How to salt a gold claim – Part 2, Karpa Springs and Busang

How to Salt a Gold Claim: Part 2 – Karpa Springs and Busang

In my previous post I described my encounter in 1984 with claim salting (or at least, alleged salting). These were early days, the late 20th Century gold boom was still young, and claim salting considered a rather amusing but small-scale misdemeanor practiced by dishonest small-time prospectors – easily spotted by the sophisticated explorer.


Two major multimillion-dollar scandals, in 1990 at Karpa Springs in Western Australia and in 1997 at Busang in Indonesia, ended this age of innocence. Although well known, the stories are worth re-telling, and as I had some peripheral first-hand knowledge of both scandals, I might be able to add some additional insights.

Here is the Karpa Springs story, as I understand it from information given to the press at the time and from talking to people involved. It begins with three wheat farmers (Clark Easterhay and the brothers Len and Dean Ireland), filling in time before the harvest, who pegged a Lease on the nearest available ground to Mount Gibson in the West Australian Yilgarn.  Mount Gibson was then a hot “address” following nearby well-publicized gold discoveries.  The ground acquired by the three wannabe prospectors was available for pegging because it was underlain by granite. Granite terranes in the West Australian goldfields have historically produced only insignificant amounts of gold compared to the adjacent, basalt-dominated, greenstone belts – hence usually ignored by experienced prospectors.   Having acquired a RC[1] drill rig, the trio then proceeded to drill a number (around 9, from memory) of random, 60m deep, vertical holes along the line of an old track that traversed the sandy soil and thick scrub of the property.  As an exploration strategy this was hardly sophisticated, but the trio’s next step showed more cunning: they added fine gold grains – acquired from somewhere else – to the drill cuttings.  On assay, all holes were mineralised, one of them yielding an intersection of 38m at 34 g/t Au. The fraudsters then contacted a mining consultancy group called the Aracus Syndicate that included entrepreneur Mike Novotny and geologist Laurie Whitehouse[2].  Whitehouse travelled to the site and supervised the prospectors while they drilled a duplicate set of holes on each of the original sites. He then sampled the cuttings and was able to replicate the earlier assays.  Convinced they had a major new discovery, the Syndicate then promoted the property around  Mining Companies in Western Australia, one of which was my then employer Renison Goldfields Corp. (RGC). My colleague Keith Watkins visited the site and panned RC cuttings from the holes which were lying on the ground. Keith told me he recovered gold that was clearly alluvial and not consistent with the granite bedrocks being drilled: on Keith’s recommendation and suspecting fraud, RGC declined to become involved. However, an Australian Junior company called Perilya, along with their Canadian partner Noranda (a major player with deep pockets), were less discriminating: Perilya optioned the property and made a first payment of Aus$6.5 million to the fraudsters (reports at the time said the Aracus Syndicate were to receive a 5% Royalty on the profits from any subsequent mine). But in the absence of the merry farmers (they were in Perth, cashing their cheque) and their magic drill rig, all Perilya’s subsequent test holes were duds. To cut a long story short: Perilya stopped payment on the cheque and the police were informed.  The West Australian Department of Mines then got involved and, under police supervision, drilled a fresh set of holes on all the earlier sites. No gold was found. At this stage there were now four closely grouped holes on each of the nine original sites. The first of each set were those drilled and sampled by the prospectors. The second were drilled by the prospectors under the supervision of, and sampled by, the Aracus Syndicate. The third drilled by Perilya using their own contract drilling team.  The fourth by the Mines Department in the process of collecting evidence for criminal prosecution. Clearly, the prospectors had salted the second round of holes in full view of Laurie Whitehouse, but this was probably not too difficult for them – in these innocent days he would not have been expecting fraud, and it is easy to be wise after the event. Eventually, the prospectors were charged, found guilty of fraud and served 13 months in jail. But see footnote [3].

