to the sky. The deal came when it did because the Indonesian government forced the company’s hand on the matter, but Walsh had been stalling to give himself and his friends time to cash out. So the appropriate strategy for Bre-X, knowing this, would be determined by the extent to which Walsh had already cashed out. The CEO cannot just sell shares and hide the money quietly, and maintain public confidence in the company, so Walsh’s cut was going to have to come from non-insider shares, such as those held by his friends and family. Ultimately, having his hand forced brought about the end of the fraud just four months after the case. The recommended strategy, based on the real situation Bre-X faced of knowing that there was no gold and they had been defrauding everybody the entire time, is that Bre-X had to walk away from the deal and stall some more. That was the only way to buy the time needed to cash out a little bit more, before, inevitably, the claim was nationalized or a deal forced upon the company. There is little difference to the core recommendation, which is that Bre-X should not accept the deal as presented, but the underlying rationale is obviously quite a bit different. Walsh ended up dying in the Bahamas in 1998, but not before his assets were tied up in court pending legal actions. His wife apparently got some of the asset released, so in that sense Walsh ended up getting away with the scam (Waldie, 2006).


Waldie, P. (2006) Collected woes. Globe and Mail. Retrieved April 5, 2015 from http://www.globeadvisor.com/servlet/ArticleNews/story/gam/20061124/RO12COLLECTED

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