U.S. gets burned by lax Canadian oversight

Updated 10:00 p.m., Tuesday, June 12, 2001

VANCOUVER, B.C. — A miner’s headlamp, a 1930s stock ticker and a picture of oil oozing from the ground in 1914 are among the memorabilia in the reception room of what was known for 93 years as the Vancouver Stock Exchange.

But perhaps the most telling exhibit is a chunk of shiny rock about the size of a cantaloupe: fool’s gold, the worthless pyrite confused with the real thing by early prospectors.

For years, the Vancouver Stock Exchange served as the financing nucleus for so-called junior mining companies. More often than not, these start-up operations raised a lot of other people’s money, spent it on unsuccessful exploration and then slipped into oblivion.

The small exploration firms commonly financed in Vancouver are considered crucial by the hard-rock mining industry because they locate many of the hard-to-find deposits that pan out.

But critics say the juniors, usually selling stock for less than $1 a share, sometimes allow fly-by-night operators to raise just enough capital to open mines that aren’t economically viable.

And when the venture collapses, the junior lacks the money to repair environmental damage — leaving American taxpayers to pay its bill.

A gold-rush mentality permeates these companies. Adrian du Plessis, a retired corporate investigator and business consultant who looked at the stock exchange intensively in the 1980s and 1990s, wrote that they are part of a “corporate carnival … a financial freak show of sorts — on occasion representing nothing better than institutionalized fraud.”

Forbes magazine in 1989 labeled the Vancouver exchange the “scam capital of the world.” Another commentator called it the financial world’s equivalent of professional wrestling.

Often, critics say, entrepreneurs form a mining company or take over a defunct one with nearly worthless stock. After some drilling to test for the presence of minerals, they promote the stock. They may even open a mine.

But mineral production is a secondary concern, they say. The goal, at this point, is to raise the value of the stock by bringing in new investors.

“With these one-mine, fly-by-night companies, you make money off the share price, not what’s in the ground,” said Tom Bartek, a Toronto minerals economist who has worked for the Canadian government, Indian tribes and environmental groups. “You mine the shareholders. Finding a deposit is extremely rare.”

Criticism about stock swindles prompted cleanup of the Vancouver exchange in the late 1990s. In 1999, the Vancouver exchange merged with the Alberta Stock Exchange — the very place, according to du Plessis and even some staff members of the new exchange, where some of the companies fleeing stricter new Vancouver rules ended up.

Now they have teamed up with two other small exchanges and are known as the Canadian Venture Exchange, or CDNX.

“Nothing has changed,” du Plessis said. “It’s all the same crap. … In a way, the Vancouver Stock Exchange today has done what most of its scam companies have done when they get discredited. It’s changed its name and is portraying itself as a new being.”

Bill Hess, president of the CDNX, has characterized it as “a safe place to make risky investments.”

Investments in small, emerging companies like those found on the CDNX — which include about 2,600 junior companies in mining, the Internet, finance, energy and other endeavors — are inherently a dicey affair, CDNX officials say.

“A lot of people say they got fleeced, but really, they lost on a risky investment,” said Angela Huxham, vice president of market regulation for the CDNX. “There’s a difference between a risky investment and a stock fraud.”

CDNX officials say they watch carefully to make sure companies are not inappropriately hyping themselves. If they discover a serious case of over-promotion, exchange officials say, they can present the offending company with a choice: Fire the person involved, or be kicked off the exchange.

Only a handful of firms have been involuntarily delisted for any reason since the CDNX was formed in 1999, records show. Officials of the exchange would not say how many people they have forced to resign.

Exchange officials say they also can refer cases to Canada’s province-level equivalent of the U.S. Securities and Exchange Commission, but won’t disclose how often this happens.

“We have been able to create the best-regulated junior market that we know of anywhere,” Huxham said. “We have a whole new beginning here. … People should never think there are not any abuses. (But) I think we have a pretty good track record with our companies.”

Defenders of the mining industry acknowledge that juniors can be get-rich-quick ventures that attract people who lose everything.

Jack McOuat, a principal in the Toronto consulting geological firm Watts, Griffis & McOuat Ltd., recalls an aunt of his who bought junior mining stocks rather than gamble on the lottery or the horse races.

“The problem with the horse race is it’s over in two minutes, whereas a junior mining stock, you can read about it every day in the paper,” he said.

McOuat and others trace the rise of Canada as the juniors’ finance center to the establishment of the U.S. Securities and Exchange Commission in 1934. The SEC requires detailed financial reporting for publicly traded companies.

In Canada, each province has its own regulatory apparatus, and critics say the B.C. and Alberta securities commissions are overwhelmed by the sheer volume of penny stocks they must regulate.

Over the years, the Western United States has proved to be a fruitful place for Vancouver-financed juniors to prospect, because the General Mining Law of 1872 leaves vast tracts of public lands open for exploration.

Victor Lazarovici, senior base-metals analyst for Nesbitt Burns, a major Canadian investment firm, acknowledged that junior companies, including mining firms, “tend to attract people who make money watching stock go up rather than by providing products.”

“The get-rich-quick, high-risk/high-reward nature of hard-rock mining is what attracts that speculative mind-set,” he said.

Occasionally, one of these juniors hits it big.

Take, for example, Barrick Gold Corp. The founder, a Hungarian war refugee who immigrated to Canada, first tried his hand at South Pacific hotels and a company that produced radios that looked nice enough to be furniture, according to a Barrick spokesman.

When that didn’t work out, Peter Munk got into the gold business. His team took an interest in a Nevada property that had been explored by a mom-and-pop company, invested $62 million in it and produced what became an astounding success, one that miners talk about in reverential tones.

About 18.6 million ounces of gold has been mined there since, providing a cash flow in 2000 alone of $315 million.

The company has been able to take over 1,945 acres of onetime federal land with a gold deposit worth billions for less than $10,000 because of the generous terms of the 1872 Mining Law.

But Barrick’s success stands in contrast to the hundreds of juniors that have come and gone — and three that became environmental disasters: Colorado’s Summitville mine, South Dakota’s Brohm mine and Montana’s Zortman-Landusky Mine.

The successful juniors typically sell out to or partner with a major company to develop a mine. An example is the Crown Jewel mine proposed at Buckhorn Mountain in north-central Washington, which is a joint venture between a subsidiary of the giant Newmont Mining Corp. of Denver and a small Canadian firm, Crown Resources Corp.

“The junior mining company plays a major and important role in the mining industry food chain,” said Laura Skaer, director of the Spokane-based Northwest Mining Association.

Her explanation for why so many are based in Canada? “The Canadian investor seems to be willing to take a greater risk-reward … whereas Wall Street is more conservative.”

Alan Young of the Environmental Mining Council of British Columbia, an environmental group, puts it differently.

“The Vancouver Stock Exchange is notorious the world over for the look-the-other-way approach of allowing venture capital to be raised for mining projects,” he said.

“The Vancouver Stock Exchange is to mining capital what Panama is to shipping — it’s a place where you can always get a flag.”

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