Editorial: Southwestern Heads South With Rest of Market

Miners and their investors endured another period of pain in the week ended Sept. 1, the 35th trading week of 2007, as the mining sector gasped its way through its third straight week of market-cap contraction.

* Southwestern Resources set the tone with news that things were as bad as first feared at the high-profile Boka gold project in China. Following up a mid-July announcement that the company was withdrawing all its previous results from Boka, Southwestern dropped the biggest bombshells on Aug. 27: that it believes the Boka resource is “significantly less than previously reported” and that “manual and deliberate changes were made to its prior database to increase the grade of samples within mineralized sections.”

Southwestern is now suing its recently departed CEO John Paterson for fraud, breach of fiduciary duties and insider trading.

This is the biggest scandal to hit the Canadian mining industry since Bre-X Minerals a decade ago, but its impact will be much smaller. Thankfully, the post Bre-X introduction of the much stricter and well thought out National Instrument 43-101 guidelines for mineral exploration has meant that this latest problem was exposed early on, and the lines of responsibility are now clearly defined.

Some traders have noted that Southwestern looks like a bargain now that it’s trading just above its cash level, but that doesn’t take into account how much of that will be eaten up by lawyers and consultants descending on the crippled company in the years ahead.

* In another sign that the market may be peaking in the short term, a second junior financing was cancelled in as many weeks. Following on the heels of Fieldex Exploration’s kyboshed $3.9-million equity financing, Oslo’s Wega Mining pulled the rug out from Tagish Lake Gold on Aug. 31 by cancelling an $8-million tranche shortly after Tagish had completed a new resource estimate for its Skukum Creek project, in the Yukon.

* Cameco subsidiary Centerra Gold’s experience with its Kumtor mine in Kyrgyzstan this past week plainly showed the power that Third World governments hold over foreign resource companies, and the hidden risks always lurking in these jurisdictions. After protracted negotiations with the Canadians, the Kyrgyz government is now almost doubling its stake in Kumtor by having Cameco hand over 22.3 million Centerra shares, and Centerra issuing it another 10 million treasury shares.

While Cameco takes a $120-million loss on the transaction, this is actually a pretty good deal considering the threats being made last spring by Kyrgyz lawmakers of much higher taxes or outright nationalization.

These kinds of experiences will no doubt make it easier for Cameco management to convince shareholders after years of talk that it’s time to unload the company’s gold assets and focus on the less rough-and-tumble uranium subsector.

* The week’s events in the Democratic Republic of the Congo showed another way a government can be meddlesome, this time by fiddling with a foreign miner’s share price to scuttle a hostile takeover bid. After many months of rumour, on Aug. 29, Central African Mining & Exploration Co. finally unveiled an all-share, hostile bid for Katanga Mining that consisted of 17 CAMEC shares for each Katanga share, valuing Katanga at C$1.5 billion. The DRC government responded before the week was out by having a Congolese public prosecutor issue a revocation order on one of CAMEC’s key permits in the DRC — a move that hammered CAMEC’s stock and effectively ended its bid as it’s now constituted.

* All was not bleak, though, with a hint of a grassroots copper discovery giving a little juice to a group of juniors poking around the McFaulds Lake area of Ontario’s James Bay Lowlands. Noront Resources reported a pair of copper-mineralized intercepts from initial drilling of its Double Eagle project, including one that cut 26 metres (from 56 metres down-hole depth) of visible chalcopyrite within a pyrrhotite-chalcopyrite-peridotite ultramafic cumulate setting. The second hole had 73 metres of similar mineralization.

That was enough to more than double the stock and prompt all the companies in the area to fire off press releases reminding everyone they’re still there, fortunately.