THE GAMBLE FOR BIG MONEY

A HOLE IN THE MUSKEG WITH TWO BILLION DOLLARS IN IT

November 1 1969
THE GAMBLE FOR BIG MONEY

A HOLE IN THE MUSKEG WITH TWO BILLION DOLLARS IN IT

November 1 1969

A HOLE IN THE MUSKEG WITH TWO BILLION DOLLARS IN IT

THE GAMBLE FOR BIG MONEY

THE PRESENCE of Texas Gulf Sulphur Company in the northern Ontario town of Timmins during the second week of November 1963 took the form of one 29-year-old geologist who was supposed to be on vacation and six French Canadians hired, without the authority of the company’s senior management, to man a drill rig 14 miles northeast of town.

Timmins is a cold town; the temperature lingers below zero in the winter, and the wind whips across the surrounding flat, featureless terrain. It would be bush wilderness had gold not been discovered there in 1909. In 50 years, gold worth more than a billion and a half dollars has been extracted from the rock fault that creases by Timmins.

The residents of Timmins have a lot of old-fashioned pride in the gold that has been taken from the storied mines of Hollinger, McIntyre and Dome. It was gold that attracted French Canadians and Italians and other firstand secondgeneration Europeans to the area. But what promised wealth for others yielded only a lifetime of working underground for these people; Timmins has more than its share > of beer parlors and chestinspection clinics.

Kenneth Darke, an intense young geologist, first came to Timmins in 1959, less than three years after graduating from the University of British Columbia. Darke had joined Texas Gulf for two main reasons: he was promised the

chance to travel extensively, and also the opportunity to examine and work on projects of diversified mineralogy and geology. It was a promise that Texas Gulf kept; from the time he first visited Timmins until he returned almost in secrecy four years later, Darke worked in a dozen widely separated parts of the North American continent, never spending more than four months in one place. On two separate occasions he examined in detail one of the rock outcrops in the Kidd Township area where he had found tuffs (concentrations of volcanic dust and ash) and what appeared to be pinheads of mineralization. It might have been pyrite (a brass-yellow mineral composed of iron sulphide, popularly called “fool’s gold”), but Darke was convinced it was copper mineralization.

It started with a hunch by a young Canadian geologist employee led to a wild scramble for company shares* a royal commission, book, The Billion Dollar Windfall, MORTON SHULMAN, author of

xas Gulf Sulphur Co. It made quick fortunes for a privileged few, y and U.S. court action. In this excerpt from his newly published íe Can Make A Million, reveals the story of a race for quick riches

By itself, the evidence he gathered from the rock outcrop meant very little. But directly to the north and east, Texas Gulf aerial surveys had indicated that the ground contained conductive material, the first clue to the presence of a mine. In June 1963, Texas Gulf finally acquired an option to purchase mineral rights to the property for $500. Darke was anxious to look at it when he arrived in Timmins on October 16.

Ken Darke had just returned from a summer on the northern tip of Baffin Island, where he was helping to outline large lead-zinc deposits. Before going to Baffin Island, he had met with the company’s chief geologist, Walter Holyk, and offered to forego his vacation if he could spend a month in Timmins. Holyk, another British Columbian, had been at Texas Gulf since 1952 and was the man who initiated the company’s Canadian Shield project in 1957.

What excited Darke and Holyk, and to a lesser extent the management of Texas Gulf, was a quarter-mile patch of muskeg and alder bush 14 miles to the north of Timmins. Texas Gulf called it the Murray Hendrie property after the estate that owned it and that, after four years of careful negotiations, had optioned it to Texas Gulf earlier that year.

On the Hendrie property, Texas Gulf’s airborne survey crews had detected an anomaly — a reaction recorded by geophysical instruments in which there is a variation from the norm. Anomalies may indicate the presence of some conductive or magnetic material below the surface of the ground and are a clue to the possible presence of economic minerals. Anomalies abound in the area around Timmins, and most are worthless. Texas Gulf, in fact, had spent close to three million dollars finding and drilling 65 anomalies in the preceding four years, with no results.

Excerpted from The Billion Dollar Windfall. Copyright © Morton Shulman, 1969. Published by McGraw-Hill Co. of Canada Ltd.

TEXAS GULF continued

T

Ahe rock sample glinted tantalizlngly.

A secrecy-shrouded adventure that was to make a few insiders wealthy had begun.

