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 20^th 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-publicised gold discoveries.  The ground acquired by the 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 dirt from RC cuttings 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, a 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 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 [3].

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 was very small beer compared to what happened a few years later in Central Kalimantan on the island of Borneo. A group of Filipino contract geologists and technical assistants, 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 $40 million, and 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 consultants (who never saw any of the mineralised core because whole core, rather than splits, had been crushed for assay) estimated a 71 million oz. gold resource. Another estimate put it at 200 million oz. No outside experts were allowed in to visit the property – I know this because I, and many other geologists working in Indonesia at the time, applied and were refused. However, a group of international investors and stock brokers (money men, who would not know an epithermal from an epitaph) were given a site tour, and wrote uncritical, glowing reports. With hindsight these were all warning signs but at the time, no one seriously considered fraud. Where the 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..

Major players, including Barrick Gold, Freeport McMoRan and companies associated with members of Indonesian President Suharto’s family became involved in a bidding war for the property.  As part of this process, Freeport sent a technical team to the Busang site to conduct a forensic examination of the drilling, sampling and assay methodologies being employed. This was standard due diligence, they were not expecting fraud.  The Filipino site team, and especially Chief Project geologist Michael de Gusman, must have realised that the game was up. Things came to a dramatic head when de Guzman fell out of an Indonesian Army 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. Not long after, Freeport announced their conclusion that core samples from Busang contained only insignificant amounts of gold. The stock price collapsed, Bre-X became bankrupt, and Vice-President Felderhof put on trial in Canada for insider trading. That was the best the Canadians could do as the actual crime (if crime their was by Felderhof) took place in a foreign jurisdiction. Felderhof’s defense was that he, too, had been duped. His trial lasted for years and, although he was ultimately acquitted, Felderhof was reportedly bankrupted by his legal fees. Only the (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’s son Tommy (and that mysterious Indonesian Army helicopter 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.

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

Conclusion

In the 1990s, I knew John Felderhof, Mike Novotny and Laurie Whitehouse. I thought John Felderhof and Laurie Whitehouse were able, honest and hard-working geologists. After the events at Busang described here I have come to believe that gold fever and desire for riches and fame led Felderhof to suspend oversight and critical judgement and become a dupe for an unscrupulous group of technically clever fraudsters. 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…..

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

CAVEAT EMPTOR