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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.

 
 
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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
 Dedera, see note 26 above.
31
 Dedera, see note 26 above.

 
 
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said they plucked from the Ft. Defiance locations. Clarence King, famed Western geologist, who visited the alleged discovery and concluded the gems resembled stones from African and Brazilian diamond mines, uncovered the hoax.

 
 
14
IV. Case Histories
The case histories cited below were selected to give an overview of Arizona’s experience with modern mining scams. The list is not complete, more mining scams occurred in Arizona than are known to any one private entity or governmental authority. Some victims reacted with little more than embarrassment, failing to seek reimbursement for an investment that would never have occurred with the exercise of common sense. The histories show that not only investors have been swindled. Both the United States government and the State of Arizona have fallen prey to outlandish claims of mineral wealth.
A. Desert Gold Mining Company
The BLM was victimized by one of the biggest gold salting hoaxes in recent history in this case.
32
 BLM manages 19 percent of the surface and 45 percent of the subsurface of the entire State of Arizona.
33
 It is responsible for implementation of the federal mining laws
34
 on those lands. Desert Gold Mining Company claimed discovery of a large and easily accessible gold deposit north of the Phoenix city limits in the early 1960s. In 1961 the United States issued eight mineral patents
35
 for 8,200 acres of public land to that company and others,  based on their claims of gold discovery. The land stretched between Morristown and Beardsley east of U.S. Highway 93 and spanned Castle Hot Springs Road. A mineral patent, issued by BLM if the land contains valuable mineral deposits, is outright ownership of the land for all purposes, after payment of a $2.50 per acre fee.
36
 The actual value of the land, with or without gold, far exceeded the $2.50 per acre fee.
37
 The patented land clearly had speculative residential or commercial development  potential.
 
Prior to issuance of the patents, BLM examiners collected hundreds of samples of gravel deposits, some weighing more than 30 pounds, in checking Desert Gold’s claims of vast mineral wealth. The sacks containing the samples were placed in a pile on the 8,200 acres, covered with a canvas tarpaulin and left unguarded for several days before  being processed with Desert Gold’s own equipment.
38
 
32
 Sitter, see note 12 above, A21.
33
 “Fast Facts,” Arizona Bureau of Land Management, 26 February 2001, <http://azwww.az.blm.gov/fastfact.htm> (18 April 2001).
34
 30 U.S.C. § 21, et seq.
35
 Ibid.
36
 See note 34 above.
37
 “1
st
 Gold Salting Trial in Years Begins,”
 Arizona Republic
, 10 January 1968.
38
 Ibid.

 
 
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Desert Gold then became careless and greedy. Mining activities on the 8,200 acres stopped four months after the patents issued. The Desert Gold principals formed other companies, which applied for patents to 13,320 acres of federal lands closer to growing Sun City.
39
 BLM became suspicious of Desert Gold, declared its intent to resample the 13,320 acres and obtained a court order to re-examine the original 8,200 acres. The applicant on the 13,320 acres closer to Sun City withdrew the application upon BLM’s announcement of intent to resample. The results from resampling the 8,200 acres caused considerable confusion in BLM:
40
 The confusion, he explained, was because each day only the first sample showed any evidence of gold. And this happened with unfailing regularity, McCullough said. “We concluded,” he asserted, “that someone was salting our equipment during the night.” To prove this conclusion, McCullough said, the research group scrupulously cleaned all of its digging and processing equipment before leaving it at the claim site on Feb. 28, 1963. The following morning, the crew examined the same equipment and found gold dust sprinkled over the bed of the utility trailer used to haul ore samples from test holes to the nearby processing plant. The “free gold,” which was typical of the type found in placer deposits, McCullough said, was carefully covered with a fine layer of sand. BLM then tightened security procedures and concluded there was only a smattering of gold in the same places that, only a few years before, held fabulously rich deposits.
41
 Efforts were made to catch the individuals salting the samples. On April 4, 1963, Federal Bureau of Investigation agents observed Dale Moran, a Phoenix contractor and  principal in the companies, handling government ore samples. Mr. Moran was indicted for gold salting.
42
 He pleaded guilty to a charge of deception of a prospective purchaser on December 21, 1964, and was sentenced to six months in jail. The sentence was suspended and Moran placed on probation.
43
 In 1963 BLM determined that the patents had been obtained by fraud or mistake and referred the case to the United States Department of Justice. Suit to rescind the
39
 Albert J. Sitter, “Alleged Land Grab Connected To Gold-Salting Gyp Charge,”
 Arizona  Republic
, 11 January 1968, B1.
40
 Ibid.
41
 Albert J. Sitter, “Gold Samples Tailed Off, Witness Says,”
 Arizona Republic
, 12 January 1968.
42
 “U.S. Asks Return of ‘Gold-Salt’ Land,”
 Arizona Republic
, 10 September 1963.
43
 “Gold Salting Issue In U.S. Court Trial,”
 Arizona Republic
, 11 January 1968.

 
 
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V. Conclusion
The lesson we learn from recent Arizona mining scams is neither new nor complicated: there is no such thing as a free lunch. Add in the concept that if something sounds too good to be true it probably is and the result is a better common sense fraud  prevention system than anything state or federal governments can accomplish. Excessively optimistic promoters have and will use vast mineral wealth to inflame investors’ greed. Arizona’s history and immense existing mining industry make the state an attractive area for mining fraud. The promoters are a fearless and resilient breed whose optimism is well described in
 Jim Finche’s Mine Report,
 by Ashhurst Whiteside:
96
 
So onward went Jim and onward went Bill, On up the Sonora, past valley and hill; On up the Sonora, no thought to turn back - Sans booze and sans money, sans grub and sans jack. On up the Sonora and still did not flinch,  Jim found Judge Stevens and Bill found Jim Finch. Says Finch: 'I've a mine, and, yes, it's for sale;  A heritage priceless, to describe it words fail.  It's as wide as the river and almost as long, One million dollars? Hell! That's just a song  A mine report? No! But there's plenty of ink,  An engineer nothing, the're all on the blink.  I can romance myself,” says Jim with a wink. \"And I'll write a report to make em sit up and think.”  Jim labored and wrote, and 
 
labored and swore,  And started again as sheet on sheet tore, Till along toward evening, says Jim: \"It's complete.  A good full shift's work and all on one sheet.  It sure is a gem and from my own brain,  But, by your leave, Bill, I'll just read it again.”  But the mine was not sold, for said Jim, as he swore: \"That mine's too good to sell\" and this too he tore.  Himself he'd convinced, but I question in short  If that mine were as priceless as that mine report.
An investor considering entering into a mineral exploitation project cannot rely upon the due diligence or advice of other investors, property owners or their
96
 “Jim Finche’s Mine Report,”
 Rhymes of the Mines – Life in the Underground 
 (Phoenix: Cowboy Miner Productions, 1999), 28.

 
 
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representatives. Geology is a complex science and Arizona’s easily accessible precious metal deposits were generally worked out long ago. Experienced mining companies can