At the Hendrie property, Darke paced up and down what he thought would be the outlines of the 160-acre plot, hoping to find accurate boundaries. Kidd is a “surveyed” township, but some of the lines had been laid out 50 years before, and the wood posts that marked the corners of the property had rotted into the swamp and muskeg.

When airborne surveys show the presence of an anomaly, the second exploratory step is the collection of further information by ground surveys. Darke’s first priority was to find someone in whom he could have absolute trust, someone to help him cut through the alders, willows, tamarack and spruce that grew from the gooey swamp.

At his motel Darke drew up plans for a grid, a series of lines cut at spaced intervals along which geophysical instruments can be carried. He plotted the grid's baseline along a southerly path that, as nearly as he could determine, would bisect the underground anomaly. He then tried to locate Edgar Anglehart, a rough, strapping man, who had spent a career drifting from mine camp to mine camp. He had been the cook that summer at Texas Gulf’s Baffin Island project, but he was also an experienced linecutter and claimstaker. Darke liked and trusted him.

Anglehart was traced to North Bay. Darke phoned him. Anglehart proceeded to Timmins and checked into the Empire Hotel. The next morning Darke picked him up in a Jeep, and the two men made their way north along an emergency service road.

They spent little more than an hour on the property, chaining off a distance from where Darke had located the approximate boundary line to the point where the grid’s baseline would begin. By the end of the day, Anglehart had recruited two friends, Fred Pontello and Guillaume Boudreau, for linecutting duty. With wide-blade axes, the men cut their way south from the north boundary of the property through 800 feet of water-filled alder and muskeg swamp. It was raining. At right angles to the base-

line, Anglehart’s crew cut picket lines two or three feet wide at parallel intervals of 100 feet to complete the grid. The entire job took two weeks.

Back in Timmins, Darke put in a call to Holyk, which resulted in Texas Gulf geophysicist Hugh Clayton and assistant Bernard O’Toole boarding a plane for Toronto, and thence to Timmins. Clayton and O’Toole ran an electromagnetic survey along the paths of the grid and reported their observations personally to Darke and to the company’s Exploration Manager, Richard D. Mollison:

“A massive sulphide-type anomaly extends 700 feet north from the southern boundary. For a further 600 feet, a weak anomaly indicates disseminated

sulphides or possibly massive sulphides at depth. In the best portions conductivity is excellent, and the amplitude is at a maximum.”

Next day, Darke telephoned Canadian Longyear Drilling Company and ordered one drill rig and a crew: one cook, two runners, two helpers to man each of the two 12-hour daily shifts, and a foreman. The foreman, René Gervais, had been a driller when Noranda Mines Ltd. discovered its fabulous Quemont copper orebody in northwestern Quebec during the late 1940s.

The drill crew moved on to the property on November 8, hauling the rig with a small muskeg tractor. Darke located an area in the bush about 200 feet from where the drill was to operate. (Drill camps are often set apart from the anomaly to confuse aerial snoopers, as well as to partially escape the noise of drilling.) Three tents were set up. Then Darke spotted the hole, designated Kidd 55-1. On the morning of Friday, Novem-

ber 9, the diamond drill began to churn into the soft earth.

Late Friday night, Darke settled into his motel room to plot further work at the property. At 11 o'clock there was a knock, and René Gervais, breathing heavily, thrust forward a muddy length of rock. At a glance Darke could see the glint of copper. He had trouble sleeping that night.

KEN DARKE’S THOUGHTS concentrated on Kidd 55-1 and what it might mean for Texas Gulf — and for himself. René Gervais, the drill foreman, guided by his experience on the Quemont discovery 20 years before, had concluded that this was another rich mine.

Although his hopes were high, Darke was less sure. He had seen only one part of the core, and he knew that this country abounded in pockets of rich ore that lay in very shallow depths, or else quickly narrowed or “pinched out.”

Darke had made what he called his first “good pass” in the stock market during the previous month by speculating about the shape and size of an orebody discovered in Ireland by Consolidated Mogul Mines Ltd. The Mogul orebody took the shape of a saucer and lay almost horizontally beneath the surface. As drillers moved from the narrow end of the orebody, Darke gambled that the orebody would continue to deepen into an ellipse, rather than pinching out at a shallow depth. He bought 5,000 Mogul shares on the Toronto Stock Exchange at $2.18 each; as the ellipse widened, Mogul stock rose three months later to $5.50. Darke took a profit of roughly $15,000.

