Red Flags and Scams

Mining is a completely respectable business, but lurking in the shadows are pseudo-scientists and silver-tongued scoundrels who profit from dishonest promotions and deceitful scams. They were around during the time of Mark Twain and they are still present nowadays. The infamous Bre-X Minerals salting scam was among the most daringly executed swindles in the history of mining.

Most swindles involve gold, which has a allure and mystique that doesn’t only attract charlatans, but investors who are enthusiastic and anxious to believe that riches are at hand. The scams range from stock manipulation and misleading announcements to fraudulent assays and sample-salting.

The classic stock manipulation is the "pump and dump." A dark stock, usually trading at only pennies per share, is suddenly the subject of optimum information, brokers' recommendations and street talk that fuels thedemand and drives up the price. The company's management, and at times other shareholders, take advantage of this hype to sell large quantities of stock gotten earlier at a lower price. The news then dries up, the price collapses and small investors who bought on the favorable news are left with shares gotten at the high end of the market.

In some occasions, the pump and dump is many times done in collusion with a securities firm that holds sufficient stock to act as a market maker in the company's shares.

There are other manipulative techniques, such as "high-closing," in which two holders make a trade at a higher price near the closing bell of the market, creating the illusion of price movement. Large block trades between company insiders or market-making securities firms can the same way serve to create the illusion of trading volume.

In other schemes, devious promoters sometimes show investors spectacular samples from old gold mines containing visible gold. Be cautious of high-grade assays from narrow quartz veins. While some veins can be economically exploited, many are uneconomic because they are much too narrow to be mined using modern techniques. Remember, a few high-grade results do not make a mine.