EXPLORATION 1998 — Battle over a Barren — Regal Goldfields to take dispute over protected site to court

Arguing that the government of Nova Scotia did not have the authority to revoke its right to access and explore a tract of ground in western Cape Breton, Regal Goldfields (REGL-C) has applied to the province’s Supreme Court to have the government’s decision declared “unlawful.”

The company’s land package includes six permits that cover 95% of Jim Campbell’s Barren, a highland bog that had been designated

a candidate for protected-site status in 1993. Following a lobbying campaign led by a local development commission, the Barren was removed from the list by former premier John Savage in late 1996, only to be relisted less than a year later by his successor, Premier Russell MacLellan. These events generated widespread controversy and eventually led to a series of allegations involving insider trading and a suspected cabinet leak.

“This [negative publicity] has been the bane of my existence,” says Regal President Richard Brissenden, who argues that the government “seized” his property “without compensation and without authority.” He describes the court hearing scheduled for March 11 as the “first step” in what may be an ongoing battle.

Brissenden has told reporters that Regal may seek compensation for the “expropriation” of its property, including “potential profits” it might have reaped had a large orebody been found. “If the matter of compensation gets before the court, we will demonstrate that our damages are considerable, evidenced, in part, by the fact that our stock, which was once as high as $3, has fallen to about 25cents.”

Regal may be hard pressed to find precedents for its bid to be compensated for “potential profits” from a hypothetical mine, or the erosion of its share price, because no mineral deposits of economic interest are known to occur in the Barren, and the company did not drill or make any discoveries there.

“We don’t have legal advice yet on what can be included [in a compensation claim],” Brissenden says. “But we think there are damages that may be applicable.”

Should the dispute escalate into a compensation claim, it would likely focus on whether this small part of Regal’s total land package has “significant mineral potential,” as stated in the company’s corporate literature, and on whether the company has been treated fairly. The Nova Scotia government would then face a challenge it might have avoided several years ago, had it paid heed to advice from its own mines ministry.

While the Barren and 29 other sites slated for protected status were studied in the early 1990s, government geologists complained that they were not given enough time to complete comprehensive mineral resource assessments.

“It is impossible for staff to say without further study that any of the 30 areas have low mineral potential, and so all the areas were found to have at least moderate-to-high mineral potential,” their 1992 report states.

At the same time, the Mines and Minerals branch warned that the province’s mineral industry faced “a significant land-use problem.” It pointed out that the additional 6% of land identified in the park-planning process would push the total of “limited land access areas to about 40% of the province, including over half the remaining Crown land.” And it urged the government to complete comprehensive mineral assessments before setting aside more protected areas. Despite these warnings, the Barren remained on the list and, in early 1993, a moratorium was placed on new exploration licences.

The next year, two private Nova Scotia companies, North Cape Breton Resources and Highland Range Minerals, started assembling exploration permits in areas near the Barren that were open for resource development.

Both private companies had been formed by geologist Fenton Scott and business consultant Gerald Doucet, a former provincial cabinet minister who grew up in the region.

Regal came to the area in 1995 and agreed to acquire a 51% interest in North Cape’s land package for $400,000 cash and $1 million of exploration commitments. It also obtained the right to acquire the remaining 49% of the properties for 5 million of its shares. Regal’s literature from this period focuses on the area’s potential for nickel-copper-cobalt deposits, drawing parallels with the Voisey’s Bay deposits in Labrador.

In the first quarter of 1996, Regal and its partner drilled 15 holes on licences just north of the Barren. Curiously, a March 1996 report by Regal fails to mention this work, stating only that drilling was anticipated to begin that summer. Asked what results were returned from the drill program, Brissenden says a flat-lying gold target was identified, but the mineralization was “not economic.”

In May 1996, Regal retained Watts, Griffis & McOuat (WGM) to complete a study of the Trout Lake nickel-copper property. WGM reviewed past work and took a few samples from the most prospective area, which had been tested previously by Inco. Results were low for copper and nickel, and below detection limits for gold and platinum-group elements. Overall, the report is less than bullish, and most other areas were not viewed as having much potential for economic mineralization.

Regal’s focus then shifted to other properties in the region, including ground that an affiliate, International Northland Resources (INA-A), had optioned from Highland Range. Northland could earn a 51% interest in the properties by spending $1 million on exploration, and could acquire the remainder by issuing 5 million shares. By this time, Doucet’s brother Fred had joined Regal’s board, thus strengthening the company’s clout in the region.

