Natural resource companies – especially in the mining sector-have taken a beating during the past few months. Their market value plummeted amidst scandal, panic and doubt. Investors have become fearful. This is unfortunate because it’s nothing more than unwarranted fallout from the Bre-X debacle.
Bre-X’s massive find in Indonesia’s Busang region was touted as the largest recoverable gold resource in history. Pundits everywhere praised Bre-X, newsletter writers recommended Bre-X stock, and gold mining giants were clamoring to merge with Bre-X.
In actuality, Bre-X geologist Michael de Guzman orchestrated the largest gold mining fraud in history and investors lost $6 billion. Canadian private investigators working in Indonesia recently discovered that de Guzman bought about 60 ounces of river gold from a Borneo tribesman and mixed it (known as salting in mining terminology) with bags of crushed rock on top of a pool table.
A few months later, de Guzman allegedly committed suicide – and the Calgary-based company he left behind is facing dozens of multi-million-dollar class action lawsuits from investors in both Canada and the United States.
Hindsight is always better – especially when money is involved but there were several indications that should have set off an alarm where Bre-X was concerned. For instance, Bre-X had no earnings and no sales. Plus, the company was located in a hostile environment run by a shaky government. Perhaps the biggest clue something was amiss was that Bre-X allegedly failed to apply for a Contract of Work in a timely fashion. This could mean they never actually held the title to their Busang property. These errors together with significant indications that Bre- X broke many mining industry standard rules for handling rock samples, give a clear picture of a very risky investment. Now, anyway.
How could investors know better” After all, there was some big money in Bre-X.
According to Glorianne Stromberg, member of the Ontario Securities Commission and Canada’s best known critic of mutual funds, “because there [was] big money in Bre-X, [investors thought] it’s got to be all right.”
Frank Mersch, manager of the Altamira Equity Fund– which held no Bre-X stock when the scandal broke – said he “was always a nervous holder of Bre- X … primarily because of the Indonesian government’s way of doing business.” He said he always felt “they would back into the property and … was always concerned whether Bre-X legally owned the property by Indonesian law.”
Others say the Bre-X disaster shouldn’t tarnish Canada’s long history of successful mining.
”No single rogue operator and no single deviant member can change these fundamentals,” ‘said Peter Munk, chairman, Barrick Gold. “Our industry is second to none … our mining industry has shown innovation, cability and, above all, integrity throughout 100 years.” He also feels investors will look for quality and become much more selective in what stocks they buy. “Quality is defined by major producers, track record, assured profits, [and] assured capital,” he added.
Gold Wi
ll Regain Its Luster Jackee Pratt, manager of Toronto based Maxxum Resource Fund, said: ”The recent drop in the price of gold has more to do with psychology than reality. Gold is still in demand in many parts of the world for jewelry and other commercial uses.” She feels “there is less reason for central bankers or companies to sell” and that the price will eventually come back.
Historically, some of the world’s most profitable investments have been in natural resources, and those stocks have outperformed their underlying commodities.
Mining companies are built from years of extensive research by qualified engineers, geologists, and other experts. James U. Blanchard III, author of Why Junior Resource Stocks? Why Now?, said: “I find the majority of the mining prospectuses which come across my desk offer tangible assets, experienced management and honest value.”
Oil & Gas Spewing Profits
It appears small cap oil and gas stocks have recovered from their 10- year slump. Global demand is strong and there is an increasing need for equipment and services. According to Forbes magazine, oil and gas companies are focusing on growth again. New technologies have allowed them to cut costs and streamline operations. Today there are fewer oil and gas rigs worldwide – yet production is up. Governments around the world are seeking foreign capital… Great Britain is dropping its petroleum revenue tax on new fields … and Cuba is considering opening its waters to offshore drilling. Investors could find some rewarding returns in oil and gas.
Forestry Indus
try Out of the Woods
The lumber products industry is doing well, primarily because there’s a whole lot of building going on. Home building recently reached its highest level since 1987 (growing 8% over previous years) and commercial building – especially office construction – is booming.
While prices for pulp and paper dropped last year – as a result of their peak in 1995 – they are expected to rally back by the end of 1997 or early 1998.
Now Is The Time To Buy As long as the global economy continues to grow, demand for natural resources will continue to increase. Despite recent setbacks, this could be the best time to pick up some promising investments in natural resource companies .
Featured on the following five pages are several natural resource companies with exciting projects and interesting stories to tell.