In the light of later events that flowed from Texas Gulf’s discovery at Kidd Creek, that $15,000 profit took on an enormous significance for Darke and for many thousands of claimstakers, prospectors, and stock - market speculators who eventually rushed to the area. It helped to set off a chain of circumstances that led to an international frenzy in penny mining stocks, the appointment of a Canadian Royal Commission, and revelations without which the United States government might never have laid a case against Texas Gulf Sulphur Company.

It also, incidentally, enabled Darke to become a wealthy man within six months. On February 20. 1964, he purchased 300 shares of Texas Gulf stock at 24%. One week later he approached a Timmins friend. T. F. Moran, who was working in a dry-cleaning plant. At Darke's request, Moran purchased a call on 1,000 shares of Texas Gulf stock at 22% through an uncle who worked in a Montreal brokerage firm.

From the Texas Gulf discovery was to come wealth for William A. T. Gilmour, of Hamilton. Ont. The Ontario Supreme

continued on page 95

TEXAS GULF from page 30

Court had named Gilmour sole beneficiary of the estate of his stepfather, Murray Hendrie, whose property Texas Gulf had optioned. What it really meant was that Gilmour and his heirs would get 10 percent of the gross profits of the Texas Gulf Sulphur Co.’s Kidd Township production. It would mean for Gilmour an annual income of up to $10 million.

At the drill site, beside the warmth of an oil-burning stove and with a bucket of water set between his legs, Darke began a systematic visual inspection of the core. The core, lying in rows of five in 30-inch cardboard boxes, was covered with mud. He submerged each piece in the water bucket to remove the muck, examined it with a hand lens, and replaced it in the box, making sure it was properly labeled. His first entries in a small notebook were:

“2 ft — sand boulders

24 ft — overburden [clay]

8 ft — 3% cu [copper]

16 ft — traces cu”

The next two feet indicated 10 percent copper by weight, and the next 28 feet appeared to be even higher grade. Farther down the core, at depths just past 100 feet, Darke ran into evidence of rich zinc ore.

It was dark and eerie by the time he had finished logging the core drilled to that time. During the following two days, drilling had been completed to a depth of 655 feet. The bit cut eight feet past the end of the conductor, which just happened to be almost on the boundary of the property that lay to the west. Darke could hear the chatter of the drillers and, although he doesn’t speak French, he could sense their excitement. He made his way on foot toward the Jeep. He walked, and where possible ran, along the path. He stumbled through puddles and ponds: his feet were soaked, but it was of no consequence. Despite the darkness, he was back at the Jeep within 40 minutes. In daylight the hike took at least an hour.

At the Bon Air Motel, Darke placed a call to Holyk, the chief geologist, at his home in Stamford, Connecticut. Holyk said he would depart for Timmins as early as possible the next day. Holyk in turn called Richard D. Mollison, Texas Gulf’s exploration manager, and Mollison called Charles A. Fogarty, then Senior Vice-President. At the end of this series of conversations it was after 10 p.m. and Fogarty made the decision to rouse President Claude Stephens from his bed with the news.

In the complaint laid later in the U.S. Court of Appeals by the Securities and Exchange Commission against Texas Gulf Sulphur Co., it was stated that prior to November II, 1963, Fogarty owned TEXAS GULF continued

705 shares, Mollison owned 50, Clayton 200, Earl Huntington (an attorney for Texas Gulf) 50.

Darke did not return to the property on Monday, November 11, but waited for Holyk’s arrival later that day. Holyk recalled the visit to me as follows:

“I flew to Timmins on Monday, November 11, and visited the property on November 12 and logged approximately 600 feet of core, with Darke keeping the records. I chained off 2,640 feet from the road on the eastern boundary of the lot in order to determine the approximate location of the western boundary of the Royal Trust lot, and was alarmed that the actual boundary was several hundred feet to the east of where Darke had initially pinpointed it.”

Thereafter, on November 12, 1963, Fogarty, having information concerning the results of Texas Gulf’s drilling on the northeast section, which facts were not generally known by the investing public, purchased 300 shares of Texas Gulf stock at $177/8 per share on the New York Stock Exchange without telling the seller what he knew.

Holyk and Darke plotted their next moves. Through Gervais, they issued instructions to the drillers that any outside discussions about drill operations were forbidden. It was proposed, and accepted by all but the cook, that the crew would remain on the property at least until Christmas. Their bonus was to be full payment, $1.75 an hour, for a full 12hour shift every day, even during periods when the drill was not operating.

The next move was the camouflaging of hole Kidd 55-1 and the transfer of the rig to a decoy location. The drill was dismantled and the wooden sills that supported the rig on the mushy surface were lugged to near the northeast boundary, the farthest possible spot from the hole.

