Mining Scams
Adapted from Circular 59 by Michael N. Greeley
Introduction
A time-honored method to bilk the public of millions of
dollars is the ubiquitous mining swindle. Since an unusually rich
ore deposit, or bonanza, has historically produced enormous
profits for the developer, many of us believe that we too, like
the '49er, can strike it rich. The glamour attached to
"discovery" creates, in the imagination of some people,
a relatively easy way to attain fantastic wealth.
Although money can be made in mining and this
Department certainly encourages mining, we also have a
responsibility to urge the public to exercise prudence in its
investment. Too many people have lost their hard-earned savings
on an ill-advised mineral scheme. Archives are full of outrageous
examples of mining scams and swindles in which the only
beneficiary was a glib entrepreneur with unbounded optimism. In
most cases, he disappeared before his investors realized what
happened.
General Considerations
When making an investment in any
mineral enterprise, there are a number of factors or key features
to consider. A checklist of significant considerations follows.
- Title
- Sampling and Assaying
- Commodity Type
- Mining Method
- Mill Site
- Recovery Process
- Permitting and Reports
- Security and Safety
- Marketing
- Profit Distribution
- Taxes
- Sequence of Development
- Professional Evaluation
Prerequisite to the investment in the
development of a mineral deposit is legal access to the resource.
The potential investor should know who ultimately owns or
administers the subject mineral property and commodity. The
property may be controlled by the State, Federal Government,
Indian tribe, or a private individual or organization. Moreover,
jurisdiction over the land surface may be separate from the
jurisdiction of the underlying mineral resource. Where ownership
or control of the mineral rights is severed from the surface
rights, obvious legal problems can arise.
If a mining claim or prospecting permit for
minerals is not legitimate, the money invested is wasted from the
beginning. In addition, the investor should understand basic
differences between leasable and locatable minerals and lode and
placer deposits. These classifications determine the type of
mining agreement and/or claim established on the resource. Very
specific requirements must be met and procedures followed to gain
the right to develop a mineral deposit. Furthermore, encumbrances
against the deposit, though legal, may be detrimental to its
development.
Typical examples of cloudy or illegal title to
a mineral deposit include oversized claims, inappropriate claim
designation and improper filing, failure to perform annual
assessment or to file affidavits of labor, or location of claims
on a privately held mineral estate. The investor should establish
exactly what rights he has to the property in question and what
conditions are imposed before he spends one penny on exploration
or development.
Sampling
Perhaps the next major consideration in
evaluating a mineral investment is the sample and assay data. One
sample does not make a mine. A person who brings a rock that
contains two ounces of gold per ton, to an investor, may be
carrying the entire mine in his hand. One such high-grade ore
specimen is not representative of the deposit. Many samples,
commonly numbering in the thousands, are required to give a
reasonably accurate measure of the tenor, or quality, and tonnage
of the ore.
Depending on the configuration and geologic
setting of a mineral deposit, there are recommended scientific
procedures to follow and methods to use to properly sample the
mineralization. The investor should be satisfied that the samples
referred to by the mine promoter were collected specifically from
the property of interest and also that they were collected in a
proper way. The sampling method should be adequately described
and each sample site precisely located, preferably on a map.
It is important not to forget the practice of
deliberately salting, or adulterating, samples. Ingenious ways
have been devised to fraudulently enhance the grade of samples
either before or after they are collected, regardless of the
method of collection. The temptation to salt is particularly
appealing when dealing with a mineral of high unit-value such as
diamond or gold.
Once collected the samples must be
properly prepared and assayed. In general, the final sample
preparation and assay should be done by qualified laboratories.
Assayers registered in Arizona are generally familiar with
different types of ore and are knowledgeable about the proper
method to test for particular metals or other components.
All ores are amenable to rigid testing and
comments to the effect that the ore is unassayable are simple not
true. Statements belittling the methods of registered assayers,
complaining for example that they never report all the gold, are
immediately suspect. Modern copying devices also make it a rather
simple procedure to later falsify the assayer's report. If there
is any question, of course, the sample pulps (unused prepared
portion) may be sent to another lab for comparison.
Spectrographic analyses do not provide an
accurate test of mineral samples. This type of analysis, though
relatively inexpensive and useful in providing a list of
components in a sample, does not yield a reliable, quantitative
measure of tenor. Often a billion- or trillion-dollar "ore
body" is created by simply multiplying the generalized
amount of each of the metals listed in a spectrographic analysis
by their current market price. An ore body, however, is not that
simple. At this time, there is no commercially acceptable process
known whereby each element can be recovered from a deposit.
A degree of skepticism should also be
reserved for ores said to contain uncommon metals or minerals.
Because of their rarity, these substances may command a very high
price and are therefore extremely attractive to the investor. The
platinum-group metals including platinum, palladium, rhodium,
ruthenium, iridium, and osmium, are the darlings of the swindler.
Considering their high unit-value, even minute amounts of these
metals appear to be a reasonably good bet to the innocent
investor.
The problem here is usually the grade or
tonnage, or a combination of both. The amount of platinum, for
example, is generally too low to realistically consider
extraction, or the tonnage is almost limited to a hand specimen.