Throughout much of 1996, Regal took part in a series of local consultations, which involved arranging meetings between the company, provincial resource and environment agencies and their national counterparts, and the Cheticamp Development Commission, a provincial agency set up to encourage economic development in western Cape Breton. According to an affidavit that Brissenden submitted to the Supreme Court, the Development Commission “strongly encouraged” the provincial government to review the status of the Barren. Regal also argued that without access to the Barren it was “stymied” in its exploration efforts.

Records of a September 1996 meeting with Nova Scotia’s Minister of Natural Resources, Eleanor Norrie, obtained by Dean Jobb of the Halifax Chronicle-Herald, show that the Development Commission’s representatives told the Minister that the Barren area had a “very high potential for base and precious metals,” basing their conclusions on a consultant’s report from geologist William Shaw that cited earlier work on gold and base-metal showings. Having failed to complete a mineral assessment years earlier, the government had little data of its own on hand to either substantiate or contradict this view.

Arguing that mineral development would provide jobs in the region, the Development Commission kept up the pressure to open the area for exploration, and the government removed the Barren from its protected list on Dec. 3, 1996. The nearby Everlasting Barren was named as a substitute.

Environmental groups, angered by the decision, soon noticed that the value of Regal shares had increased by 30% during a few days of heavy trading in late November, a week before the decision was publicly announced. The media jumped on this trading flurry, and later reported that authorities were investigating the possibility of insider trading and a suspected cabinet leak.

“None of the directors traded stock in that period,” Brissenden says. “The trading was related to what we were doing in Timmins. We had a beautiful anomaly, but when we drilled it, it wasn’t there.”

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Internet promotion

Regal began drilling its 20-claim property in Kidd Twp., near Timmins, Ont., in summer 1996. The program was designed to follow up copper-zinc-silver mineralization Regal had intersected during its 1994 program, and included downhole electromagnetic surveys to detect conductors at depth.

Investors began taking a keen interest in Regal’s work, their appetite whetted by glowing reviews in The Greenwic
h Report newsletter and bullish postings on Silicon Investor, an Internet bulletin board. Many of the Internet postings were from Richard Birch, who also helped Regal set up its own website.

Birch’s postings in the summer of 1996 made liberal use of “unsubstantiated rumors,” one being that “Robert Friedland of Diamond Fields fame might be interested” in Regal’s nickel project in Nova Scotia. A month or two later, he told investors that “preliminary work and drilling” on the Cape Breton claims “indicate rock very similar to the rock in the Hemlo camp (of Ontario), with gold values near the same levels.” He also let people know that Regal’s Timmins drill program was experiencing various technical problems.

Birch’s honeymoon with investors ended when Regal announced plans to buy 4.7 million shares (70.7%) of International Northland, whose key asset was the Nova Scotia claims optioned from Highland Range. The deal involved Regal buying all the shares of a numbered Alberta company in return for 2 million of its own shares. Investors were concerned about dilution, as well as the “confusing” nature of the deal. “Is it normal for a guy like Brissenden to be involved with a bunch of mining companies?” one shareholder asked Birch.

“I don’t know much about the mining industry, but it seems like in any other industry there would be a conflict of interest or something.” Birch replied that the transaction was a “housekeeping measure” by the owners, “who, I would have to agree, probably have controlling interests in all three companies.” He attempted to dismiss concerns by arguing that “it more or less all comes out in the wash, and there is no dilution.” Shareholders were not mollified and, by late October, Regal reported that the transaction would not be concluded, though it did give a reason.

Regal’s work at Timmins kept shareholders intrigued, however, and upbeat messages were posted on the Internet, some saying that shares could rise to $20, or $60, if a major discovery was made. Hopes were dashed when an investor posted “temporary bad news” in early October. “I spoke to the president. He said that the first two holes were completed at Timmins. No large mineral deposits were found.” The bad news was confirmed by Richard Birch a few days later. “They didn’t hit in the second hole.” By early November, Regal’s share price had slipped to below $1, down from the $2-level in early July and its $3-high in February. The Internet postings contained numerous complaints about the lack of information from Regal, such as “Press releases are not this company’s strong suit.” The bulls tried to drown out the bears by posting messages that praised Regal’s “guts and determination.” But the bears fought back: “This business about guts, glory and determination is a load of crap. We are investors, not a fanclub, [and] they are a company with a proven track record of leaving their investors totally in the dark.”

