A black name for Black Rock

The mother of all recent Arizona “desert dirt” plays was the project of International Precious Metals (IPM), 90 miles west of Phoenix.

IPM started as a small-scale explorer of platinum, with shares traded on the Toronto Stock Exchange (TSE). In 1993, the company acquired an Arizona property known as BRX, or Black Rock, by raising US$27 million through a private placement. It also owned nearly 20% of Xenolix (T.N.M., Aug. 13-19/01), as reported in December 1997.

IPM was listed on the TSE in early 1994, when it announced sensational gold and platinum grades from its Black Rock property. TSE officials asked the company to hire an independent firm, Kilborn Engineering, to audit IPM’s results. Kilborn found no significant amounts of precious metals, and so trading of the stock was soon halted. The Arizona Department of Mines and Mineral Resources (ADMMR) also conducted an investigation.

“I have checked hundreds of platinum samples in Arizona and have never come up with any positive platinum values,” said department director Mason Coggin.

He added that he could find no gold and only trace amounts of silver.

When trading resumed in April 1994, the stock plunged. The following month, the company’s shares were delisted on the grounds that IPM had failed to file financial statements.

The company soon found a new listing, on the Nasdaq in the U.S., and announced more sensational gold and platinum results, using a “modified” fire assay procedure.

The company was also heavily promoted on the Internet, which became a battleground for desert dirt supporters and detractors. Of note, more than 30,000 IPM-related messages have been posted on Silicon Valley, a popular Internet stock-talk forum.

IPM’s shares peaked at US$14 in April 1994, but things soon began to unravel. The Northern Miner questioned IPM’s BRX project, while the ADMMR continued to respond negatively to inquiries about the company.

Furious at the allegations, IPM sued the ADMMR and Coggin, obtaining an injunction against the government department discussing the investment value of IPM stock. But if Coggin was contrite, he was not showing it. “We can still tell you that we have not been able to corroborate [IPM’s] values using registered Arizona assayers and fire assay procedures,” he said in an interview.

IPM’s share price slid to less than US$2 in 1998 and was delisted from Nasdaq in April of that year. Two months later, IPM filed a voluntary petition for reorganization under Chapter 11 of the U.S. Bankruptcy Code. The company later declared bankruptcy under Chapter 7 in October 1999, leaving behind a list of 158 creditors, including employees, banks, attorneys, the state of Arizona, and the U.S. government.

The 78 million remaining unissued shares were sold, with the approval of the Bankruptcy Court, on Oct. 12, 2000, for US$20,000.

Prior to falling apart, IPM displayed remarkable power and influence for a mining company that did not profitably produce any precious metals. Its marketing succeeded on a worldwide scale. Some big mutual-fund operators were eager get involved. Capital Research & Management Co., which has $150 billion under management by American Funds, owned almost 12% of IPM, and London-based Midas Fund had picked up 200,000 shares.

During its heyday, IPM stock was the focus of intense investor interest on both the TSE and the Nasdaq. The shares were traded in huge volumes, averaging about 2 million shares every day until trading was halted by the exchanges.

The stock promoters of Xenolix and IPM are mild-mannered compared with some characters involved in recent Arizona mining scams. For example, the Santa Maria mine of Florida-based Orex Gold Mines was used by organized crime as the foundation of a bogus scheme. The 480-acre property was promoted as containing substantial reserves of moderate-grade (0.25-oz.per-ton) oxidized gold ore and a fully permitted subterranean gold and silica mining operation.

In April 2001, federal prosecutors announced the indictment of 45 alleged members and associates of New York City’s five organized crime families on charges that included murder, racketeering, stock fraud and bribery. Thirty-two of the defendants are associated with the Genoveses, described by police as the strongest and most secretive of New York’s mafia families.

Four of the men were charged with, amongst other indictments, an alleged “pump and dump” stock fraud involving the Santa Maria mine and Orex. One of the four, Alan Longo, allegedly ran the Genovese family’s daily operations over the past several years because the usual family leader was imprisoned.

