Bre-X Survivor Clarifies Why He Invested

by John Kutyn

It has been brought to my attention that there may be some concern regarding my motivation in assessing the financial situation in South-East Asia, given my prior role in recommending the purchase of the ill-fated Bre-x Minerals Ltd. to friends and associates. Specifically, I was referred to a June 3, 1996 article in the Alberta Report: http://albertareport.com/23arcopy/23a25cpy/2325ar03.htm

Except for the price paid for my shares, most of the information given is basically correct. In early 1995, I was struggling to make a living like most people I knew. I felt that I had one gift, that being financial analysis, which my training in economics and commercial lending had helped expand. I felt that expanding debt levels, especially in Japan, would one day topple many currencies and that gold would one day rise substantially in value. I also knew that if you invested in an exploration company making a world-class discovery, that you would be well rewarded, even if the price of gold did not move. I started requesting financial information from every gold company I could and analyzing the information. My approach was very simple. First I attempted to determine the value of a company's gold in the ground. Then I looked at the value the market was giving the company (the number of shares outstanding times price per share). When the value of the gold in the ground appeared to be substantially above the market value, I got excited, especially when the company appeared to also have good exploration potential. By the time I got the information package from Bre-x I had looked at close to 200 companies. Based on the information provided by the company, IT WAS THE MOST UNDERVALUED COMPANY on my list (no other company was even close) for the amount of gold that it apparently had apparently found. There was also tremendous exploration potential on their south-east zone which they had just started to drill. I thought that friends and associates could also benefit from my research of which I shared freely.

At the time, I always mentioned that my analysis was based on the information given by the company for which I had no means of confirming. By the fall of 1995, this did not seem to be an issue, as mining analysts from various brokerage houses returned from the property, all talking of this huge gold find.

I note that at the time, I only shared my ideas with friends and associates in an attempt to help them financially. While I had some exposure due to being one of the first people to identify what appeared to be a world-class discovery, by 1996, the Bre-x story was about Indonesia, Barrick, Placer Dome, greed and corruption. Some profits were taken and so mentioned to friends and associates when problems developed with the Indonesians. My role was solely evaluating information that was publicly available to all investors. Unfortunately, the public information was fraudulent, but I do not believe that this invalidates the quality of the analysis.

Since my first investment in Bre-x, I have continued to acquire information on mining company's. And now I have information on between 800 to 1,000 companies. The only companies I have a strong recommendation for are Aber Resources Ltd.(abz.t) and Francisco Gold(fgx.v). While both stocks have been hurt by fund selling and a weak gold price, this has made undervalued situations MORE undervalued. My analysis on Aber can be viewed on Silicon Investor, under Aber Resources dated Oct 28/97 (#292) (http://www.exchange2000.com/~wsapi/investor/reply-2576532). Aber owns 40% of what appears will be the most profitable mine in the world (this is a diamond mine, the other 60% being owned by Rio Tinto). While we are still awaiting a pre-feasibility study, it appears that pre-tax profits could exceed $8 per share and at the recent price of $12.60 are undervalued. Francisco Gold has just announced a world-class high grade resource of 3.2 million ounces of gold with cash costs of under U.S.$100 per ounce. This deposit is open to the north, east, west and to depth. It is anticipated to increase in size as drilling continues. I believe there are about 15 million shares outstanding, giving the company a market cap. of $150 million Canadian at the recent price of $10cdn. With about $40 million in the bank, the market is valuing these 3.2 million ounces at U.S.$24 PER ounce. With cash costs under U.S.$100 per ounce, even with gold at present prices, it appears substantially undervalued. If we assume gold at U.S.$300 AND PRODUCTION OF 300,000 ounces per year, earnings before tax and depreciation are U.S. $4.00 per share or $5.60 cdn. Be NOT mistaken, these are NOT buy recommendations. I do not have any idea how much these shares could drop in value due to the currently dismal market conditions for gold shares, but wish to illustrate the thought process I used when Bre-x was first recommended.

As for my analysis on South-East Asia, my conclusions are contrary to virtually every central banker, government official and most financial analysis in the world. These are powerful people who control both the mind and the money of world markets. However, we must remember that economic laws are similar to the natural laws of any science. They are based on logic and reasoning and pure mathematics. It is my belief that these powerful people have ignored these laws or attempted to create new ones, and as a result, all mankind, each and everyone of us will pay a very dear price.

My motivation has always been to be of service to others, so that they may add my insights to that of their own.

December 1997

Currency Chaos and Financial Collapse - Part 1

Currency Chaos and Financial Collapse - Part 2

THE DOMINO EFFECT

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