I THINK MINING

The news is all over the web that Southwestern Resources is suing its ex-CEO, John Patterson, for fraud, breach of fiduciary duty, and insider trading. Here is some of the spicey language being used by David Black, current chair of Southwestern Resources, to describe Mr. Patterson’s behavior:

“Paterson engaged in a course of deceitful and dishonest misconduct, in breach of his contractual, fiduciary, and statutory duties….[he] misrepresented the assay results from the Boka project and delaying the completion of (Southwestern’s) pre-feasibility study for the Boka project to cover up the misconduct…[his] actions were not only fraudulent and improper but they were also reprehensible, high-handed, reckless, wanton and callous. Manual and deliberate changes were made to the prior database to increase the grade of samples within mineralized sections.”

I tarry to note that a Canadian Press report tells us that in the BC Court filing it is alleged that Patterson “created falsified assay certificates to match falsified results in electronic form that he or someone else entered into the company’s drilling database.”

Quite a change from the days when Southwestern Resources handed Mr. Patterson a $264,000 severence check. Patterson is predictably in hospital suffering from depression and communicating only via a lawyer.

Other lawyers too are gathering to pick over the flesh & bones of this latest Canadian mining-scandel. To wit: “Jay Strosberg, a lawyer in a $320 million class action filed by Sutts, Strosberg LLP and Siskinds LLP, called yesterday for investors who bought shares based on Southwestern’s prospectus that included the Boka project to come forward.”

The brilliant analysists are ducking for cover: “Wendell Zerb, an analyst with Canaccord Adams, said Southwestern’s legal actions would do little to set aside investors’ concerns. “At the end of the day, there appears to be a fairly large fraud in place,’ said Zerb, who recommends selling Southwestern shares.” And see this link for optimism in the face of reality.

The folk I really feel sorry for are the consultants who seem to have gotten drawn in by all this. I cannot establish their respective roles or responsibilities—no doubt time and lawsuites will unravel the details, but for what it is worth here are a few extracts from readly available public documents–go to this link for full citations and extended abstracts.

The Company had L.D.S. Winter of Sudbury, Ontario prepare a series of NI43-101 reports between 2003 and 2006. Mr. Winter tells us in one of these reports that he is an “independent consulting geologist,” with a degree in mining engineering from University of Toronto (1957) and a Master of Applied Science from McGill. In his 2005 report, he notes this: “I visited the Property between January 10, 2003 and January 14, 2003 inclusive for 5 days, on September 10, 2003 and November 15, 2003.” I find no record that he visited the site after late 2003. In March 2007 he prepared an NI 43-101 report for Southwestern Resources on the Liam Gold-Silver Project in Peru.

In his 2005 NI 43-101 Report, Mr. Winter tells us “The Company received a report dated June 30, 2005 (the “Hatch Report”) entitled “Southwestern Resources Corp. – Preliminary Assessment, Boka Deposit Yunnan Province, P.R.C.”. The report was prepared by C.L.B. Grant, P.Eng. and Paul A.J. Hosford, P.Eng., employees of Hatch Limited (“Hatch”), each of whom is an independent qualified person as defined by NI 43-101. The Hatch Report was prepared for the purpose of assessing a potential resource based upon a small number (67) drill holes.”

In 2006 Southwestern released a report that includes this: “The Boka 1 mineral resource estimate was prepared by Danny Kentwell, MAusIMM, and Louis Bucci, MAusIMM, of SRK Consulting, an independent international engineering consulting company. Assay and geological data used in compiling this resource estimate have been verified by Mr. Bucci by direct observation of drilling, sampling, sample preparation, logging and laboratory visits. Assay and geological data used in compiling this resource have been verified by Mr. Kentwell by analysis of assay, QA/QC (quality assurance/quality control) checks, duplicates, standards, and repeats and database/statistical validation.”

In the 2006 Annual Report, we read: “Several advances were made in the prefeasibility study on Boka in 2006 under the guidance of Ausenco, a world-renowned engineering firm specializing in mine development within the Asia Pacific region. Ausenco has extensive experience in China and oversaw the commissioning of the Jinfeng Mine. The presence of Ausenco as lead consultants has many advantages due to their favourable working relationships with Chinese government groups, which is essential for the advancement of the project to the mining stage.”

There was no end of qualified people and reputable consulting companies trotting around China, the project, the boreholes, and the data. Did none of them notice anything? Were they asleep, inattentives, victims of a brilliant Vancouver fraud, or just being paid too much to care.

Is there something fundamentally flawed with the NI43-101 process? There are enough NI 43-101 reports to wallpaper a hospital room for the legally depressed. But not one of these reports warned investors of a scam more brlilliant, bold, and brazen than Bre-X. Seems it is back to the drawing board to redesign the NI43-101 process.

Afterall, Bre-X was old fashioned sample salting. Boka appears to involve sophisticated computer fraud clever enough to bamboozle qualified persons from Toronto to Australia. Right now all I can advise is: ignore those information packed NI43-101 reports. How can you now trust any one of them?