This week a British judge entered a court order freezing the global assets of a Utah-based gold mining company called Sinaloa Gold Plc. The court concluded that the mining company may have engaged in fraud when it sold shares to U.K. investors. The judge found that one of Sinaloa’s officers, Glen Lawrence Hoover, a Utah resident, failed to explain to the court how investor money was spent. Mr. Hoover is one of the defendants in the case.
Recently I have seen an increase in inquiries from individuals who are interested in investing in gold mining operations, and from some who have lost money in this investments. I assume much of this is driven by the skyrocketing price of gold, but the challenge for investors is that this is a highly specialized area that requires significant technical expertise. Investors can be misled by complex technical descriptions, faked or doctored assay tests, and spectacularly high mine valuations.
Investors are often told that the mine is worth billions, but rarely are told that mining operations take years to get going and the mining and refining process is extraordinarily expensive. Just buying a stake in a gold mine does not automatically lead to getting actual gold out of the ground — or dollars in your pocket.
According to the Nevada Securities Division here are the main things to ask when evaluating a potential investment in a mining operation:
- Check the legitimacy of the dealer. Investment in most mining companies is made through stock purchases by licensed brokers. Almost all major companies’ stocks are traded on the NYSE, AMEX, or other exchanges and in the NASDAQ market. Legitimate mining companies do not generally solicit investors by telephone or mail.
- Investments take many forms, which can be confusing. Mining companies do not sell ore, processed (“concentrated”) or unprocessed, and rarely sell precious metals (bullion) to individual investors. Consult a reputable financial adviser and deal through a recognized merchant, broker, or financial institution.
- Do not fall for claims of new of “secret” processes. Processes used by mining companies to extract precious metals are well-known and understood. Almost all use one form or another of cyanide leaching.
- Promises greater than average amounts should be viewed with scrutiny. The average ore grades at most Nevada mines range from 0.04 to 0.20 troy ounces of gold per ton.
- Precious metals do not mix. Claims of a mine site with high levels of platinum group metals (PGMs) along with gold and silver is almost a certain indicator of fraud. Platinum and palladium have not been mined in Nevada since 1919 and, more than likely, will not be for the foreseeable future. Iridium, osmium, ruthenium, and rhodium have never been mined in Nevada.
- Reward vs. Risk. Mining is a capital-intensive industry with great rewards possible. However, mining operations are high risk ventures. Investments are usually long-term. Be skeptical of “guaranteed” or promised high returns over short periods of time, i.e., 6 months to 2 years.
Here is a link to information from the Nevada Department of Securities that discusses the different ways you can invest in gold.
© 2010 Mark W. Pugsley, all rights reserved.