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The Sunshine Mine Saga, Part 43.2.8b


April 27, 2010

Wallace, Idaho " Somebody should write a book about the fabled Sunshine silver mine. Oh, duh, what were we thinking? A boat load of folks already have, including most recently and most famously, Gregg Olsen's superbly crafted The Deep Dark: Disaster and Redemption in America's Richest Silver Mine about the government-mandated tragedy that was the Sunshine Mine Disaster of May 2, 1972, which claimed the lives of 91 Silver Valley miners and the reputation of an honest and safely run industry.

Since that deadly 1972 tragedy, Sunshine endured year-long strikes at regular intervals, the most troublesome one being in 1980 when, as silver soared to more than $48 an ounce, the mine sat idle and ended up faced with margin calls for the high-priced silver it did not produce but had shorted (excuse us, we mean “hedged”).

In the 1960s and 1970s, the Sunshine Mine was pillaged by a New York outfit headed up by Irwin  Underweiser for a variety of unprofitable ventures. Then in the late 1970s a group of Texans spearheaded originally by the Hunt Brothers took over and bet the future of the silver mine on some catastrophic oil plays. Before a century-old Silver Valley penny stock " Sterling Mining Co. " got a lease on the mine and mill, the parent company had bet the Sunshine ranch on a property in Argentina, the Pirquitas, which metallurgical properties they could not crack, sending them into bankruptcy and forcing the “permanent” closure of the Sunshine Mine.

A privately held mining equipment dealer, American Reclamation Inc., acquired rights to the Sunshine (the old company's bond-holders ended up with Pirquitas and sold it to Silver Standard, and the mine entered production last year; the common shareholders, then as with now, got nothing) with the initial idea of stripping the place for scrap. With silver prices seeming to be headed nowhere in 2001, Sunshine's last best hope seemed to be to hire a crew for a few years to strip the 6,000 foot deep mine with nearly 200 miles of workings of its iron rail, copper wire, transformers, compressors, hoists and other machinery.

But American Reclamation's CEO, Robert Mori, could not quite bring himself to do the obvious “smart thing” and wreck a great silver mine, and when he met up with a stamp collector and big dreamer who'd worked for Bechtel and was relocating to North Idaho and had great faith in silver, they hatched a plan whereby, when the silver price improved, the Sunshine Mine, if undisturbed, might return to production indefinitely. Then-CEO of Sterling Mining, stamp-collector Ray Demotte, assembled a superb crew of mining engineers, geologists, electricians and assorted country-savvy others " some of whom had worked at Sunshine since before the 1972 fire " and set about rehabilitating the 120-year-old silver mine to modern standards and with the hope of finding another Chester, another Hook Area, another Syndicate, that would ensure another century of operations " this time unburdened by the nefarious outsiders that had cursed the mine almost since its discovery in 1884.

Mori and Demotte worked closely together, bound by a loosely-written lease/purchase agreement. Sterling had little cash and most deals between Sterling and American Reclamation were done on a handshake. Demotte worked to secure relationships with the Sunshine Mine's neighbors, many of whom had conflicting claims to veins and rights deep inside the mine. Some of these companies and individuals had litigation claims against the old Sunshine Mining Company dating back to the 1950s, despite an effort in that decade to “unitize” the Sunshine and parcel out its “iceberg of silver” to all with legitimate claims to its hundreds of million ounces of the white metal.

What struck us as unique about the partnership between Sterling and American Reclamation, so aggressively misunderstood by the latter day idiot-geniuses of the silver game, was the common goal they shared. Mori would have been far better off scrapping the place; Demotte would have served himself better staying in San Francisco. But they both saw opportunity, and hope for this community, in resurrecting the aulde 'Shine. That came crashing to a halt in May 2008 when Sterling's board summarily dismissed Demotte and set about closing down the just-reopend mine.

The one guy who offered any hope for Sunshine's recovery was Minco Silver's Ken Cai. At breakfast in June of 2008, we suggested to Dr. Cai that Sterling might be a perfect acquisition for Minco Silver. (He was looking for a silver producer in the U.S. to attract investors to Minco and its giant new Fuwan property in China near Guangzhou, (formerly Canton), which we visited with him back in 2007.