Before long, Richard Birch signed off as the company’s main cheerleader. But a few diehards kept the faith and posted messages that some “extremely hot” information would soon be coming from Regal.

Trading in Regal shares picked up pace between Nov. 21, when Premier Savage’s cabinet reportedly made its decision to remove

the Barren’s protected status, and Dec. 3, when that decision was made public.

On Nov. 25, Regal announced that its downhole surveys on the Timmins claims had revealed an “anomalous structure.” Unfortunately, the hole drilled in September had bypassed the anomaly, as had Regal’s 1994 hole, which was neither cased nor surveyed. All of this meant that the anomaly was still a potential target for future drilling.

On the same day, Regal announced an offer to buy all of the issued shares of Highland Range and North Cape Breton for $1.5 million, thereby amending previous agreements with the private companies. To complete the offer, Regal agreed to sell 3.3 million units for $1.98 million to insiders and existing shareholders.

On the same day that the government withdrew the 1,700-ha Barren from its protected site candidate

list, the Department of Natural Resources issued a release stating that the decision was in response to the wishes of the local community, “which wants the jobs and economic diversification that mineral exploration and potential development can bring to this area.” And it quoted the Cheticamp Development Commission as saying “The Barren has a high potential for gold deposits.” Regal shareholders then turned their attention to the Nova Scotia claims, which were expanded to include ground in the Barren. By the end of 1996, Regal had acquired or optioned 32 licences covering 90 sq. km., including 14 sq. km in the Barren. The land package abuts Cape Breton Highlands National Park to the north. Only two of the licences (covering 20% of the Barren) predate the 1993 moratorium, while four of the them (comprising an additional 75% of the Barren) were issued after the moratorium. The remaining 26 licence areas are outside the Barren.

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Jumping Brook

By year-end, WGM had completed another report, this time on the Jumping Brook project, which comprised a small tract of ground held by Regal and a much larger block that International Northland had optioned from Highland Range.

The 74-sq-km land package covered almost the entire extent of the Jumping Brook Metamorphic complex, a sequence of metasedimentary and metavolcanic rocks hosting 38 known gold and base-metal occurrences. The structure was described as complex, with several phases of folding and faulting.

WGM found that many of the occurrences (including some in the Barren) had been explored by previous operators and, as a result, was able to compile the results of 60 geophysical surveys, 40 geochemical surveys, 25 geological surveys, numerous trenches and about 200 drillholes. Few, if any, were found to have been adequately tested, and most were described as being “at a very early stage of exploration.”

WGM followed up the compilation work with field checking and fill-in surveys, which included examination of the low-grade gold target previously drilled by Highland Range. The mineralization was found to consist of disseminations of pyrite and arsenopyrite, with the best result being 0.01 oz. gold per tonne over 25.6 metres, in hole 96-8.

Because the gold was intimately associated with arsenopyrite, WGM cautioned that the metallurgy “will have an impact on the economic potential of the mineralization.” It recommended that no further exploration be conducted, pending the outcome of a metallurgical study to determine if the mineralization would be amenable to processing technologies such as bioleaching.

While other gold showings were identified on the land package, many of these also contained high arsenic values. As a result, WGM assigned a higher priority to areas prospective for high-grade massive sulphide mineralization with lower arsenic-to-gold ratios. Some of the best targets of this type were identified on Tract 81, ground previously explored by Noranda, BP-Selco and others. WGM recommended more drilling in this area, which is outside the Barren.

Among the targets identified within the Barren is a geophysical conductor, previously drilled by Cominco, which returned 7 ft. of 0.28 oz. gold, 1.42 oz. silver, 0.28% copper and trace amounts of lead and zinc. Cominco drilled three more holes into the conductor, but did not intersect significant mineralization.

Noranda tested the same area in 1988, but assays were low. The company’s 1989 trenching west of the conductor did return some high-grade gold mineralization in a series of narrow (20-30-cm thick) sulphide lenses, however, subsequent drilling failed to intersect as much mineralization as was indicated in the trenches. WGM has recommended more drilling to test the geometry of this mineralization and to test two other areas where Noranda had intersected gold mineralization.

By far the best compilation of work in the region came from WGM, which identified a number of drill targets prospective for lead-zinc-copper (with precious-metal content) and/or gold mineralization, including several in
the Barren. A $1.2-million work program was recommended, including 8,850 metres of drilling.

