Country club crowd catches gold fever
Bonanza in Bolivia?
Friday, June 20, 2003
By Cindi Lash, Post-Gazette Staff Writer
Jeannette Blosel/Pittsburgh Post-Gazette
Joe Kohler, Mary Jo McNamara and Jim Dougherty have invested in Golden Eagle International.
Row by row, dozens of men and women in tailored sport coats and linen suits slipped into seats in the sun-drenched hall to listen to a speaker with a rich baritone voice and assurances about their future.
They smiled when he talked about what they'd accomplished together and nodded when he thanked them for their unflagging faith. They applauded a guitar-strumming man who sang his own composition about soaring on golden wings.
A revival meeting? Sort of.
But this recent appearance at the South Hills Country Club, in Whitehall, by officers of a Utah-based mining company was aimed at recharging the financial convictions of Pittsburgh investors who hope to strike it rich as shareholders in a Bolivian gold mine operation.
During the past five years, about 90 people -- many of them country club members or employees -- have spent hundreds of thousands of dollars to acquire millions of penny-stock shares in Golden Eagle International Inc., a Salt Lake City-based gold exploration and mining company. Pittsburgh investors now make up between 5 percent and 10 percent of the company's shareholders.
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Golden Eagle owns or owns rights to mine nearly 200,000 acres on two sites in Bolivia. Last year, the company began mining gold near Cangalli, about 70 miles north of La Paz.
Golden Eagle, however, has yet to be profitable, losing more than $31 million since it started mining gold. In the first quarter of this year, the company lost $1.6 million on revenue of only $137,196.
In securities filings, Golden Eagle disclosed it has had problems paying employees and suppliers and doesn't have the $9.9 million it estimates it will need for expenses this year and to fund future development. The company has funded operations by issuing more stock, including 5 mil- lion shares in the first quarter.
In a May 15 filing with the U.S. Securities and Exchange Commission, Golden Eagle warned that unless it found willing lenders or increased revenue, "there is a substantial concern about our ability to continue as a going concern."
Nevertheless, the local investors believe that one day Golden Eagle stock will soar far above its current price of about 17 cents a share.
No one is more sure than Joseph Kohler, 82, of Whitehall, the first member and chief cheerleader of the investors who've dubbed themselves Pittsburgh's Golden Eagles.
"The brokers thought this was another scam,'' Kohler said. "But I'm gonna make a lot more with Golden Eagle.''
Kohler was scanning newspaper financial pages in May 1998 when he spotted a USA Today story about Golden Eagle's claim that it had found 6.4 million ounces of proven gold reserves in Bolivia and that it believed there could be as much as 157 million ounces. The story also detailed regulatory action by the SEC that followed that claim.
Kohler remembered the international hoax pulled off a year earlier by Bre-X Minerals, a Canadian firm that sold stock in a fake gold mine in Indonesia. Yet he was intrigued by Golden Eagle's assertion that it was sitting on up to $46 billion worth of Bolivian gold.
"If there was $46 billion in the ground on the moon, someone would go get it,'' said Kohler. "I also felt the chances were slim of two scams at once, after BRE-X.''
The soft-spoken florist, who said he'd become a millionaire by investing in stocks, flew to Utah to meet Golden Eagle's president, Terry Turner. Any misgivings were swept away by Turner's knowledge, confidence and matter-of-fact openness about his Mormon faith, Kohler said.
Since then, Kohler has acquired 18 million shares of Golden Eagle at prices ranging from 3 cents to 50 cents a share. He's persuaded relatives to buy millions more, and he's tirelessly touted the company at the country club.
"There was a lot of heated debate through the cigar smoke in the grille. Everyone was talking about [Kohler,], saying, 'Oh, poor Joe.' They were laughing, calling him [investment guru] Warren Buffett,'' said club member Jack McNamara, 69, of Whitehall. "He knew they were rolling their eyes. But you know, he'd hit with four or five [stocks], so they couldn't laugh too much.''
Among the debaters were the Barone brothers, who heard about Golden Eagle while golfing with friends.
Stephen Barone, a real estate appraiser from Whitehall, eventually bought a "couple hundred dollars" worth at 9 cents a share. His brother, also a real estate appraiser, was more cautious.
"I'm on the fence on it,'' said R. Robert Barone of Mt. Lebanon. "Sometimes I wish I [went into it], sometimes I don't care. If my brother becomes a billionaire, then I would like to be involved.''
Over the past year, Golden Eagle stock has traded at between 10 cents and 30 cents a share. Some Pittsburgh Eagles have made money, buying stock at 3 cents a share and selling later when it hit 31 cents. Others bought it at around 30 cents, then watched it fall to 17.
McNamara and his wife, Mary Jo, who run a public relations and marketing firm, were initial skeptics. They kidded Kohler about coming to a bad end in Bolivia a la Butch Cassidy and the Sundance Kid.
But in the face of Kohler's strong convictions, McNamara said he had second thoughts. He and his wife researched the company and sought the counsel of U.S. Sen. Orrin Hatch, R-Utah, with whom he'd attended Baldwin High School.
Hatch spokesman Adam Elgrenn said the senator did discuss Golden Eagle with McNamara "to promote Utah businesses in general'' but did not endorse Golden Eagle specifically. Nor did Hatch encourage anyone to invest in the company, Elgrenn said.
McNamara, however, said he was heartened enough to buy 2 million shares at 3 cents each and, later, to promote Golden Eagle in exchange for additional shares. He and his wife now own 4 million shares.
Golf pro Sam Depe III ponied up for "a small stake.'' So did locker room employees, waitresses and waiters.
