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ARIZONA MINING SCAMS AND UNASSAYABLE ORE PROJECTS OF THE LATE 20TH CENTURY
Open File Report 02-20
December, 2002
by W. Scott Donaldson
Arizona Department of Mines and Mineral Resources
1502 West Washington Phoenix, Arizona 85007
This is a preliminary report, subject to technical and editorial revision.
ARIZONA MINING SCAMS AND UNASSAYABLE ORE PROJECTS OF THE LATE 20TH CENTURY
by W. Scott Donaldson
Mining Attorney Phoenix, Arizona
OFR 02-20
December, 2002
Arizona Department of Mines and Mineral Resources 1502 West Washington Phoenix, Arizona 85007 (602) 255-3795
www.admmr.state.az.us
©©©©
December, 2001, by W. Scott Donaldson
Dedicated to the memory of H. Mason Coggin, a passionate combatant of mining scams. W. Scott Donaldson
2
Table of Contents
I. Introduction.................................................................................................... 3 II. Characteristics of Modern Mining Scams...................................................... 5 III. Mining & Early Arizona................................................................................ 10 IV. Case Histories................................................................................................ 14 A. Desert Gold Mining Company........................................................... 14 B. Tracon International of Phoenix........................................................ 16 C. Pannos Mining Company................................................................... 16 D. Mammoth Mine................................................................................. 17 E. New Times Article............................................................................. 18 F. Xenolix Technologies, Inc................................................................. 18 G. International Precious Metals Corp................................................... 20 H. Orex Gold Mines Corp....................................................................... 22 I. Other Unassayable Ore Projects........................................................ 23 V. Conclusion..................................................................................................... 26
3
I. Introduction “A gold miner is a liar standing next to a hole in the ground.”
The quote, traditionally misattributed to Mark Twain,
1
defines the experience of the many investors who have lost money in dubious Arizona mining projects. The state has a long and glorious history of mining scams, a history that continues today. The introduction to the Arizona Department of Mines and Mineral Resources’ (ADMMR) mining scams circular
2
describes the phenomenon: A time-honored method to bilk the public of millions of dollars is the ubiquitous mining swindle. Since an unusually rich ore deposit, or bonanza, has historically produced enormous profits for the developer, many of us believe that we too, like the ‘49er, can strike it rich. The glamour attached to “discovery” creates, in the imagination of some people, a relatively easy way to attain fantastic wealth. Although money can be made in mining and this Department certainly encourages mining, we also have a responsibility to urge the public to exercise prudence in its investment. Too many people have lost their hard-earned savings on an ill-advised mineral scheme. Archives are full of outrageous examples of mining scams and swindles in which the only beneficiary was a glib entrepreneur with unbounded optimism. In most cases, he disappeared before his investors realized what happened. Arizona history is inextricably tied to the mining industry. Unfortunately, a lot of the invested money has gone to promoters and projects that had nothing to do with actual mineral exploration and development. The state’s effort to educate the public against mining swindles has been going on for over a century. A front-page story in an 1899 edition of the
Arizona Republic’s
predecessor newspaper contained the following admonition while discussing an early Graham County mining scam:
3
Smalley concluded his story by charging, “The Spenazuma company is committing a crime against Arizona which its people should punish. They are obtaining money under false pretenses, and at the same time injuring the mining interest of the entire territory.” The effort continues today.
1
Kim A. McDonald, “Many of Mark Twain’s Famed Humorous Sayings Are Found to Have Been Misattributed to Him,”
Chronicle of Higher Education
, 4 September 1991, A8.
2
Mining Scams – Circular No. 59
, Revised March 1997, Arizona Department of Mines and Mineral Resources, 1.
3
Earl Zarbin,
All the Time a Newspaper
(Phoenix: Arizona Republic, 1990), 45.
4
This article studies the characteristics of modern Arizona mining scams or non-traditional mining projects and describes a number of examples. The purported mines or properties were located in Arizona, or the schemes had other substantial ties to the state.
