Northern shareholders sue Canamax

A group of Alberta-based shareholders of Northern Minerals (TSE) who lost a small fortune after the company ran into financial difficulties two years ago, are suing Northern and former joint venture partner Canamax Resources (TSE) for $26 million. A committee representing about 130 shareholders, led by Edmonton lawyer Joseph Doz, are seeking answers to questions relating to startup problems at the Ketza River gold mine, which rendered their shares almost worthless.

Before it was brought into production in 1988, Canamax and Northern Minerals (formerly known as Pacific Trans-Ocean Resources) each held a 50% stake in the Yukon gold mine where a $6-million cost overrun and lower-than-expected gold production left PTX with a $13-million debt load that it could not service.

After agreeing to buy out PTX’s interest in the operation, Canamax says the mine produced 39,000 oz. gold last year. President Wayne Lenton, however, wouldn’t confirm speculation that it is being operated at a profit.

In their statement of claim, the shareholders are accusing Northern, Canamax and mining contractors Wright Engineering and Strathcona Mineral Services of negligence and misrepresentation with respect to work performed and failure to make accurate disclosure.

They are also seeking $16 million in compensation for the declining value of their shares and $10 million in punitive damages.

“As far as we are concerned, the thing is completely without merit,” said Northern Minerals President Elmer Stewart, who is working on his own to rebuild the company.

While Lenton called the allegations “a complete lot of nonsense,” members of the committee say they have garnered support from investors from as far away as London, England, after advertising in several newspapers.

“It appears as though the only way we can get any redress is through the courts,” said Gordon Severin, principal of an Edmonton elementary school who once held 60,000 shares of Pacific Trans- Ocean.

Believing that a successful mining operation at Ketza would eventually increase the value of the shares up to $10, Doz said he purchased a similar number of shares for $4-7.

“It’s tough when you wake up one morning to find that your shares are worth less than 5 cents,” he said.

The lawsuit is just one of a series of events that has troubled Canamax since the mine was brought into production in August, 1988. After agreeing to buy out Canamax’s interest in the project and the outstanding shares of PTX for about $16 million, Belmoral Mines (TSE) said it was suing Canamax for allegedly misrepresenting the reserves.

The two companies agreed to settle out of court, but not before Canamax had bought out PTX and declared a $8.6-million writedown in the value of the operation.

In a telephone interview with The Northern Miner, Lenton said the company’s current share price — $2.65 on The Toronto Stock Exchange — is largely due to the problems that have been experienced at Ketza. Those problems arose when Canamax misjudged the level of reserves in its feasibility study and the mine wasn’t able to meet targeted production levels. /c2h/ The most significant factor contributing to the problem was the specific gravity level which was used to calculate the Ketza reserves before the mine was brought into production. Specific gravity is the ratio of a mass of a body (in this case, rock) to the mass of an equal volume of water at a specific temperature.

Lenton said the company didn’t know until it started mining the deposit that it was working with a specific gravity level of 2.3 instead of 3.1 tonnes per cubic metre.

“You wouldn’t expect to have that kind of variation,” said Lenton who also attributed the operating problems to unusual ground conditions around the mine.

But shareholders, who have hired Edmonton lawyer Harold Veale to represent them, are also upset that mine development costs proved to be $6 million higher than specified in the original feasibility study. As PTX was liable for 50% of the overrun, it was immediately unable to pay off short-term debts owed to Lloyds Bank and Central Capital Management of Toronto.

“Maybe there are plausible reasons for this,” said Doz. “But it is very hard for us to accept what happened, especially when you read that Canamax is mining the thing at a profit,” he said.