Here is a simple investment rule: do not buy shares in a mining company with no assets, especially if the share value of the company is very high.

This simple rule is derived from the extraordinary story of Sungro Minerals. The full story is told in detail by David Baines of the Vancouver Sun at this link.

The story is long and involved, as is the fraud perpetrated by the folk who pulled it off. It may be summarized by this paragraph from the full report:

“At the $4.75 [share value] level, Sungro had a total stock market value of $46.3 million US. This is a ludicrously large amount considering that, by that time, the company had defaulted on its B.C. property option and its total assets consisted of $299 cash. All it had was a vague reference to possible new property acquisition in Wyoming.”

You may well ask how the value of a company with no assets to speak of could be worth nearly $50 million if you look at its share value. That is where the scam and fraud come in of course. As Baines describes the company, it was “a newly minted Nevada company with a dubious exploration project, dummy seed shareholders, highly suspicious trading, and an undisclosed promoter lurking in the background.”

In practice we have a promoter who forms a company, issues a vast number of shares, gives them to friends and relations or “sells” them at a very low price without an exchange of cash, acquires options on properties, and then proceeds to arrange for these valueless shares to be “traded” between the friends and family, none of whom actually pays anybody anything.

Greedy, but stupid, mining investors see lots of movement of the shares with a steadily increasing price, they see a bit about property options, and so they jump in and buy. “Can’t afford to miss this boat,” they are no doubt thinking. As reported by Baines:

The British Columbia Securities Commission has issued a notice of hearing against Sungro, citing “suspicious trading activity” and surmising that “persons may have engaged in conduct that resulted in or contributed to an artificial price for Sungro shares.”

The hearing into a cease-trade order will continue until late December. Seems the authorities need more time to try to work out what was actually done and how it was done. In the meantime, however, you can take this as another reason to be cautious when buying mining shares and in particular shares in mining companies with no assets and high share value.