As our commodities exchanges takeoff, remember Bre-X

Bre-X Minerals Limited was a Canadian mining company that sank and got delisted from the stock exchange after its manipulation of the gold recovery rate blew open. That event, which took place in a remote forest in Indonesia, should guide the operations of our commodities producers and the operators of exchanges gearing up to trade […]

Bre-X Minerals Limited was a Canadian mining company that sank and got delisted from the stock exchange after its manipulation of the gold recovery rate blew open. That event, which took place in a remote forest in Indonesia, should guide the operations of our commodities producers and the operators of exchanges gearing up to trade such commodities.

Last week, the Lagos Commodities and Futures Exchange (LCFE) commenced real-time trading of agricultural commodities, solid minerals, and oil and gas. For a country such as Nigeria that depends almost exclusively on earnings from primary commodities, this development should bring hope to the millions of farmers. Futures trading should engender stability, price discovery and a conducive atmosphere in a sector that has been marked by cyclical fluctuations.  

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The Managing Director of LCFE, Mr. Akin Akeredolu-Ale, captured the stabilising power of futures trading when he said: “Whenever prices drop we can plan for our trades in the future. This will boost the balance sheet, enhance liquidity and shore up the value of the naira. External reserves will become both external and internal reserves. The exchange is currently setting up frameworks and structures to achieve this and more details will unfold in due time”.

What happened in Lagos a few days ago was just the first step in a long journey toward these objectives. Its success ultimately will require a structure anchored on integrity. The multitude of operators along the line – dealing member firms, commodity brokers, issuing houses, solicitors, insurance companies, trustees, settlement banks, aggregators and assayers, among others – will achieve little if the trust element is absent. In this regard, among the operators, the assayers hold the ace, in my view, as the Bre-X story of 1997 illustrates.

In March that year, Bre-X announced that gold reserves at its concession near the Busang River in the mountainous forest of Borneo, Indonesia, stood at roughly 200 million ounces. Bre-X acquired this concession in 1993. Going by the market price of gold in 1997 of about $350 an ounce, the concession was worth about $70 billion. By the first quarter of 2008, when the price of gold had shot up to $1000 an ounce, the value of the concession would have risen to $200 billion!

The current price of gold is about $1,794.60, after hitting a year-high of $2,043.30; it got to $2,058.40 in 2020. Just do a few iterations with these prices with the announced gold deposit of 200 million ounces, and see what Mr Guzman and Co would have projected Bre-X to be worth if that were to happen now.

The value attached to the gold deposit at the mine was based on the ore grade announced by Bre-X of about 5.68g per ton of resource. In mining, the rate of recovery is a key element that drives the viability of a project. In this case, it meant that for each ton of ore processed by the company at the gold mine, it would recover 5.68g as pure gold. By world standards at that time, that rate was a good result. Just to be doubly sure, the company conducted an independent drilling close to its Busang concession. That was when the bubble burst. The test showed an ore grade of just 0.01g per ton of resource. This meant, invariably, that there was no gold at all.

The truth finally came out! There was really no gold in the concession. As it turned out, Bre-X’s geologist, Michael de Guzman, had fooled the company (which was why the scandal later became known as the “Fools’ Gold”).

The truth was that the ore sample from Busang had been “salted” with gold dust- literally, gold dust had been poured into the ore, right there in the jungle, where the analysis allegedly took place. It was not done in a laboratory.

As the gold bubble burst further, Bre-X’s stock, which had risen dramatically in price in response to the tantalizing resource find, lost 90 per cent of its value on the Toronto Stock Exchange and was ultimately delisted. Also, in the jungle of Borneo, de Guzman died in a helicopter crash, which many believed was a suicide.

Normally, the result of the mineral test or ‘assay’ would also indicate the ore type on the concession. Is it oxide or sulphide ore? The difference affects the process that will be employed in the mining process. Miners say that the molecules in the sulphide ore are tightly bonded, and therefore hold the gold particles much more tightly than in oxide ore, which has a looser bonding.

Therefore, as Nigeria marches into this phase of our efforts to diversify the economy, more work lies ahead. We need to build the relevant laboratories for the test to certify the qualities of our commodities that will be traded on the exchanges. Beyond the physical structures, the human or people factor will come into play.

Who will be the chemists at such facilities? It is so easy today to procure a Guzman to “salt” any commodity sample to procure an acceptable grade. From gold to palm oil, the commodities so far selected for trading on the LCFE, can be adulterated at any stage of their production or project evaluation. In the case of gold, a poor gold mining project can inadvertently be selected based on a manipulated result.

Our local markets are today awash with palm oil that has been tainted with various substances many of which are detrimental to human health. Ask some women, and they will tell you their experiences from consuming palm oil that was mixed with colour-enhancing liquids. These materials can be added to the oil at any stage along the value chain, from the producers to the merchants and retailers.

These possibilities call for stringent regulatory frameworks. Attempts at quality manipulation by any of the operators must be fought by the regulators as only this can ensure the sustainability of this venture.