Silverado Gold Mines Ltd. (fka SLGLF)

[basserdan]

Silverado racks up expenses with zero revenue attached

David Baines, Vancouver Sun
Published: Saturday, April 19, 2008

Silverado Gold Mines Ltd. is an interesting stock market creation -- nine parts brass and only one part gold.

I have written three columns outlining the myriad ways this company has been abusing shareholders. You would think that, in the face of all this negative press, president Garry Anselmo would be a little more restrained, but his behaviour is as outrageous as ever.

According to just-released financial statements, the company generated zero revenues during the three months ending Feb. 28, but managed to rack up $2.2 million US in expenses (including $446,000 for office expenses, $375,000 for consulting fees, $146,000 for advertising and promotion, and $80,000 for reporting and investor relations).

As usual, about half this money ($1.26 million) was paid to Tri-Con Mining Ltd., a private company owned by Anselmo. Tri-Con provides contract services to Silverado and is reimbursed according to a formula that last quarter worked out to cost plus 18.4 per cent. That had the effect of funnelling another $232,000 profit into Anselmo's pocket. (Keep in mind, that's just for one quarter.)

Also as usual, Anselmo financed these expenses by selling company-issued stock to private investors. Last quarter, he issued 140 million shares at an average of 3.25 cents each, for gross proceeds of $4.4 million. This not only paid for the company's exorbitant expenses, it pumped an additional $2.7 million into the treasury, which he will be able to extract at some later date.

Over the years, Anselmo has issued so much stock that it has become the principal business of the company. Even after several share consolidations, the company has 926 million shares outstanding.

To facilitate his shares sales, he asked shareholders at the company's annual general meeting in May 2004 to give him unlimited power to issue shares without further reference to them. Because share ownership is dispersed over a large number of small shareholders (institutions are not dumb enough to invest in this dog), Anselmo and his cronies were able to carry the day. Since then, he hasn't held another annual general meeting. So long, suckers.

Why do private investors buy stock if it's such a crummy company? Because Anselmo sells it to them at nearly half the prevailing market price, which enables them to sell the shares back into the market at big profit. During the last quarter, for example, his average selling price was 3.25 cents. The average market price, meanwhile, was about six cents.

Of course, what private investors gain, retail shareholders lose. Consider how you would feel if you bought stock in the open market at six cents each, while your president was madly selling shares to private investors at half that price. I would be outraged. Fortunately for Anselmo, retail investors are generally so unsophisticated they don't realize they're being screwed.

Who gets the cheap stock? The answer is, we don't know. Silverado, because it is a B.C. reporting issuer, has to provide investors lists to the B.C. Securities Commission, but the commission, in its highly questionable wisdom, has decided that releasing the information to the public would offend privacy legislation. It's a fair guess, however, that these preferred investors are close to Anselmo.

Obviously, private investors can only make a profit if share values and volumes remain robust. This is where Anselmo shines. He knows how to pump a stock. Just this week, he issued a release heralding a report by Leonard Melman, a stock writer from Nanoose Bay:

"The Melman Report concluded that, 'given typical market valuation of 10 to 20 times earnings for mining shares,' should Silverado succeed in its gold exploration, and subsequent production ('...which appears to be possible given their current placer operations, exploration work and reserves indicated in the Bundtzen Report...'), then 'the shares would have the potential to move to the region of 40 cents to 80 cents -- or a multiple of eight to sixteen times the current price."

Anselmo described the report as an "independent, objective and expert, third-party review of the company." He also noted that Melman would provide a "more in-depth review ... in the near future."

There was nothing in Melman's disclaimer to indicate he was anything but "independent" and "objective." However, when I talked to him, I got quite a different picture.

"I was contacted by the company to put together a quick preliminary report which took note of what was already public record," he told me in a telephone interview. "They have requested that I do a full study. If I did that, I would be paid for it."

Judging by Anselmo's assertion that Melman will be providing a full report, it's not a matter of "if," just when. Melman said they even discussed a price, but refused to say how much. I think it's clear he wrote his preliminary report with the expectation of receiving a future financial benefit, which makes him neither "independent" nor "objective."

Silverado has been on the B.C. Securities Commission's "issuers in default" list for the past two years. Commission spokesman Andy Poon said this is because the company's auditor, Berkovits & Company LLP of Ft. Lauderdale, Fla., is not registered with the Canadian Public Accountability Board, which is a requirement for any accounting firm that audits Canadian public companies.

The commission has tolerated this situation for two years because, according to Poon, it views this as a "technical offence."

I'm not so sure. Whether it's a technical offence depends on the circumstances. In some cases, issuers may "shop" for compliant auditors. I have no evidence this is the case here, but it's interesting to note that Silverado, which has nearly all its operations in Alaska, chose an auditor from Ft. Lauderdale, and is retaining that auditor even though it isn't eligible to audit public companies in Canada.

It is also interesting to note that, in a Feb. 28 report, the U.S. Public Company Accounting Oversight Board said it had reviewed three of Berkovits's audit files and found two of them contained "deficiencies of such significance that it appeared to the inspection team that the firm did not obtain sufficient competent evidential matter to support its opinion on the issuer's financial statements." The firm has been given 12 months to shape up.

What I find most perplexing about Silverado is that it has a prominent Vancouver lawyer at its heart. James Dixon, a partner at Shandro Dixon Edgson, has served as an "independent" director for the past 20 years. He is also a member of the audit committee.

I have asked him numerous questions about the company's governance, but he has refused to respond. Instead, he has referred me to the company's public filings, which given the quality of the company's disclosure, is no answer at all.

Commission investigators are beginning to snoop around Silverado. Dixon should remember that, if you choose to fly with the crows, you might very well be stoned as a crow.

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