5
II. Characteristics of Modern Mining Scams
A mining scam, for purposes of this article, is a money-raising scheme whose alleged potential profit is based on mineral exploration and/or development but which does not conform to generally accepted geological or metallurgical industry practices, did not profitably produce precious metals and was subject to civil, criminal or administrative enforcement action by state or federal government. An unassayable ore project, for purposes of this article, is a mineral exploration and/or development endeavor whose assay methods do not conform to generally accepted geological or metallurgical industry practices. Both the mining scam and unassayable ore cases discussed in this article were reported in other publications. Fraud or misrepresentation involving mining schemes has occurred for centuries. Although some of the cited cases are more than a few decades old, most correspond to the high gold prices of the mid-1980s and the stock market declines of the late 1980s. Organizers of fraudulent schemes look for an angle to fuel their activities; their use of mining will correspond to economic events. Gold prices jumped from $227.20 per ounce at the beginning of 1979 to $672.00 per ounce in 1980. They fell and rose through the 1980s, peaking at $476.10 in 1988. The price then generally declined to $284.90 per ounce in 2000.
4
Black Monday struck the United States on October 19, 1987. The stock market crashed, dropping more than 500 points in the worst one-day loss in its history. The crash affected the way people invested their money:
5
Yet the market’s plunge left real devastation in its wake. Small investors suffered heavily, and many were so alienated by the experience that they never returned to trading. Already suspicious of the market’s integrity, these investors were now convinced that the stock market was a rigged game for professionals. Ripples from the crash showed up immediately in Arizona mining scams. It went so far the State of Arizona took steps to educate the public about the dangers of investing in mining:
6
“We want to stop the ‘fool’s gold rush of 1988’ before it reaches epidemic proportions in Arizona,” said Matt Zale, director of the ACC’s [Arizona Corporation Commission] Securities Division.
4
Gold Comex Monthly Average Spot Settlement 1979 – 2000
.
5
James B. Stewart,
Den of Thieves
(New York: Simon & Schuster, 1992), 419.
6
Pay Dirt,
September 1988, 13A.
12
Running through the center of this property is a vein of ore one-half mile in width and two miles in length, every foot of it rich in gold, copper and silver. It is said this is the richest and largest continuous vein of ore (rich from the surface rock into the bowels of the earth) ever discovered in the world. And of this rock of which there are millions and millions of tons, yields of the precious metals $12 to the ton and upwards, and doubled in value every few feet as you tunnel into the side of the mountain on either side. The prospectus also described how the deposit was originally found by Spenazuma, the son of Aztec Emperor Montezuma, and relocated by the entirely fictitious Professor T.A. Halchu of Longhorn, Montana. The Professor learned of the riches from an aged, dying Mexican who said the secret to finding the wealth was unearthing the profile of the lost Spenazuma. Almost $3 million in stock was sold to easterners who knew nothing of mines and mining before the
Arizona Republic
predecessor uncovered the scam.
28
A prospectus for one doubtful Prescott mine circulated among Eastern investors even resorted to doggerel:
29
Come, little brother, and sit on my knee, And both of us wealthy will grow, you see; If you will invest your dollars with me, I will show you where money grows on the tree. Some historians suspect that, before the days of the copper mines, more money was lost to mining scams than was produced as income from actual mining operations.
30
The scams have been based on whatever will catch an investor’s interest. One of the oddest and most audacious salting schemes is called “The Great Diamond Swindle.”
31
In 1872 one Arnold and one Slack excited New York and San Francisco with displays of some splendid rough diamonds and some top grade rubies. The men said the gems were from an extensive diamond field north of Ft. Defiance in the Arizona Navajoland. Not to be gulled so easily, experienced San Francisco investors dispatched a team of investigators. They returned, sure enough, with more diamonds they
27
Zarbin, see note 3 above.
28
Zarbin, see note 3 above.
29
Dedera, see note 26 above.
30