Investors were sucked into paying about US$6.8 million for Orex stock at prices artificially inflated by two Florida brokerage houses. The stock peaked at US$7.50 in June 1999 but dropped to US13 two months later.

There are still reports of wrestling matches between state and federal authorities on one side and unassayable ore proponents on the other. However, new methods and tools have become available to the authorities.

Hexagon Consolidated Companies of America claims there are 3 million ounces of combined gold, silver and the platinum group metals on its state mineral lease in Skull Valley. Hexagon is a publicly traded company with interests in mining, health care, music publishing and real estate. In 1998, the company claimed “a resource well in excess of 450,000 tonnes at Skull Valley, grading 505 grams osmium, 300 grams iridium, 253 grams ruthenium, 180 grams platinum, 69.6 grams silver, 51.4 grams gold and 28.1 grams palladium per tonne.”

In a measure of its success at that time, the company subsequently consolidated its share capital, trading one new share for 1,000 old shares.

In October 2000, the Arizona State Land Department (ASLD) issued a notice of default and denial of plan of operation. The notice is based on ASLD’s inability to find precious metals on the lease and Hexagon’s failure to comply with past ASLD orders.

A final ASLD hearing was held in March 2001. Hexagon’s target on the mineral lease is the tailings from former streambed placer operations. A judge found that Hexagon’s plan of operations was properly denied because the tailings constitute waste, have no special economically recoverable value and are a common variety of mineral subject to auction and sale. The judge also found that the assay reports created by Hexagon’s purported expert witnesses — Dr. Donald Jordan of Metallurgical Research and Assay Laboratory and Dnyanendra Shah, a registered Arizona assayer and president of Copper State Analytical Laboratories — are highly suspicious and unreliable. Whether ASLD can make the recommendation stick in the inevitable appeal against an existing mineral lease issued in 1983 remains to be seen.

Another suspicious company is Maxam Gold, a publicly traded company engaged in the acquisition, exploration and development of mineral properties, mainly in southwestern Arizona. Its Peoria 7 property, consisting of federal unpatented mining claims south of Gila Bend, is touted as rich in gold ore not amenable to standard assay techniques.

In June 1998, the Board of Land Management (BLM) issued a decision refusing parts of Maxam’s application for occupation of the mining claims. The decision was based on BLM’s inability to find any proven or probable reserves, as defined by the U.S. Securities Exchange Commission. Maxam appealed the decision to the U.S. Department of the Interior’s Board of Land Appeals. The appeal was dismissed in October 1998 after Maxam withdrew its notice of appeal.

In 1996, the BLM introduced 43 new CFR 3715 regulations to govern the use and occupancy of mining claims and mill sites. These regulations deal with all types of unauthorized uses of mining claims, including safety hazards, environmental contamination and investment fraud. The regulations shift the burden of proof to the claim-holder to show that any planned activity is incidental to mining.

Ralph Costa, a mining engineer with Arizona’s BLM, commented on the relatively new BLM use and occupancy regulations: “When an operator proposes m
ining or occupancy, he must have some measure of proven or probable reserves before BLM would allow the construction of a mill or other facilities. BLM wants to have some assurance that any proposed mining activities conducted on public lands stand a reasonable chance of success.

Under the new regulations, the burden of proof is squarely on the claimant to show that mining is based on sound exploration data. The 3715 regulations are an important and powerful regulatory tool that is now available to the BLM. The regulations allow for criminal as well as civil penalties.

These recent Arizona mining scams reaffirm one thing: there is no such thing as a free lunch. Add to that the common-sense knowledge that if something sounds too good to be true it probably is, and the result is a better fraud prevention system than anything state or federal governments can accomplish.

— The preceding is the last in a series of columns examining the history of mining scams in Arizona. The author is a lawyer in Phoenix.