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Sunday, February 14, 2010

Gold, Finger

Nothing excites people like gold. It is malleable, shiny, never loses its luster, and looks great around a girl’s neck. It is the stuff of legend, where a new discovery can make a man rich overnight. Gold is now at record prices, and the airwaves are inundated with ads to buy gold, sell gold, and invest in gold. What do you get when you combine beauty, excitement, and instant riches? Why, a great opportunity to scam investors, of course.

The typical gold mining scam follows a theme with common elements. The first of these is a great story. Maybe the speculative property is an “overlooked” piece of land next to one owned by a large mining firm. Maybe the owner went bankrupt and had to sell it on the cheap, regardless of its true value. Maybe the story combines a bit of everything.

I attended a seminar of a TMX-venture listed company a couple of years ago that nicely illustrates the “story” portion of a gold venture. First, the meeting place itself. The conference room was supplied with boxes covered in gold foil (each of which, I was told, represented one metric tonne). On the tables were gold vases and gold foil chocolate bars on gold tablecloths. But aside from flair, this presentation had a great story.

As I soon learned in a video, an old prospector (we’ll call him “Yukon Bob”) had a gold mine. The mine was so successful that he made a living at it using only a pick, shovel, and some occasional dynamite. It was this dynamite that proved his undoing. Yukon Bob’s beloved mine collapsed upon him, killing him instantly. That was about a hundred years ago. The family kept the property, but did not mine it in memory of poor Yukon Bob. Our heroic CEO convinced the family to sell this accursed mine to him for a small sum, just to be rid of it. Great story.

After hearing the tale, I perhaps didn’t look as excited as I might. The CEO noticed this, and immediately sent over a honey trap. Sitting uncomfortably close for a room full of people, the lovely lady asked me what I do for a living. Upon saying, “banker,” I thought I could see drool form at the edges of her mouth.

The other part of their story, which is typical of gold-mining presentations, is the quality of management. Having nothing but a hunk of land and an office somewhere, the company will tell you how management is “well respected” in the industry, and has “100 years” of experience between them.

A truly really great opportunity (you will hear) is when the company has not yet gone public. They will hint that if you invest now, the eventual IPO will make you rich whether the company finds gold or not. Not mentioned is that in the meantime, the CEO and directors will pay themselves nice six-figure salaries using your money until, hopefully, the company goes public as planned. At the peak of the hype, the owners will sell most of their shares, leaving penny stocks that will eventually get bought out by still more promoters, at which point the company’s name will change. This is why venture companies often have press releases for names that read like a play-by-play of what is hot in the market; for example, “Super Wind Alternative Energy, formerly known as Capsule Biomedical, formerly known as, has changed its name to Gold Sierra Cortez Inc.”

Then there are companies that tell you the truth, but neglect to mention the downside risks. Take for instance, a company that made a great gold discovery in Peru. The core samples showed excellent potential. The mineralized area was close to the surface, in rock that was easy to mine. All great so far. What the promoters neglected to mention was that the property is commercially inaccessible except by helicopter, that local prospectors frequently get kidnapped and held for ransom, and, oh yes, the small matter of the thousands of land mines.

Of course, some companies actually do search for gold, and some even build mines and strike it rich: probabilities, however, are not on your side.

The “golden rules” (pun intended) of investing in venture mining companies are as follows: first, if you want to invest your money, choose companies that are either in the process of building a mine or where production has already started – this alone with weed out the 95% of discoveries that never pass the feasibility stage; this should be the start of your research, not the end. If you want to speculate, there are almost no rules save one: don’t commit a penny more than you don’t mind losing.


“Oh, the only gold I know about is the kind you wear... you know, on the third finger of your left hand?” Miss Moneypenny to James Bond, Goldfinger, 1964