EDITORIAL PAGE — The discovery, then the lawsuit

You’re the head of a junior company with a major discovery, a world-class find that is making the front page of newspapers (including The Northern Miner). You’ve worked hard at putting together the property deal, understanding the geology and lining up funds for that initial round of exploration. You’ve put your own money on the line and sold your idea to a group of investors, mostly on the retail side. And you’ve gone ahead and carried out the work programs on a shoestring, without much fuss and fanfare.

The discovery is made, but, before your can bask in the honors and reap the rewards, your lawyer taps you on the shoulder and says, “Remember so-and-so, the guy who used to have the property but gave up on it? Well, he thinks he’s entitled to a piece of the pie.” Or, “Remember the equity position so-and-so used to have in the company before he sold the rug out from under your feet? Well he’s suing you because you didn’t convince him the property was as prospective as it turned out to be.” Or possibly, “Remember so-and-so, the guy you fired because he was plotting a palace coup? Well, he’s suing you because, by virtue of his-saying-so, he was the brains behind the discovery and is therefore entitled to a piece of the action.”

Unlikely? Preposterous? Think again, and welcome to the world of mining, where the size and importance of your discovery are directly proportional to the degree to which you can expect to be subjected to lawsuits.

But that is only half the story; the rest is timing. For a lawsuit to succeed, it must have leverage. If you’ve just made the discovery, you can probably expect a grace period until conditions are right for a suit to be filed.

Companies are most vulnerable once they decide to sell the discovery, or just before they expect to close such a deal. As any good hunter knows, ducks are easier to shoot once they have been flushed out of the reeds. The importance of timing is directly proportional to the degree to which the lawsuit is meant to be a nuisance. The better the case, the less dependent it is on timing.

No matter how hard companies try to dot their `i’s and cross their `t’s, they should expect to be sued if they make an important discovery. It has become a left-handed compliment, a confirmation of discovery, that mining companies probably would prefer to live without.

Shareholders don’t like the uncertainty either, as it delays the normal course of events and downgrades their investment. But we are hard-pressed to come up with any suggestions on how the situation can be improved. People in the mining industry are not going to stop suing each other because we say it is not good for minority shareholders and slows down development of important resource projects that benefit a region’s economy.

And we recognize, too, that some lawsuits can be successful on points of law, such as Corona’s lawsuit against Lac Minerals for control of gold mining assets in Ontario’s Hemlo gold camp. At the onset, few believed the junior would prevail, yet it did, and perhaps rightfully so. Still, in hindsight, it would seem the Corona suit only added fuel to the misconception that all Davids, or those who portray themselves as such, should prevail over the Goliaths of this world.

If there is a tragedy in the proliferation of lawsuits in the mining business, it is that too many are being settled out of court, thus encouraging only more lawsuits. All too often, these settlements are not based on legal merits but, rather, on other considerations, such as the need to consummate a deal by a certain deadline, which only muddies the water of mining law.