RC drilling for gold in West Australia

A Reverse Circulation rig drilling for gold in the West Australian Yilgarn


Karpa Springs was serious fraud – an attempt to steal $6.5 million – but it was very small beer compared to what happened a few years later (1995-98) in Central Kalimantan on the island of Borneo. A group of Filipino contract geologists, working for a Canadian Junior Mining Company called Bre-X, salted diamond drill cuttings from a genuine (albeit, as much later established, sub-economic) epithermal hard-rock gold prospect known as Busang. The resulting assay results, consistent over almost 300 diamond drill holes, caused the penny-stock Bre-X to soar to over Can$285 on the Toronto Stock Exchange, valuing the company at over $6 billion. The site geologists, and Bre-X Vice-President of Exploration John Felderhof, reportedly sold their stock at the inflated values: Felderhof reputedly making over $80 million, and in 1997 awarded the title “Prospector of the Year” by PDAC – the Prospectors and Developers Association of Canada (4).

Over a period of several years, the conspirators had operated a secret jungle laboratory where carefully calculated and measured amounts fine gold were added to literally thousands of drill samples from hundreds of holes. An astonishing, sustained, industrial-scale operation. The doctored samples were then dispatched to an outside laboratory for assay. Such was the scale of the deception it is estimated that well over $30,000 worth of alluvial gold must have been used in the deception. External ore reserve geologists (working from data provided by Bre-X in their reports to the Toronto Stock Exchange) estimated an 80 million oz. gold resource (well over $160 billion at today’s prices).  No outside experts were allowed in to visit the property. However, international investors and stockbrokers (money men, who would not know an epithermal from an epitaph) were given site tours and produced uncritical, glowing reports. With hindsight these were all warning signs, but at the time no one seriously considered fraud. Where that thought occurred, the sheer scale, technical difficulty and effrontery of the effort that would have been required led to the idea being dismissed.

But in 1998 the Bre-X bubble was to burst, as all bubbles do. The events took place rapidly, and I am not clear on all the details (perhaps no one is) but here is my understanding..

In 1997, at the height of the stock market bubble, major North American gold mining companies, including Barrick, Placer and Freeport, became involved in a bidding war for the Busang property.  Each sought advantage by signing up various members of President Suharto’s family or his close confidants. Freeport won this war, but before committing to a large up-front cash payment (which would have been in excess of $100 million), sent a team of geologists to the Busang site in Kalimantan to conduct a forensic examination of the drilling, sampling and assay methodologies employed by Bre-X, and re-drilling and sampling a number of check holes. This was standard due diligence: the Freeport geologists were not expecting fraud. The Filipino site team, and especially Chief Project geologist Michael de Gusman, must have realised that the game was up. While this was going on, there was a dramatic development: Michael de Guzman, returning to site from the Toronto PDAC meeting, had fallen from a helicopter (or did he jump, or was he pushed?) and his body (or at any rate, someone’s body) found in the jungle four days later, partially eaten by pigs. A few weeks later, Freeport announced their conclusion that the core they had drilled at Busang contained only insignificant amounts of gold, and that the core previously drilled from the same sites by De Gusman’s team had been doctored with added alluvial gold. The Bre-X stock price collapsed, the company was de-listed and went bankrupt. Vice-President of Exploration John Felderhof (who after his triumph at the Toronto PDAC meeting had retired to his new villa on the Cayman Islands: David Walsh had retired to his in the Bahamas) was put on trial in Toronto for insider trading. That was the best the Canadians could do as the physical crime of salting drill core had taken place in a foreign jurisdiction. Felderhof’s defense was that he too had been duped and all his actions were made in good faith. Felderhof’s trial lasted for years and, although he was ultimately acquitted, he was reportedly bankrupted by his legal fees. Only the (now conveniently dead) De Guzman is known to have been certainly involved in the fraud. Other participants (and there must have been many) in the biggest mining fraud in history simply disappeared into the barrios of Manila, never named or charged.

The crime took place in the jurisdiction of the Indonesian Government, but in view of the involvement of the President Suharto’s family (and the mysterious Indonesian Air Force helicopter pilot that featured in early press reports, then mentioned no more), it is perhaps not surprising that their investigation was cursory and inconclusive. The de-helicopterisation of de-Gusman remains a mystery.

