Gold scandal rocks Vancouver miner in China

Canada's junior mining sector was left reeling yesterday from a scandal reminiscent of Bre-X after Southwestern Resources Corp. revealed that drill samples from its flagship gold property in China appear to have been tampered with and that the project's general manager has been fired after refusing to answer questions about the apparent breach.

Shares in the Vancouver company, which are held by some of Canada's largest investment firms, plunged as much as 80 per cent, as the company withdrew all of its previously announced results for its Boka project in China's Yunnan province.

"I'm not well today. I'm having a tough day," Southwestern chairman David Black said in an interview.

Mr. Black said that Southwestern's founder John Paterson resigned as chief executive officer on July 4, after a special committee of the board was struck to review company procedures.

That came after a prefeasibility study on the Boka project, which was supposed to be tabled at the end of June, was suddenly delayed for six months.

"He resigned. We went to the market with disclosure that the prefeasibility study was going to be delayed. There was quite an uproar in the market because [Mr. Paterson]had been telling people it would be delivered by June 30 and it was not.

"When he and I discussed that, he volunteered his resignation," Mr. Black said.

The special committee then sent a group of Southwestern executives to China to review the operations first hand, Mr. Black said. The visit raised "two red flags," he said.

First, that a February press release that disclosed some assay values at Boka "does not jive with the assay certificate received from the assayers office," Mr. Black said.

The second so-called red flag, according to Mr. Black, was the revelation that some of the drill samples from the project had been compromised.

"It appeared that our metallurgical samples had been tampered with. When confronted with it, our manager in China, John Zhang, refused to be forthcoming about it. We don't know if he knows or doesn't know about it, but he won't talk to us about it."

Mr. Zhang, a resident of China, has been fired, Mr. Black said.

The Southwestern chairman said he was not aware exactly how the samples had been tampered with.

"I don't know that. When I say tampered, somebody was at the bags, they weren't in order," Mr. Black said, adding "somebody was doing something with them they shouldn't have. This whole thing is very tricky because we can only tell you what we know. We'll have to analyze that and see what happened."

Promising drill results from China had made Southwestern a high flier among the junior gold companies trading on the Toronto Stock Exchange. In early 2004, the company's shares were worth more than $21 dollars each. Yesterday, they plunged on the TSX, leaving the company with a market value of $130-million.

Resource-focused fund manager Sprott Asset Management Inc., is Southwestern's second-largest shareholder, according to data from Bloomberg News, owning more than three million shares or roughly 7 per cent of the company.

John Embry, Sprott's chief investment strategist, has been a major supporter of Southwestern, recommending it to clients and to the public on television investment programs. Sprott officials said Mr. Embry was not available for comment. Other major shareholders include RBC Dominion Securities and Merrill Lynch.

Southwestern's revelation that its core samples were compromised, causing investors to be given erroneous assay results, does not look good for the project, one industry expert said.

John Meech, director of the University of British Columbia's institute of mining and engineering, said Southwestern's announcement doesn't necessarily mean the core samples were tampered with. It could mean the drilling results weren't handled correctly or that paperwork wasn't completed properly.

"If this company is now pulling back on [its previous reports] that doesn't necessarily mean that there's been a scam," he said. "There may have been other problems."

Though regulators have introduced new rules to prevent the embarrassment of another Bre-X, Mr. Meech said problems are difficult to prevent entirely. (Bre-X Minerals Ltd., a Calgary-based company that once claimed to have found the world's largest gold deposit, collapsed in 1997 after it was discovered that there was no gold at its Busang site in Indonesia and test results from the project were declared fraudulent.) And with a red hot mining sector, investors are flocking to junior minors looking for big scores.

"I think that most of the junior companies are doing legitimate work. It's just that the odds of finding a resource are at least a thousand to one. So it's a bit of a lottery and a shooting match," he said.

Who owns Southwestern

Percentage of outstanding shares, according to the latest available filings:

Global Gold Corp. 16%

Sprott Asset Management 7%

John Paterson 1.7%

Blackrock Advisors 1.2%

Elliott & Page 1.2%

RBC Precious Metals Fund 1.2%

RBC Cdn. Growth Fund 1.1%

Merrill Lynch 0.9%

Source: Bloomberg