There were other considerations: one of International Nickel Company’s aerial survey planes had flown directly overhead while Kidd 55-1 was being drilled, and a helicopter belonging to McIntyre Porcupine Mines Ltd., used to supply and co-ordinate the pulpwood operations of McIntyre, had been in the area. The McIntyre chopper was piloted by an acquaintance of Darke’s, a man known for his perceptiveness in locating and tracing the activities of ground-exploration projects.

To have drilled a second hole near Kidd 55-1 might have led an aerial observer to conclude that Texas Gulf was putting a second drill probe into the same anomaly — a sure sign they were on to something. Darke and Holyk wanted to make it appear from the air that

the rig was still operating at the same site. Therefore, the second drill site was located in a similar surrounding of trees and brush. The three tents were pitched in the same juxtaposition to each other, and to the rig. Darke instructed Gervais to burn or bury all wood, paper and other refuse that had collected around the first drill site. He planted a small tree in the cement collar of the drill casing, and others throughout the site of the first drill hole. Pine boughs were scattered over the tractor tracks. Two days later came the first snow of winter, the best possible disguise. The entire area was blanketed in white for the next five months.

On Wednesday, November 13, Mollison and Fogarty arrived in Timmins. Early the next day, accompanied by Darke and Holyk, they visited the property.

That night, Fogarty, Mollison and Holyk returned to New York.

On November 15, 1963, Fogarty purchased 700 shares of Texas Gulf at $175/8-$177/8 a share on the New York Stock Exchange; Mollison purchased TOO shares at $177/s; Clayton purchased 200 at $173A.

The following Sunday, Darke brought back to the camp two bottles of VO whisky and 24 bottles of beer as compensation to the crew for being stuck in the bush. That day, with the authority of Exploration Manager Mollison, he also handed a $250 bonus cheque to Edgar Anglehart.

On November 19, Fogarty bought 500 shares of Texas Gulf at $18V8.

After discussion on general plans with Holyk and Mollison, Darke pinpointed the location of the second drill hole, knowing that it would bore through worthless rock. It would deceive aerial snoopers, and it would provide lengths of barren core that could be left in full view on the chance a prospector or surveyor or pulpwood worker happened by. Drill Hole No. 2 — Kidd 55-2 — was started November 20.

On November 26, 1963, Fogarty purchased 200 shares of Texas Gulf at $173A per share; and on November 29 Holyk’s wife bought 50 shares at $18 per share.

Edgar Anglehart was assigned to split the core from K 55-1 into semicircular lengths. Half of the core was kept in Timmins, the other half sent to Salt Lake City for chemical tests that would confirm, in more precise terms, Darke’s and Holyk’s visual assays.

By November 30, 1963, Kidd 55-2 was completed with predictable results.

continued on page 98

TEXAS GULF continued

THE FIRST PRIORITY of Texas Gulf, one that even took precedence over the further investigation of Kidd 55, was the accumulation of land and mineral rights in the surrounding area. It was not simply a case of acquiring land that might contain some geological extension of the Kidd 55 orebody; there was the matter of ensuring that there would be private access to roads and a site for mine-plant operations if, in fact, Texas Gulf had found a commercial orebody. To have announced the results of Kidd 55-1 immediately would have brought mining companies and speculators flooding to the area in a contest for land that would have driven prices upward. Darke, the geologist, and Clayton, the geophysicist, were assigned to marshal the desirable land. Where land was open for staking under the Ontario Mining Act, they were to proceed by staking; where it was patented land, they were to advise other Texas Gulf officials, who were to carry on private negotiations for the acquisition of mineral rights.

While much of the land around Timmins was patented land, staking on the scale envisioned by Texas Gulf would require the activity of a large number of people in the field. (By the time the land acquisition program was completed four months later, the company had tied up 60,000 acres.) Negotiations to hire staking teams were by necessity delicate. It would have been desirable to keep each two-man team ignorant of the activities of the others, but of course that was impossible. Among those recruited by Darke was Anglehart and some of his cronies who had helped with the linecutting duties on Kidd 55.

