EDITORIAL PAGE — Scams and scoundrels

When markets are hot, scoundrels come out of the woodwork. That is the only way to explain the recent Timbuktu Gold fiasco, a salting scam that lured in unsuspecting investors by conjuring up the romance of Africa’s legendary gold mines.

According to street gossip, the salting was so crudely done that shavings of the South African Krugerrand could be found in the worthless samples.

Another theory is that placer gold was added. Whatever the case, the salting was deliberate and meant to deceive.

The incident cast a pall over the Alberta Stock Exchange, where Timbuktu was listed, and a black cloud over the brokerage firms involved in selling and/or recommending the stock. And rightfully so. These firms are sufficiently sophisticated to know that if it sounds too good to be true, it usually is.

Where was the due diligence?

Salting scams pop up once every 10 or 20 years. Most remain unsolved, usually because the salting is done in a foreign jurisdiction, which hinders the investigative process. Getting to the bottom of the Timbuktu case, for example, would require the co-operation of law-enforcement authorities from Canada, the U.S. and Mali. We hope it happens, but we won’t hold our breath.

Fortunately, salting is rare. A more common headache for regulators is the modern-day alchemists who, each year, bilk millions of dollars from unsuspecting investors, particularly doctors, dentists and retired couples with substantial savings.

A few years ago, the Northwest Mining Association mentioned that, in 1987 alone, an estimated US$250 million had been lost to gold scams in North America. The most elaborate of these involve projects where millions of ounces of gold are in the ground but can’t be measured by conventional assaying because of “interfering elements” or because of “wicking” (whatever that means), or because the temperature is not “high enough” or the right “pre-treatment” was not used.

Sometimes these promoters will have their own laboratories, where all sorts of exotic steps are taken to produce the “right” assay results. Or, they go to labs that specialize in the people-pleasing business. Granted, the going rate may be 10 to 20 times higher than normal, but business is business, and someone has to pay for the gold they find.

Investors are kept hanging by a string while the promoters work furiously to solve the “complex chemistry” through never-ending, costly research. Or they try to build some sort of pilot-plant . . . a black-box that allows them to recover the mysterious gold that reputable, certified labs are not able to find. When the jig is up, they close up their tents without ever producing an ounce of gold and move on to the next “big discovery.” Sometimes they do produce a few ounces, but at a cash cost per ounce that would be incalculable.

Years ago, the mining industry urged regulators to take a tough stand against these types of scams. The Vancouver Stock Exchange was probably the first of all Canadian exchanges to address the issue, through its disclosure policy on assaying. Companies can still use the exotic labs but, at the same time, must report results from a certified Canadian lab using accepted techniques. When the results do not compare, both parties can not be right. Investors should keep in mind that when faced with this situation, regulators will side with the tried and the true. After all, conventional technology has had no trouble finding all the deposits in production today.