"I've heard some negative comments about it, but I'm pretty confident in it,'' said Ryan Zielinski, 20, of Pleasant Hills, a Slippery Rock University of Pennsylvania sophomore who works in the men's locker room. He spent $300 last year to buy Golden Eagle stock at 15 cents a share.
"I figure if it stays around where I bought it, it's $300 I still have,'' he said. "If it grows, then that's a good fund.''
But does Golden Eagle warrant that faith?
"We would all like to be rich, to have a lot of money,'' said Jay Taylor, an analyst and adviser who publishes gold and technology newsletters. "But people don't realize that it's just not that often that you find a lot of gold. People who consider buying it need to be very careful.''
Golden Eagle was founded in 1988 as Beneficial Capital Financial Services in Denver, and over time changed its name, owners, headquarters and focus. By 1998, it was concentrating on mining -- and had attracted the attention of the SEC.
In May 1998, the SEC filed a lawsuit against Golden Eagle and its then-officers, contending that the company had made inflated public claims that caused its stock to rise as high as $6.25 a share. The lawsuit also charged the company with filing late or false documents about mining interests in the United States and company officials with selling unregistered stock.
A month later, the SEC suspended trading of Golden Eagle stock for 10 days after the company announced that its Bolivian geologist, Guido Paravicini, had performed tests indicating that its Cangalli site had proven gold reserves of 78 million ounces.
Paravicini put the company's inferred reserves at up to 157 million ounces. Tests, however, indicated that the gold was scattered erratically, and sometimes in tiny amounts, throughout the property.
SEC officials said they acted because they doubted the thoroughness and accuracy of Paravicini's testing. The company acknowledged in subsequent SEC filings that it didn't have enough information to claim such huge reserves, and its stock price dropped.
The SEC filed new fraud charges in November 1998 against Turner, who by then was company president, saying he continued to mislead investors.
Other company officers left Golden Eagle and reached settlements with the SEC. Turner refused to settle.
After a trial in 2000, a federal judge in Denver ruled that Turner was not reckless in releasing the findings of a reputable geologist. The judge refused to issue an injunction sought by the SEC, which argued that Turner was likely to issue more inflated claims about Golden Eagle.
Turner touted the court ruling as an opportunity to move forward. But progress has been measured.
Golden Eagle began mining at Cangalli in September. By the end of November, the company was processing 2,000 tons of ore a day. Turner forecasts the company will be profitable when it can process 3,500 tons a day.
The company's quarterly report says it produced $556,206 worth of gold in the six-month period that ended March 31.
Turner said workers haven't produced more because they were hampered by a heavy rainy season and because they assisted with disaster relief after a catastrophic mud slide in a nearby town. Gold yesterday was selling at $361.30 an ounce.
Last month in Pittsburgh, Turner and Golden Eagle Vice President Ronald Atwood announced that the company would pay $250,000 in cash and $175,000 in stock shares for 2,500 acres adjacent to 125,000 acres it already owns in a mineral-rich area 162 miles north of Santa Cruz. They said tests on that land, known as Buen Futuro -- good future in Spanish -- show significant deposits of both gold and copper.
Addressing investors at South Hills Country Club, they spoke of expanding the Cangalli operation to process 11,000 tons of ore a day -- a project costing $6 million, which they don't have -- to get production costs down to about $75 per ounce of gold, below the production costs of their rivals. At that point, they predicted, Golden Eagle's profitability would make the stock more attractive to investors.
Some of about 60 investors who listened quizzed Turner about how the company could complete the $6 million Cangalli project. In its quarterly report, the company said it also lacked the $1.5 million needed to maintain the mines and $2.4 million to pay administrative expenses this year.
Golden Eagle already has sold nearly 292 million shares of stock. Some Pittsburgh Eagles also asked whether the company intended to raise money from loans or by selling still more shares -- diluting the value of the stock they already own.
Turner said he wanted to increase the value of their investment, but did not rule out selling still more stock if he can't obtain other financing.
To finance the expansion with stock only, the company would have to issue 35 million new shares, or more than 10 percent of the shares it already has issued.
Because of Golden Eagle's chronic shortage of cash, Turner hasn't been paid most of his $200,000 annual salary over the last six years. According to SEC filings, he waived the right to receive $443,777 of what he was owed at the end of 2001. Last year, he did receive $103,038 as well as a noncash bonus valued at $60,000.
In March 2002, however, Turner was given options to buy 25 million Golden Eagle shares at 7.5 cents each. He exercised 13.6 million of those options in December, when the stock was selling for about 28 cents per share, realizing a profit of $2.8 million.
Turner exercised the remaining 11.4 million options in March, generating another $1.3 million in profits.
Golden Eagle's financial picture isn't uncommon for a small mining company, but it shouldn't be ignored by potential investors, cautioned Taylor, the analyst.
Taylor includes Golden Eagle in purchase recommendations to subscribers, but warns them to be realistic and to put no more than 2.5 percent to 5 percent of their investments in any risky equities. Gold has historically been a boom-bust industry, and Taylor said people who are giddy about getting rich often don't stop to remember that the price can fall as well.
"People get real excited, where they leverage their homes, and then things don't work out quite the way they planned,'' he said. "[Gold mining] can work on a shoestring, but that's not usually the way it's done. There's always the problem of raising more equity to keep alive until they get cash-flow positive.''
Turner said he understands why shareholders may be nervous about Golden Eagle's finances, but he also marvels at their continued trust and backing.
"Mark Twain said a gold mine was a hole in the ground with a liar standing next to it. I'm not that liar,'' he said. "There's a lot of faith here and I don't want to let that down.''
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(Staff writer Len Boselovic also contributed to this report. Cindi Lash can be reached at clash@post-gazette.com or 412-263-1973.) |