As a primary ore, platinum has never been mined in Arizona; its
only production has come from trace amounts recovered in the
final stage of refining copper ores. The geologic environment of
Arizona, diverse as it is, does not encourage the search for
platinum-group metals, graphite, cobalt, nickel, bauxite,
diamonds, and a number of other commodities.
As plans are drawn to mine an ore
deposit, proposals are made which frequently are misinformed and
ill-advised. There are innumerable examples of deep shafts and
long adits driven to nowhere. Many of these openings have been
cut at great expense and with little or no evidence to suggest
they would meet success.
An example of a mining scheme which can be
described at best as ignorant was recently sold to a number of
investors in the Chemehuevis Placer District, near Lake Havasu
City, Arizona. The plan called for an investor to purchase a plot
of ground 60 x 120 feet in size from which 8,000 cubic yards of
unconsolidated gold-bearing gravel would be dug and treated. In
order to recover 8,000 cubic yards of gravel from this plot, the
excavation would require vertical walls, 30 feet deep!
Since loose gravel cannot be mined at a slope
exceeding its natural angle of repose, approximately 45 degrees,
the maximum amount of material that an investor could ideally and
safely expect to obtain from an isolated parcel is about 62
percent of the total, or 5,000 cubic yards. No attempt was made
to explain to the purchaser that, in this case, after an
investment of $50,000 he would actually get less than two-thirds
of what he paid for. This scenario illustrates one catch to a
sales promotion involving fractional interests in a mineral
property. The entire land package, comprised of all individually-
owned parcels, must be mined together to insure each investor's
return.
An interesting twist to this story is the
statement made later by the developer that only 40 percent of the
aggregate was gold-bearing. Consequently the investor was now
entitled to 20,000 cubic yards of gravel (to yield 8,000 cubic
yards of gold-bearing material) from his plot. Since 5,000 yards
was the maximum he could physically dig, this is truly adding
insult to injury.
There is a tendency among many of us to want to
build. We want others to see our accomplishments. To some degree
this attitude explains why a mine tunnel is begun with little
justification.
The same propensity for building might explain
why a mineral processing mill is erected or a leaching facility
is frequently constructed without any obvious sign of ore.
Another reason these engineering marvels are installed is due to
their impressiveness. The humming, turning, grinding, and
screeching of equipment and the smoke and odors of a mine plant
are exciting to the potential investor. He sees industry in
action - his money at work - and profits just around the corner.
Unfortunately, however, he is commonly one of a
multitude who has emptied his pockets for a pipe dream. With a
paltry amount of ore stockpiled, a dump laden with debris, or an
old mine map showing the "lost" ore body, the developer
spends the last dime of every investor getting ready to treat the
mineral-rich rock. The $500,000 mill, designed to treat 500 tons
per day, mills nothing, and the dreams of many become a
nightmare.
Even when good ore exists, the
treatment facility is often poorly designed. Frequently its
component parts are improperly matched or not sized adequately.
Materials handling procedures are commonly cumbersome and energy
intensive. An adequate supply of water may be lacking. Hazardous
operating conditions may be present. These circumstances are a
few costly examples that can shut a plant down abruptly.
The recovery process is in many cases a mystery
to the investor. Technological methods vary according to the
metal or mineral recovered. In addition there are many variants
based on the size of the mineral component, its gangue
association, its state of chemical alteration, the hardness and
specific gravity of the ore, permeability of the ore, and a
myriad of other factors.
The milling and metallurgical treatment of ores
is comprised of both physical and chemical means of
beneficiation. These processes though technically sound and well
understood by the professional are frequently vague and confusing
to the lay person. An investor not familiar with basic
physical-chemical laws is easily misled.
Proprietary methods utilizing secret chemicals
and "black box" techniques, therefore, are often
praised as technological breakthroughs. According to the
developer, these so-called miraculous inventions will convert
formerly worthless rock to metal-rich ore or improve, manyfold,
the recovery of a metal or other commodity that heretofore had
been difficult to extract. One should exercise caution when
evaluating such claims.
Developers often speak of 100 percent recovery.
Complete extraction, however, of most constituents is essentially
unknown over the long term. At the turn of the century a mining
firm in Ajo built a giant retort into which ores were to be
shoveled and melted. Spigots were tapped into the vessel at
various locations and labeled copper, lead, zinc, gold, silver,
etc. All the investor had to do, after he had helped finance the
operation, was turn the spigot for the metal he desired.
Understandably the entire operation fizzled.
In many cases difficult technical problems are
oversimplified. The ill- informed investor is merely asked to
retain faith in the management and to perhaps ante a bit more so
that this "minor problem" can be speedily resolved.
A host of other factors should be
evaluated by the prospective investor before spending money on a
mine or a beneficiation plant. Proper permitting must be obtained
at various stages of development from local, state, and federal
authorities. In addition to routine reports required by certain
government agencies, internal reports generated for management
and for the investors should be factual, accurate, and timely.