Mining claims may be staked by anyone over 18 who pays five dollars to hold a miner’s license. But a licensee may not stake more than 18 claims in any one year (April 1 to March 31) in each of the province's 14 mining divisions. Thus there was the need in Texas Gulf’s case for several teams of stakers. Claims are squares of roughly 40 acres, and staking requires the erection of four-inch-wide posts at each corner. Boundaries must be marked, either by a trail blazed through the bush, or by pickets or mounds of earth placed at given intervals. Claim stakers frequently get their bearings by using aerial photographs; this staking method later became of importance when a team of stakers working under Edgar Anglehart improperly staked four claims and were required to forfeit them. The claims later fell into the hands of Windfall Oils and Mines Ltd. and subsequently became the subject of Canada's greatest mining scandal.

To ascertain which land was open for staking, Darke had to get copies of

township maps from the government mining-recorder’s office in Timmins. He was a frequent visitor there, but it had been his custom to pick up only one or perhaps two maps of the township he was working in. The mining recorder, a slender, orderly young man named Chris Egerton, thought it adequate to meet demand by maintaining an inventory of three maps per township. Darke needed many more than this for his staking program. As casually as possible, he began ordering more maps; to escape suspicion, he had Anglehart order further maps. Later, Darke asked Nedo Bragagnolo to pick up maps for him. Bragagnolo, a young real-estate salesman who had formerly worked in the mines but quickly tired of working underground, occupied the office on Pine Street next to Darke’s. Bragagnolo, too, was to become a millionaire as a result of the Texas Gulf discovery; he is a shrewd man, and it seems likely in retrospect that his first hint of Darke’s clandestine activities was that request to pick up maps at the mining-recorder’s office down the street.

In early December 1963, Darke’s security precautions began to fail. The drill core from Kidd 55-1 was transported by helicopter from the property to Timmins airport, where it was loaded on to a plane. Its destination was an assay office in Salt Lake City.

In the Fountain Court bar of Timmins’ main hotel, the Empire, the navigator on these helicopter flights remarked on the great volume of core that was being flown out of Kidd Township. The Empire Hotel bar is the clearing house in Timmins for all mining intelligence. The helicopter pilot, Doug Boughner, later recalled his own suspicions about the core. On one occasion in early December he had been alone with the core. “They were packed in cardboard boxes, wrapped in burlap, covered with heavy cardboard and bound with wire,” Boughner said. “If I would have had just one look at the core, I’d be a millionaire today.”

On December 11, Holyk’s wife bought 100 shares of Texas Gulf at $20.37.

When a reporter from Toronto’s Globe and Mail phoned Timmins Mayor Leo Del Villano to ask about the rumor that TGS was flying the drill cores to the U.S. for assay in the interest of secrecy, the mayor replied that this would be against the law, because cores had to be kept on the property.

It was testimony to the assiduity of the mining grapevine in Timmins that even the forethought of shipping the core as far as Salt Lake City failed to prevent news of the assays from leaking out. Darke was telephoned one day by an excited Holyk, who began the conversation, “Ken, do you know how much sil-

ver was in that core? . . .” Holyk went on to tell Darke that the core had returned silver values higher than three percent.

Somewhat later, Darke was accosted by Mel McCormick, a brokerage salesman who had recently been hired by the Timmins branch of one of Canada’s biggest stockbrokers, Doherty, Roadhouse and McCuaig Brothers. McCormick proceeded to repeat to Darke the silver assays that Holyk had reported over the telephone. Darke, trying to hide his shock and anger, pretended to reproach McCormick for his ignorance of mining-exploration practice. He told the young salesman that the assays had in fact been repeated to him in a telephone call from New York, but he went on to explain the practice of mining companies in using code names for the transmission of information.

“Those figures,” said Darke, “refer to barren pyrite [a worthless material commonly found in the Timmins area].” He further suggested to McCormick that he would feel no compunction about laying charges against anyone eavesdropping on his telephone. Darke didn’t take any such action, however.

He called Holyk and said, “Walt, no more telephone talk.” Holyk immediately understood, and the two men agreed they would in future exchange all information in writing.

Around Christmastime strong rumors began circulating in Timmins that Texas Gulf had a major nickel find. The extraordinarily high assay of 10 percent nickel was frequently mentioned. Darke was telephoned by W. S. Row, the president of Kerr Addison Mines Ltd., a major producer of gold and other metals. Row made a laughing reference to the rumors of a nickel find, and asked if he could send an emissary. Darke replied that he had no objections.

As Darke recalls it, the Kerr Addison representative sent by Row came straight to the point and asked if Texas Gulf had found nickel. Darke joked, “Have you ever heard of 10 percent nickel in these parts?” Then he said, “We have no nickel.” It was the truth.