Borneo Rain Forest

The Borneo Jungle where a secret gold salting lab was operated for many years


During the 1990s, I knew John Felderhof, Mike Novotny and Laurie Whitehouse. They were part of an informal syndicate or network of geologists, assay chemists and general “fixers” who offered services to mining/exploration companies in the fields of target generation, land acquisition, government liaison and ready-made contract geological teams (5). They had long experience in Australia and Indonesia and provided useful services for incoming players to these countries. Novotny- no scientist – was an old Indonesia Hand who spoke fluent Bahasa and knew how to navigate the Byzantine Jakarta bureaucracy. I thought Felderhof and Whitehouse were able, honest and hard-working geologists. After the events at Busang, I have come to believe that gold fever and desire for riches and fame led Felderhof at Busang to suspend oversight and critical judgement and become a dupe for an unscrupulous group of technically clever on-site Filipino fraudsters. But I might be wrong.

Would I have been any smarter had I ever been in a similar situation? I like to think that I would. You may judge that is just my conceit, and there, but for the grace of God…..

09 August 2011 Former chief geologist for Bre-X minerals, John Felderhof, expected to take the stand

Canadian geologist John Felderhof outside a Toronto Court House – still in litigation in 2011


If something is too good to be true, it most likely is.

Caveat Emptor


[1] Reverse Circulation

[2] Other members of the group were Bill Galbraith and Geoff Stokes.

[3] It must be pointed out that the three prospectors have always protested their innocence, and, on appeal in 2003, had their convictions quashed on technicalities by the Western Australian Court of Criminal Appeal. However, it is my opinion that the circumstantial evidence for their guilt is overwhelming. The only remining question to my mind is: how on earth did they hope to get away with it? The fraudsters at Busang, by comparison, did get away with it. Apart, that is, from the unfortunate De Gusman, although the mysterious circumstances of his demise leaves conspiracy theorists with the intriguing possibility that he too is living somewhere under an assumed name enjoying the fruits of his crime.

(4) This was the Bill Dennis Award for Canadian Discovery or Prospecting Success. Interestingly, although the 1997 award to John Felderhof  and David Walsh, (the President of Bre-X) was widely reported at the time, the current listing of all recipients in the PDAC website, while complete from its inception in 1977 to present, shows no recipients for the years 1996 and 1997. Felderhof and Bre-X have been airbrushed from the record.

(5) Contract Filipino geologists were much favored for field work throughout SE Asia at that time. They were acclimatised to tropical conditions. They were generally technically competent, hardworking and, above all, cheap. They were, in fact, being exploited by Western Companies and they knew it. With hindsight, it might be considered foolish for Bre-X to have offered these guys extra remuneration in the way of stock options. Once the geologists  realised that adding $10 worth of gold to a single drill sample could add $100,000 to their potential net worth, the temptation to do just that must have been great. And local supplies of alluvial gold were readily available from the rivers of Central Kalimantan.  The geologists probably began in a small way, considering this a minor misdemeanor. Isolated for months on end in a remote jungle field camp with little or no supervision, who would ever know? But there was no easy exit strategy: they were on a treadmill and could not get off. They had to continue the deception at an ever-increasing rate because to stop would lead to exposure. It was a Ponzi scheme.

I want to emphasize that the vast majority Filipino geologists that I have worked with were honest, dependable, and great guys to be with. But from the actions of the few, I can quote another example, trivial in itself, but which well illustrates my point about the potential problems with low-paid Asian contract workers.

In the mid 1990’s the company I worked for was drilling a gold prospect in the Malaysian part of Borneo. As this was in a protected forest area, we had to obtain a special permit to allow construction of temporary access tracks for our drill rig. A team of Filipino geologists was hired to do the field work. The prospect turned out to be sub-economic, the Lease was relinquished and the geologists paid off and returned to Manila. A few weeks later, our Australian Exploration Manager flew to Malaysia to check that the required remedial site rehabilitation had been properly carried out as per the requirements of our Lease. He was arrested on arrival and thrown in to a local jail. It transpired that the now-departed geologists had been accepting money from a local logging company to allow it to use the drill roads to extract illegal logs. It took a few days of frantic activity by company lawyers (and the payment of a large fine) before the manager was released.

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