On-site security should be adequate to protect
expensive equipment and supplies as well as the mine or plant
product. Of course appropriate security measures must be taken
also whenever the product, especially a high-value material such
as bullion, is transported from the treatment facility.
Acceptable safety procedures must be implemented and must be
adhered to rigidly from the start to finish of any operation.
Even after termination of operations, it is imperative that
hazardous materials be properly disposed of and unsafe
conditions, such as open shafts, be resolved.
Proposed or actual marketing of the
mine or mill product should be reviewed thoroughly by the
investor. There may be assessed charges for further treatment of
the product. There may be by-product credits returned to the
miner. The investor should also be aware of the involvement of
any intermediate sales agents and their remuneration.
Another obvious consideration is the
distribution of profits. What liens, including ownership
royalties, loan payments, and rental fees, must be deducted from
the gross to determine the net profit? Are estimates of operating
expenses and pro-forma statements realistic? The investor should
be satisfied with the form of payment whether it is in cash,
stock, or in-kind.
Like other high-risk investments, mine
and mineral developments are often subjected to careful scrutiny
by the Internal Revenue Service. Beware of accelerated tax
write-offs. Such an advantage was one of the attractions in the
Chemehuevis Placer scam referred to earlier. Supposedly the
investor would receive a $50,000 write-off on his tax statement
the first year of his investment by merely paying an advance of
$10,000 and signing a promissory note for an additional $40,000.
(The prospectus projected within four years a net income, based
on gold production, of $139,000.)
In this particular case, the courts apparently
upheld an IRS ruling disallowing the tax deduction. Reportedly
the original developers of this program, some $3 million richer,
are now unavailable.
In every mineral development there is a
logical sequence of events with which the enthusiastic, yet
uninitiated, investor may be unfamiliar. Each project can be
broken into phases, the completion of which can be evaluated
before expending large sums of additional funds. There is no
legitimate reason for throwing good money after bad. Classic
examples exist which have expensive land being purchased on the
basis of someone else's assays or a costly mill being constructed
without proven ore.
Engineering reports are useful tools that will
assist the mine developer and investor. Decisions to pursue a
project into the next stage, and in a particular manner, will be
made easier and more logically after consultation with the
appropriate professional engineer, whether a geologist, mining
engineer, or metallurgist. Other professional assistance such as
financial and legal is generally warranted.
In general, professional evaluation and advice
should be sought outside of the developing organization.
Principals with the firm and other vested partners, though well
intentioned, may write overly optimistic reports. Statements, for
example, referring to the attractiveness of a deposit because of
its close proximity to a famous producer or the historically
proven improvement of ore grade with depth in the mining district
may have the ring of authority but are often pure speculation.
Such reports frequently speak glowingly of questionable assets
that may be virtually worthless, e.g., raw mill sites,
dilapidated buildings or sheds, and rusted, dismantled equipment.
Past production records may be doctored, and projected
production/cost data may be presented in an unrealistic manner.
Profits are often inflated or guaranteed in such company-prepared
prospectuses. It is recommended, therefore, that most
professional advice be obtained from consultants who have no
financial connection with the company principals, the property,
the mineral technology to be employed, or any part of the
proposed operation.
The Department of Mines and
Mineral Resources is perhaps one of the first places an investor
should go seeking information. Knowledgeable, qualified engineers
can provide existing historical data on numerous properties and
discuss solutions to problems.
A list of registered assayers and a directory
of registered mining consultants are available at the Department.
In addition, an excellent reference library is maintained, as
well as a museum in which the interested individual can obtain
hands-on knowledge of rocks and minerals.
While it is obvious that venture capital is
needed to start a mine or mineral project, and the Department
promotes the development of Arizona's mineral resources, we
believe it is essential that the investor be as well informed as
possible. Under the best of circumstances mining is a risky
business and we should never tolerate fraudulent practices within
the industry. An informed investor, therefore, is better prepared
to take the risk without being fleeced at the same time.
Regulatory Contacts
U.S. Securities and Exchange Commission
1801 California St. #4800
Denver, CO 80202
(303) 391-6800
Arizona Board of Technical Registration
1110 W. Washington, suite 240
Phoenix, AZ 85007
(602) 364-4930
Arizona Corporation Commission
Securities Division
1300 W. Washington
Phoenix, AZ 85007
(602) 542-4242
Arizona Attorney General
Special Investigations Section
1275 W. Washington
Phoenix, AZ 85007
602-542-4853
Additional Information
-
Open File Report 02-20 - Arizona mining scams and unassayable ore
projects of the late 20th century [pdf format]
- by the Arizona Dept. of Mines and Mineral Resources
-
Fraudulent Mining Promotions
- from the Nevada Bureau of Mines and Geology
-
Investing Tips and Education Materials
- from the Arizona Securities Division, Corporation Commission
-
Mining Fraud and Mining Investment
- from the Nevada Division of Minerals
-
Mining Investments
[pdf format]
- from the Arizona Securities Division, Corporation Commission
-
Results of Analyses of Standard and Blank Samples Tested at
Selected Assay Laboratories in North America
[pdf format]
- a Mineral Report released in January 2003 by the
U.S. Bureau of Land Management.
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