On December 30, Fogarty purchased 200 shares of Texas Gulf at $22 per share; and on December 31, 100 shares at $22.

In its efforts to stop the rumors, Texas Gulf executives made a statement to the Northern Miner. On February 27, 1964, the Miner reported:

“The rumor machine has Texas Gulf obtaining some fat ore indications from its work.

“ ‘Not so!’ was the gist of the remarks of a top TGS executive. TGS has turned up nothing suggestive of an orebody to the moment, but the company is following up indications of an airborne survey done several years ago.”

continued on page 102

TEXAS GULF continued

In the annual report of Texas Gulf Sulphur Company, the opening remark of President Claude Stephens in his message to shareholders was: “Nineteen sixty-three was an eventful year for your company.”

Only one paragraph made reference to the company’s operations around Timmins:

“We have continued our metallic sulphide exploration activities in eastern Canada. The program has included geological and surface geophysical surveys and related drilling, all of which will be intensifed during 1964. We have also staked claims on Crown lands and obtained options on patented acreage.”

BY MARCH 27, Good Friday, Texas Gulf had completed the staking of the last claim in its land-acquisition program. Save for a four-claim group in Prosser Township, Texas Gulf had every piece of land that it desired in the area, every plot where there was an anomaly that Hugh Clayton had pinpointed as worthy of investigation.

There was no suggestion to this point that Texas Gulf or its officers had any duty whatsoever to disclose their Timmins activities to shareholders or to the public. It is a clearly accepted principle that the responsibility of management to the corporation goes far beyond the responsibility to any individual shareholder. Certainly there was a corporate purpose to be served in maintaining, for as long as necessary, secrecy about the results of K 55-1 and about the subsequent attempts to marshal choice land in the area.

It would have been impossible, or at least prohibitively expensive, for Texas Gulf to get rights to this land if it had been known that the Kidd property had yielded a rich core. The intensity of the land - acquisition campaign itself would have inspired the owners of privately owned land to drive a stiffer bargain, and would have brought speculators and representatives of other mining companies into the competition.

It was now becoming urgent to make plans for the resumption of drilling. The water plateau at Kidd 55 was close to the surface of the ground, and the spring thaw would make the terrain wet and greasy and all but impassable. If drill rigs and other heavy equipment were to be dragged to Kidd 55, it had to be done shortly. This intelligence remained the privilege of only the tight little group centred in Texas Gulf’s exploration department: the results of drill hole K55-1, and the more timely knowledge that drilling was about to resume on the Kidd segment.

On March 30 Walter Holyk’s wife bought 100 shares of Texas Gulf at $25.87 per share. Ken Darke and some of his acquaintances to whom he had recommended the purchase of Texas Gulf were also engaged in the stock market. Darke had been in periodic contact during the preceding few months with an old girl friend, Nancy Atkinson, who now lives in Arlington, Virginia, and worked for the United States Department of Commerce. Miss Atkinson bought call options on 400 shares of Texas Gulf on March 30; her mother, Mrs. Madge Caskey, of Vienna, Virginia, bought call options on 1,000 shares; her friend Stanley Westreich, of Arlington, bought 500 shares at $25.75 each; and Miss Atkinson’s boss, Herbert Klotz, an assistant undersecretary in the Commerce department, bought calls on 2,000 shares.

In Toronto on March 3 Darke’s brother Ernest bought a call on 500 shares at a price of 22Vs. He made a second purchase of a call on 200 shares at 2505. Another friend of Darke’s, Cameron Miller of Toronto, picked up calls on 1,000 shares.

Broker Paul MacNames was also a friend of Ken Darke’s, and MacNames made about $40,000 as a result of information from Darke. On May 12, 1969, he described it: “It was no secret that I was a friend of Ken Darke’s. I got a mortgage on my ex-wife’s house and with the money I bought options on 1,500 shares at a price of 22 V2. I exercised the options at 52 V2

The side bets made by the Holyks and by Darke and his acquaintances on March 30 were exquisitely timed and not only because of the prospect of further drill investigation of Kidd 55. Unwittingly, the transactions were executed the day before Texas Gulf announced a two-dollar-per-ton increase in the price of sulphur. This was hard news that was bound to affect the market price of Texas Gulf shares, and it did. Although the stock had already risen from $22 to $26 during March, it was to continue upward another two dollars per share in the ensuing week.

