Shabu share trading still subject of RCMP probe

Nearly eight months after Shabu Gold Mines ceased trading on the Alberta Stock Exchange, the company’s irregular trading pattern is still being investigated by the rcmp.

While a spokesman for the rcmp’s Commercial Crime Division in Toronto has declined to comment on the investigation, police are attempting to find out why a company with only a couple of grassroots properties could generate a 36-fold increase in its share price in less than two months.

Before the Alberta Securities Commission issued a cease trading order, April 30, 1987, the Shabu issue enjoyed a spectacular 8-week roller coaster ride which saw the share price rise to a high of $12.75 from an initial 35 cents . It later dropped back to $3.60.

A couple of days after the asc called a halt to Shabu’s trading activities, former president David Hermiston left the country. According to the Alberta Stock Exchange, the former president has returned to Calgary but current Shabu director Lawrence Wagar says it’s unlikely that he would return to a city where so many people are looking for him.

Hermiston could not be reached for comment. “He was last seen in Wickenburg, Ariz.,” said Wagar.

Police say he could face charges ranging from fraud to stock manipulation. Before leaving, Hermiston resigned along with the rest of Shabu’s board of directors.

According to Tim Daly, manager of market surveillance at the ase, the cease-trading order was issued after it was discovered certain representations, including a $5.6-million private placement made by potential investors, could not be substantiated.

“When the cease trading order was issued April 30, the share price had dropped by $9.15 within a month and the investors were unable to make the placement,” said Daly. Drill results

As reported (N.M., April 6/87), initial results from a 10,000-ft drill program at Sheehan Lake area in northwestern Ontario helped to bring the Shabu issue’s roller coaster ride to a grinding halt. The best results included an uneconomic 24.8-ft section grading 0.078 oz gold per ton.

Since the best results included only four other narrower sections assayed anomalous gold values in the 0.06-oz-per-ton range, market watchers may have wondered how the Shabu issue could have generated so much interest.

Apart from the 102 contiguous unpatented claims in the Sheehan Lake area, which were explored briefly during the 1930s and again in the 1950s, Shabu had no other interests to justify a whopping $12.40 increase in the share price.

The drill results also made market watchers wonder how a Nevada- based consulting geologist named Robert Jones could have determined that the group of staked claims was worth $4 million. Fraud conviction

Ex-Shabu director Harvey Rubenstein was also unavailable for comment. On Aug 19, 1986, an Ontario court convicted the Toronto businessman on three counts of fraud and stock manipulation and he was given a 3-year sentence. Rubenstein is appealing that decision.

Rubenstein’s wife, Jesse Taylor Rubenstein, resigned as a director of Shabu on April 28 after the issue stopped trading in Alberta.

“Someone connected with Shabu got very aggressive and pushed the hell out of the stock,” said Jones, who wrote the qualifying report on Sheehan Lake. While he said he was surprised by the poor Shabu drill results, he nevertheless stands behind his report. “The properties were good, there is no question about that,” he said. (Jones had done some prospecting in the area between 1975 and 1980 for U.S. Steel Corp.) He is supported by Lou Chastko, president of Winnipeg-based Independent Exploration Services, who has worked in the Sheehan Lake area for more than 20 years. His company conducted the 10,000-ft drill program for Shabu and he expects to do more exploration work there when the Alberta company sorts out its affairs. Over-promoted

“The work we have done so far is definitely worth following up on,” said Chastko.

“Unfortunately, different personalities got involved and over-promoted the property,” added Jones.

According to the Nevada geologist, when Hermiston invited him to write a report on Sheehan Lake, Jones had already tried to persuade U.S. Steel to become involved.

That suggestion was based on some exploration work which had already been conducted at Sheehan Lake.

In 1937, for example, after drilling on a 2,000-ft zone discovered by a local prospector, an exploration arm of Noranda Mines called Prospectors Airways, established gold values from 0.05 to 0.07 oz at surface over a 700-ft strike length.

Leslie Hermiston, father of Shabu President David Hermiston, prospected the claims during the 1950s but couldn’t raise any money to develop the property.

“The remoteness of the area and the ultra-conservative attitudes of the industry at the time mitigated against any further interest,” the Jones report says. More exploration

So it remained in the family until David Hermiston formed Shabu Gold Mines in August, 1986, to conduct more exploration. In September, 1986, Shabu bought the property from Hermiston for 2.5 million shares.

In March, 1987, the company agreed to issue 1.75 million shares at $3 per share for two more grassroots prospects, pushing the issued amount of stock up 46% to 5.5 million shares. Those properties included 200 mineral claims in the Shabu Lake area, near Red Lake, and 200 claims in the Helter Lake area to the southwest of Shabu Lake.

“Whereas the Shabu Lake claims are contiguous to the Sheehan Lake claims and cover extensions of the same geology and possibly mineralization, a value for purchase or sale purposes of $4 million is reasonable,” wrote Jones in his report.

Although the Jones report attempted to justify the $4-million price tag, issuing 1.75 million shares for grassroots claims raised a few eyebrows in mining circles.

Since the share price had risen to $10.50 on the ase by the time the shares were issued, the paper profit for the vendors (three Ontario corporations controlled by a California-based Shabu shareholder Wagar refused to identify) was an enormous $18.3 million. Mineable orebody

However, with Shabu still under investigation and no decision likely in the near term, a number of Toronto-based geologists are reluctant to prejudge, Jones’ Sheehan Lake valuation.

As much as anything else, their hesitation seems to be based on the lack of guidelines on how Canadian mineral prospects should be valued.

“While the Canadian mining industry has no regulations for determining the value of mineral properties, especially when reserves haven’t been established, the real value of an exploration property lies in whether or not it hosts a mineable orebody,” said consulting geologist William Roscoe in an article published in the February 1986 issue of The Northern Miner Magazine. “In my opinion, the most objective way to value this exploration potential is to equate it to the cost of exploration worth whatever is warranted to assess that potential,” the Roscoe article says.

Typical Canadian practice would have seen the company pay the vendor staking costs of about $40,000, offer a modest work commitment and issue no more than 50,000 shares valued at $3 per share.

Nevertheless, a mining consultant at the osc was prepared to say that Jones’ valuation may be too high.

“Without substantial reserves in place, it would be an unusual property that could be valued at $4 million,” said John Drury a consulting geologist for the osc. “When you don’t have any reserves you can’t make any discounted cash flow projections,” he said.

While The Northern Miner placed a number of calls to Jones’ offices in Reno, Nev. to pose additional questions about the Shabu property valuations, the calls were not returned. Option granted

However, under the terms of an underwriting agreement, Yorkton Securities of Calgary was granted an option in 1986 to buy up to 85,000 Shabu common shares at 35 cents per share.

According to Michael Prew, a branch manager at Yorkton’s Calgary offices, the geological report was examined before the underwriting took place.

“As it turned out, that agreement worked out pretty good, especially for us and our clients,” said Mike Hutchins, a Yorkton broker who was involved in the underwriting.

He thinks the Shabu stock wasn’t worth any more than around $2. “Not when you can buy an excellent producer like tse-listed Belmoral Mines, with $30 million in the bank and no debt, for $2.75.”

“For every Shabu shareholder who was selling at $12, somebody else was buying,” said Hutchins, who sold his 3,000 Shabu shares when the stock hit $1.50. “I’m just glad it wasn’t me or any of my clients.”