In mid-February, Regal completed its previously announced private placement for $1.9 million. By this time, it had closed the purchase of 79% of North Cape Breton and 85.4% of Highland Range for a total of $1.2 million, and was seeking the balance of the shares of both companies. It also issued a block of its own shares to affiliate International Northland in exchange for that company’s rights under an option agreement with Highland Range.

These transactions eliminated the need for Regal and Northland to each issue 5 million shares to North Cape and Highland Range, respectively, as well as the need to obtain independent valuations and regulatory approvals.

Regal shareholders then waited for field work to begin at the Cape Breton properties. And waited. While they waited, environmental groups denounced the government’s decision and began their own lobbying efforts to have the decision reversed. The media began taking an interest in the controversy and, as a result, Regal’s ties to several former politicians, including the Doucet brothers, came under scrutiny.

Regal’s supporters tried to argue that the company’s activities had the potential to deliver high-paying jobs to a region hard hit by unemployment, but without a deposit or a discovery — or even any new exploration results — in hand, they had little to support their claims.

Regal did little work in Nova Scotia during the 11 months the Barren was open. Public announcements in early 1997 covered the company’s geophysical surveys on its Timmins property in considerable detail,

until early May, when Regal announced that results were not “encouraging” and no further work was planned. At that time, the company said it was “continuing its activities” in Cape Breton, where a program would provide the first test of eight “very attractive geological, geochemical and geophysical targets.”

Brissenden says the company spent more than was orginally planned at Timmins, which meant that more funds had to be raised for Nova Scotia. “But before we could do this, we heard that MacLellan had promised to revisit the Barren decision if he succeeded Savage as premier. That put us in limbo.” The jobs-versus-parks debate continued after MacLellan became premier. In the fall of 1997, obviously taking to heart concerns raised by environmental groups, MacLellan appointed a committee to study the Barren issue.

On Oct. 29, the premier placed Jim Campbell’s Barren back on the protected list, bringing to three the number of times that the Nova Scotia government had made land-use decisions for the Barren without benefit of a thorough mineral assessment. The Department of Natural Resources then withdrew Regal’s right to access permits in the Barren.

Environmental groups cheered the decision, but locals who wanted the area open for mineral exploration and development felt betrayed. MacLellan fueled the flames of discontent when he haughtily informed local residents that “better solutions” than resource development could be found to bring jobs to the region.

“We have not taken something away from you,” he told locals. “What we have done is given back something of far greater value — economic development that is sustainable. The government is committed to redoubling our efforts to help you expand the limitless horizons of eco-tourism and other sustainable industries.”

Many locals scoffed at the suggestion that the less-than-pristine Barren would be of interest to

busloads of big-spending eco-tourists, and blamed environmentalists for the loss of potential jobs. Environmentalists, in turn, accused Regal of inflating the job potential of its activities. And the Nova Scotia government was criticized harshly for its inconsistent policies that discouraged investment in

the province.

Government officials say Regal is free to explore its remaining ground in the region, a sizable land package in its own right. They point out that the company is not being denied access to the two pre-existing licences in the Barren, though they were less certain if mining would be allowed on them.

MacLellan, seemingly suggesting that exploration companies might drill for the sheer fun of poking holes in the earth, said Regal “can do the exploration on the leases they’ve been granted,” but there could be no development of any deposits lease holders might find in the Barren. “There’s exploration,” Premier MacLellan told the Halifax Daily News, “but mining is another question.”

Nova Scotia is now poised for another election, and industry supporters hope the next crop of politicians will realize that companies do not explore where they can’t mine. “Our government just gave us a new prospecting program . . . a bran’ new shining car without a motor,” one prospector said.

“We may as well take up bird watching.” Another asked, “Why not just declare the entire province a ‘barren’.”

As for Regal’s long-suffering shareholders, the company has revived the Timmins claims by striking a deal with Falconbridge (F-T). The major can earn up to a 70% interest in the property by paying $80,000 and spending $700,000 on exploration, with minimal commitments in the first year. It plans

to drill a hole on the property by the end of March to search for Regal’s elusive anomaly.

Regal also announced plans for a rights offering to fund both exploration work in Nova Scotia and the court challenge, as well as for general working capital. Brissenden says about $400,000 will be spent on the work program scheduled to begin in early May. The initial program will test three base-metal prospects, including one with high silver values.

A short time later, the company announced that it had completed a $150,000 private placement to buy the 1% net smelter return royalty on the Cape Breton properties.

Meanwhile the Barren sits, oblivious to the controversy that surrounds it.