Chief Geologist Walter Holyk and Ken Darke were at the property when K 55-3 began drilling on the night of March 31. This was the second drill to be aimed into the Kidd 55 anomaly, and it would establish that K 55-1 had not drilled “down dip” — that is, through a wide but shallow body of ore. There was the worse danger, although hardly worth contemplating, that K 55-1 had bored through a narrow vein of ore, had drilled “down a pipe.”

In the evening of April 1, Holyk transmitted to Senior Vice-President Fogarty his visual estimate of the ore content of the first 64 feet of core. The next day Mollison passed on to Fogarty his general observations of the core from K 55-3, and at the same time, Holyk’s visual assays of the length from 164 feet to 192 feet. This type of daily communication continued until April 7, when K 55-3 was completed at a depth of 876 feet. Visual estimates of the core indicated an average copper content of 1.12 percent and an average zinc content of 7.93 percent over 641 feet of the hole.

TEXAS GULF continued

The average gross assay values indicated by K 55-3, without regard to any silver content, was $26.43 per ton at prices then prevailing for copper and zinc. Ore with gross assay values of little more than five dollars per ton had been profitably mined from properties with similar characteristics and locations.

But geology is an inexact science. What Texas Gulf had discovered, in absolute terms, were two tubular-shaped lengths of core, with rich metal values extending over 600 feet in each case. It would be absurd to suggest that the surrounding terrain, except for those lengths of core 1 Vá inches in diameter, was barren land. On the other hand, it would have been presumptuous to project the mineral values over the entire area of the anomaly. Freak occurrences abound in rock structure; what made K 55-1 and K 55-3 especially tantalizing was that the high ore values in each hole extended for 600 feet — about the length of two football fields.

Mining engineers for the U.S. Securities and Exchange Commission later contended that ore values persisted in an east-west line from K 55-3 to K 55-1 to a width of 373 feet. They further argued that, even if the ore values were present for only six inches on either side of that east-west line, Texas Gulf had already found ore worth $750,000.

Benjamin Adelstein, the SEC’s chief mining engineer, said it was most difficult to imagine that such rich ore would not extend for at least some distance north and south of the east-west plane established by K 55-1 and K 55-3. “However, it is not possible to prepare an estimate of ore reserves at this time since mining - engineering practice demands that volume be proven by a third drill hole, at least in a third dimension.”

That third dimension was established by the third hole drilled into the Kidd 55 anomaly, designated K 55-4. It was placed 200 feet to the south of the first hole, K 55-1. K 55-4 confirmed the existence of a third dimension. It was completed in three days, by 7 p.m. on April 10, and it encountered mineralization over 366 feet of its 579-foot length. Visual estimates indicated an average copper content of 1.14 percent over the mineralized portion, and 8.24 percent zinc.

Drill hole K 55-4 went out of worthwhile mineralization 24 hours before, at the 420-foot level, at 7 p.m. on April 9. This was a highly significant time and date, because, for the first time, Texas Gulf had a firm indication — if not proof — that the orebody was in three dimensions.

It was at this point the SEC said that Texas Gulf had truly discovered a mine. Assuming continuity of ore among the three drill holes, Adelstein estimated that drilling had established 7.7 million tons of ore averaging 1.15 percent copper, 8.14 percent zinc, with a gross assay value per ton of ore of $26.51 per ton. The gross value of this projected orebody was $204.2 million.

In the subsequent trial of 13 Texas Gulf employees on charges of insider trading, Judge Dudley Bonsai of the Southern District of New York decided that Texas Gulf’s exploration prior to seven o’clock on the evening of April 9 was not material. Until that time, he ruled, the company had yet to establish the probability that a body of commercial ore existed.

Before that time, therefore, he held that any information emanating from Kidd 55 was not “material” in the sense that it might have been expected to substantially affect the market price of Texas Gulf shares. (Bonsai’s ruling on this matter was later reversed by the Court of Appeals.)

During the eight days that K 55-3 and K 55-4 were drilling to determine the second and third dimensions of the orebody. Senior Vice-President Charles Fogarty bought 800 shares, half of them at $26.50 each on April 1, and the other 400 shares at prices between $26.12 and $26.87 on April 6. Hugh Clayton bought 100 shares at $26.87 on April 2, and Mrs. Mollison, wife of the exploration manager, purchased 100 shares at $28.12 on April 8.

At the same time, Fogarty in discussions with President Claude Stephens formulated tentative plans to announce the progress of drilling at K 55 at the annual meeting of shareholders scheduled for April 23 in Houston at the company’s principal office. Still, no word of the discovery was passed on to the nonexploration members of management, and even David Crawford, Texas Gulf’s secretary and manager of public and government relations, flew from New York to Houston to plan the physical setup of the annual meeting without being aware of developments at Kidd 55.

