EDITORIAL — Last legal gasp — Coveting Hemlo

It has been said of Murray Pezim that he sometimes forgot who his real friends were, a failing not uncommon in people who need the stroking an entourage provides. But he always knew who his enemies were, and in late July 1981, Pezim believed Lac Minerals had stabbed him in the back by acquiring the Williams property adjacent to ground his Corona Resources held near Marathon, Ont.

It wasn’t just that Pezim was seeking the Williams claims too. Corona viewed Lac as a potential partner and, toward that end, allowed the major to visit its property. When the Williams deal was made, Lac even had a contract crew collaborating on a geochemical program on the Corona ground.

An angry Pezim ordered the crew off the property but agreed to a subsequent meeting with a senior Lac executive, who wanted to continue negotiating a deal with Corona. Pezim’s reply was, “give back what you stole from me” first. When Lac refused, Pezim called in the lawyers.

That was the end of the Corona-Lac discussions and the beginning of a bitter, highly publicized lawsuit between the companies that resulted in Lac being forced to turn over the Williams mine to Corona for breach of fiduciary duty. This ruling was underpinned by the judge’s conclusion that “there is a practice in the mining industry that imposes an obligation when parties are seriously negotiating not to act to the detriment of each other.” Lac didn’t give up easily. It took its case all the way to the Supreme Court, only to lose again, even though it had a who’s who of expert witnesses testifying on its behalf. The company hired investigators who pried into events going back to 1979, when two Ontario prospectors, John Larche and Donald McKinnon, tied up ground that now hosts Canada’s richest producing gold mines. And it shared that information with Scintilore, which went on to pursue its own Hemlo lawsuit.

Lac v. Corona was a milestone in mining history because it entrenched the industry’s long-standing tradition of fair play. But it didn’t end the flurry of lawsuits that now seem to trail every major discovery. Quite the contrary. Industry people now joke that lawsuits are an indirect endorsement of a property’s mineral potential.

Some cases have obvious merit, while others appear to be legal long-shots — or, in some cases, stock plays, particularly when the sole “asset” of the company is the lawsuit. Because merit is in the eye of the beholder, investors end up gambling on the outcome, as many did in the Scintilore case, and as many did in the recent case where Crystallex International sought to enforce “rights” it purported to have over a portion of the Las Cristinas gold deposit in Venezuela. The Venezuelan Supreme Court found it had no such rights or standing to pursue the case in the first place.

We said it before and we’ll say it again: What’s needed now — badly needed is a higher standard of disclosure by companies whose sole asset is a high-profile lawsuit.

Take the case of Scintilore, which alleged that prospectors John Larche and Donald McKinnon had colluded to deprive it of an interest in the Hemlo gold mines. It’s a safe bet that not all investors knew that Scintilore’s case was identical to a claim made by Lac Minerals in an earlier attempt to launch retrial of the Lac v. Corona suit over ownership of the Williams mine. This case was dismissed in 1988, a dismissal upheld a year later by the Supreme Court of Canada.

Last month, Mr. Justice Robert Sharpe rejected Scintilore’s collusion claim, citing the earlier dismissal of Lac’s claim and the poor credibility of the case in general. The court found that Scintilore had no legally enforceable right to assert any claims arising from the staking contract awarded to Larche.

As it turned out, the case had enough holes to sink a battleship, not the least of which was the fact that the claims Larche was sent to stake never covered any of the mines. Nor do stakers have “fiduciary obligations” extending beyond the claims they are contracted to stake, unless such obligations are bargained for in good faith beforehand.

As court cases go, the Hemlo lawsuits were a bittersweet chapter of Canadian mining history — bitter for the losers and sweet for the victors. Because the stakes were so high, the disputes were uglier than most, with allegations of claim-jumping, interference with evidence, and misleading affidavits. And there were private detectives and investigators engaging in tactics that harmed the reputations of some of the individuals involved.

Pity the poor investor trying to make investment decisions on the basis of contradictory allegations. Perhaps it is time for regulators to examine how disclosure could be improved in such cases. Independent legal opinions? Better dissemination of background information? Disclosure of agreed facts between the disputing parties?