(Here is a basic rule in mining company fundraising: If you own a producing property, you have access to larger stock exchanges than if you are simply an exploration company. Thus Sterling and Sunshine made sense for Minco Silver, and Dr. Cai's obvious sympathy for the plight of the then-still-operating Sunshine was an enhancing factor.)

The marriage between Sterling and Minco made absolute sense, except for the fact that Sterling's directors could not keep themselves from blowing off Dr. Cai's people, and the fact that nobody from Sterling had bothered to inform Bob Mori that the lease of his mine had been assigned to a Canadian company.

Mori and Cai could have reached a handshake accord, but Sterling's officers and directors would have nothing of the sort, even after Minco continued to advance Sterling's directors money to pay their own outrageous bonuses. The mine closed in September 2008, and Sterling, deeply in default to Mori, Minco, the EPA, the Coeur d'Alene Indian Tribe, and numerous suppliers and friends, went to bankruptcy court where it found a more-than-friendly judge.

In February 2009, a group led by John Ryan of U.S. Silver fame, and David Greenway of SNS Silver, attempted to resurrect the disaster, both informed by their long experience in the Silver Valley: Ryan's the Wallace native who rescued the Galena mine from Dennis Wheeler's death sentence, and Greenway heads the company that now owns the Crescent Silver Mine, a rock's-throw from the Sunshine. Their intent was to cash a by-then thoroughly bummed-out Minco out of the Sunshine enterprise and get the mine up and running again.

Sterling's directors concurred, and at a rather public event handed the mine back to American Reclamation in February 2009. Local press were there for the ceremony, and Sterling's Brian Higdem gave the Sunshine's keys to American Reclamation's Ed Short, who in turn handed them to SNS Silver's Greenway. Sterling even issued a press release to that effect.

But Sterling's insider directors, including operatives Carol Stephan and Roger Van Voorhees, had one more trick up their sleeves: they found a lawyer to convince a judge that Sterling really hadn't ever  done such a thing, that the hand-over was invalid, and that Sterling really never meant to do such a thing, and that this publicly witnessed and photographed hand-over had never happened.

In bankruptcy, Sterling put itself up for sale. Minco was an obvious bidder, as it had fronted the company some $9 million, and needed to protect its asset base. Canadian explorer Alberta Star also put up a bid, although it shrunk like a violet after its partner, Kootenay Gold, actually bothered to  meet with Bob Mori four weeks ago and quickly buggered off.

That left us with Minco Silver until about three weeks ago, when a mysterious Texas entity named Silver Opportunity Partners tossed in a bid for Sterling of $24 million, trumping Minco's bid by nearly $10 million.

The Texas outfit has, according to sources, Apex Silver founder Tom Kaplan's fingerprints all over it, which means (though everybody denies this) that Ryan and company are back in play for the Sunshine. The $24-mil at least gets Minco out of its worries and may bail out some of the Silver Valley's unsecured creditors, although anyone holding common shares of Sterling are smoking dope if they think they'll get anything out of this deal.

It will be good to see Minco and the Sunshine Mine escape the clutches of Sterling Mining. Sterling's neglect of Sunshine already has led to the collapse of a significant section of the Silver Summit Shaft, which is the mine's required secondary escape-way. Local estimates range between $6-$8 million to fix last winter's damage there.

The next few weeks may be very interesting. But it looks like some people who actually care about the Sunshine might be back in play. This might encourage Bob Mori to play ball, which legally he may not have to do. Yeah, that's the niggling detail: American Reclamation has not leased the Sunshine Mine to the guys with the $24 million from Dallas. It's still American Reclamation's mine, and there are big open spaces necessary for Sunshine's operations that aren't covered in the lease. Obviously, some latter-day geniuses never read the fine print.

It would be a very good thing for north Idaho's Silver Valley players to make peace right now. Mori needs to made whole, and an apology to the Silver Valley and 200 out-of-work miners from all the apostates at Sterling is long overdue.