WHILE THESE PLANS were being incubated at Texas Gulf, disaster struck. The April 9 morning edition of the Toronto Globe and Mail published a story about the discovery rumors. The Toronto Daily Star, meanwhile, had dispatched a reporter to Timmins to check out the rumors. These

news reports were quickly transmitted to New York by telephone and Telex. The next day, April 10, 92,100 shares of Texas Gulf changed hands on the New York Stock Exchange and the price closed at its high for the day of $30.12.

On the morning of April 11, the New York Herald Tribune carried a frontpage story, the first published report in the United States pertaining to Texas Gulf's rumored discovery in Kidd Township.

One of the first members of Texas Gulf’s senior management to see the Herald Tribune story was David Crawford. Crawford didn’t know that Texas Gulf was exploring in Kidd Township. At about 11 a.m. he telephoned from the airport to the home of Texas Gulf President Claude Stephens in Connecticut. Stephens had not yet seen the article and asked Crawford to read it to him over the telephone.

Stephens wasted no time phoning Senior Vice-President Fogarty, the man with overall responsibility for all Texas Gulf’s exploration. When Fogarty had apprised himself of the newspaper article, Stephens said that Texas Gulf would have to issue a press release to “clarify” the rumors.

For the next two or three hours, Fogarty sat at home, reviewing all the information at his disposal, reread the newspaper articles, and jotted down some ideas for a news release. The next morning, Fogarty

called Stephens to read the final draft of the release. Robert Carroll, a vicepresident of Doremus and Company, the public-relations firm that handled Texas Gulf’s account, listened in on a telephone extension. Stephens suggested no major changes, but instructed that the release should be distributed to the newspapers and wire services as soon as possible. He did suggest that, since Fogarty had largely written the release, he should be named in it as the spokesman. It read in part: “NEW YORK, April 12, 1964 — ... During the past few days, the exploration activities of Texas Gulf Sulphur in the area of Timmins, Ontario, have been widely reported in the press, coupled with rumors of a substantial copper discovery there. These reports exaggerate the scale of operations, and mention plans and statistics of size and grade of ore that are without factual basis and have evidently originated by speculation of people not connected with TGS . . .

“Recent drilling on one property near Timmins has led to preliminary indications that more drilling would be required for proper evaluation of this prospect. The drilling done to date has not been conclusive, but the statements made by many outside quarters are unreliable and include information and figures that are not available to TGS.

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TEXAS GULF continued

“The work done to date has not been sufficient to reach definite conclusions and any statement as to size and grade of ore would be premature and possibly misleading ...” The government later charged that this press release was false and misleading and an attempt to deceive the public. Certainly if it was meant to cool down the stock market, it didn’t have that immediate effect: Monday morning, April 13, Texas Gulf shares traded at a seven-year high of $32. FOUR DAYS LATER, on April 16, Texas Gulf called a press conference and issued a second release. This was the announcement: “Texas Gulf Sulphur Company has made a major strike of zinc, copper and silver in the Timmins area of Ontario, Canada... “Seven drill holes are now essentially complete and indicate an ore body of at least 800 feet in length, 300 feet in width and having a vertical depth of more than 800 feet. “This is a major discovery. The preliminary data indicate a reserve of more than 25 million tons of ore. The only hole assayed so far represents over 600 feet of ore, indicating a true thickness of nearly 400 feet. “Visual examination of cores from the other holes indicates comparable grade and continuity of ore. “The ore body is shallow, having only some 20 feet of overburden. This means that it can easily be mined initially by the open-pit method.” At the close of stock-market trading that day, the price of Texas Gulf shares had climbed from $34 to $37. Two weeks later the stock was at $58; a year later it was $70; ultimately, Texas Gulf stock rose to above $130 per share. One year and three days after that fateful press conference, the Securities and Exchange Commission issued a complaint in the United States Court for the Southern District of New York. The complaint charged that Texas Gulf Sulphur had issued on April 12 a press release that was false and misleading and that 13 of its officers, directors, and employees had used information not generally available to the public in order to make personal stock-market profits. The SEC said that even the first drill hole in November 1963 “gave substantial indication, if not proof, that Texas Gulf had discovered a mine of immeasurable value.” At the subsequent trial, the judge decided in favor of Texas Gulf. But the SEC appealed this decision and a new trial was ordered. The hearing is still pending. □