How to Run a Junior Mining Company

Silverado a gold mine mostly for related company
David Baines. The Vancouver Sun. Vancouver, B.C.: Apr 2, 2008. pg. D.1
Abstract (Summary)

All we have is a vague assurance in the financial statements that all Tri-Con charges "approximate the fair value of these costs had they been performed by arm's length parties."
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Copyright Southam Publications Inc. Apr 2, 2008

On Saturday, I wrote about how Silverado Gold Mines Ltd., for the past four decades, has been promoting some gold properties in Alaska and, more recently, a proposed coal-water plant in Mississippi.

Despite a steady string of boosterish releases promising shareholders imminent riches, the company has produced nothing but losses. As of Nov. 30, cumulative losses totalled $87.5 million US. Meanwhile, the company has issued nearly one billion shares to finance operations. Due to these chronic losses and constant share dilution, the stock is now trading at a mere five cents on the OTC Bulletin Board in the United States.

The company's founder, president and chairman, Garry Anselmo, boasts that he doesn't take a cent of salary from Silverado, which is technically true, but quite misleading. As disclosed in the company's filings with the U.S. Securities and Exchange Commission, he has earned millions of dollars from Silverado through his private B.C. company, Tri-Con Mining Ltd., and two related U.S. companies. Here's how it works:

Silverado leases spacious offices on the 11th floor of the Terasen Gas building at 1111 West Georgia for about $125,000 per year. None of the employees, including Anselmo, work for Silverado. They all work for Tri-Con, which is owned by Anselmo.

Tri-Con charges Silverado at cost plus 25 per cent for exploration and development work, and cost plus 15 per cent for mining operations. (Cost is defined as out-of-pocket cost plus 15 per cent for office overhead.) Tri-Con also charges a flat fee of $10,000 per month.

This adds up to a lot of money. Last year, Tri-Con billed Silverado $6.91 million, of which $1.24 million, or 21.9 per cent, represented the amount in excess of Tri-Con's costs. The year before, Tri-Con charged Silverado $4.91 million, of which $760,324, or 18.3 per cent, represented Tri-Con's mark-up over cost.

This sort of billing arrangement has been in effect for the past 35 years. During the last 14 years alone, Tri-Con has billed Silverado a total of $40 million, of which $5.6 million, or 14 per cent, represents Tri-Con's mark-up.

The bottom line is that Tri-Con, which is owned by Anselmo, has earned about $400,000 annually in mark-up for the past 14 years, courtesy of Silverado shareholders. Pretty handsome remuneration for a five-cent company.

But that's not all. In November, the company announced it had hired Irma Mungal as its vice-president of administration. She was touted as a "dynamic addition" to the management team. It wasn't until Feb. 28 -- more than three months later -- that the company disclosed in an SEC filing that Mungal is Anselmo's wife.

According to the filing, Mungal holds two degrees (in human resources and business administration), but she refused to say where she got them. "None of your goddamn business," she told me.

The filing also stated that, as a representative of a leading financial institution, she was "responsible for operations risk management across western Canada." She declined to disclose her title or the the name of the financial institution.

"Anything that this company must disclose to the public, we do. Anything that we don't disclose to the public is none of your damn business."

Then, because I was "scum of the Earth" and focused on "smutty" writing, she proceeded to tell me how often she and her husband "do it." She also told me she has a black belt in martial arts and could "kick ass."

It was all quite bizarre. I felt very fortunate I didn't work in the Silverado office.

Mungal, like the other employees in that office, is employed by Tri-Con. Presumably her services, plus an appropriate mark-up, are charged to Silverado. But how much, we don't know.

Tri-Con also leases, for Anselmo and his wife, a Cadillac SRX and two Corvettes. Each are worth about $100,000. I wanted to ask Mungal and Anselmo whether the lease costs are passed through to Silverado, but they made it clear they are not willing to talk to me.

What makes the Tri-Con billing arrangement so questionable is that it gives Tri-Con broad discretion to spend Silverado funds. Also, it has no expiry date, and there is no indication the contract has ever been put out to tender. All we have is a vague assurance in the financial statements that all Tri-Con charges "approximate the fair value of these costs had they been performed by arm's length parties." Presumably the company's outside auditors, Berkovits & Co. LLP, monitor this process, but I'm not sure how. The firm is situated in Ft. Lauderdale, Fla.

I turned to Silverado's board of directors for answers. The board consists of Anselmo, 64; Stuart McCullough, 72, a retired Canada Safeway district manager; and James Dixon, a senior partner with the Vancouver law firm Shandro Dixon Edgson. McCullough, even though he is Anselmo's cousin, and Dixon are listed as "independent" directors.

Since Dixon has been an independent director for 20 years and serves as a member of the audit committee, and is also a member the B.C. Law Society, I asked him why Silverado doesn't hire its own employees, rather than using a contractor like Tri-Con, which charges a hefty mark-up and has the effect of obscuring the president's remuneration.

I also asked how much Mungal charges for her services; whether the vehicle lease costs are charged to Silverado; and whether certain other costs (unrelated to Silverado's affairs) are charged to Silverado.

I further asked why this company does not appear to have held an annual shareholders' meeting since 2004. (The B.C. Business Corporations Act requires B.C.-registered companies to hold a shareholders' meeting every year.)

Alas, Dixon -- like Mungal -- referred me to SEC filings, which he said "to the best of my knowledge, fully disclose the business of the company." This, of course, was no help at all.

I must say, I have no idea why a lawyer like Dixon would associate with himself with a company like this. Even more puzzling is why he would advertise his directorship. But there it is, on his website biography, along with his business and law degrees, and his memberships in the Kappa Sigma Fraternity and the Vancouver Club. Go figure.

dbaines@png.canwest.com

Credit: Vancouver Sun