Business Adventures

by John Brooks

  TEXAS Gulf didn’t have a surefire mine yet; there was always the possibility that the mineral vein was a long, thin one, too limited to be commercially exploitable, and that by a fantastic chance the drill had happened to go “down dip”—that is, straight into the vein like a sword into a sheath. What was needed was a pattern of several drill holes, beginning at different spots on the surface and entering the earth at different angles, to establish the shape and limits of the deposit. And such a pattern could not be made until Texas Gulf had title to the other three quarter-segments of Kidd-55. Getting title would take time if it were possible at all, but meanwhile, there were several steps that the company could and did take. The drill rig was moved away from the site of the test hole. Cut saplings were stuck in the ground around the hole, to restore the appearance of the place to a semblance of its natural state. A second test hole was drilled, as ostentatiously as possible, some distance away, at a place where a barren core was expected—and found. All of these camouflage measures, which were in conformity with long-established practice among miners who suspect that they have made a strike, were supplemented by an order from Texas Gulf’s president, Claude O. Stephens, that no one outside the actual exploration group, even within the company, should be told what had been found. Late in November, the core was shipped off, in sections, to the Union Assay Office in Salt Lake City for scientific analysis of its contents. And meanwhile, of course, Texas Gulf began discreetly putting out feelers for the purchase of the rest of Kidd-55.

  And meanwhile other measures, which may or may not have been related to the events north of Timmins, were being taken. On November 12th, Fogarty bought three hundred shares of Texas Gulf stock; on the 15th he added seven hundred more shares, on November 19th five hundred more, and on November 26th two hundred more. Clayton bought two hundred on the 15th, Mollison one hundred on the same day; and Mrs. Holyk bought fifty on the 29th and one hundred more on December 10th. But these purchases, as things turned out, were only the harbingers of a period of apparently intense affection for Texas Gulf stock among certain of its officers and employees, and even some of their friends. In mid-December, the report on the core came back from Salt Lake City, and it showed that Holyk’s rough-and-ready estimate had been amazingly accurate; the copper and zinc contents were found to be almost exactly what he had said, and there were 3.94 ounces of silver per ton thrown in as a sort of bonus. Late in December, Darke made a trip to Washington, D.C. and vicinity, where he recommended Texas Gulf stock to a girl he knew there and her mother; these two, who came to be designated in the trial as the “tippees,” subsequently passed along the recommendation to two other persons who, logically enough, thereby became the “sub-tippees.” Between December 30th and the following February 17th, Darke’s tippees and sub-tippees purchased all told 2,100 shares of Texas Gulf stock, and in addition they purchased what are known in the brokerage trade as “calls” on 1,500 additional shares. A call is an option to buy a stated amount of a certain stock at a fixed price—generally near the current market price—at any time during a stated period. Calls on most listed stocks are always on sale by dealers who specialize in them. The purchaser pays a generally rather moderate sum for his option; if the stock then goes up during the stated period, the rise can easily be converted into almost pure profit for him, while if the stock stays put or goes down, he simply tears up his call the way a horseplayer tears up a losing ticket, and loses nothing but the cost of the call. Therefore calls provide the cheapest possible way of gambling on the stock market, and the most convenient way of converting inside information into cash.

  Back in Timmins, Darke, put temporarily out of business as a geologist by the winter freeze and the land-ownership problem at Kidd-55, seems to have managed to keep time from hanging heavy on his hands. In January, he entered into a private partnership with another Timmins man who wasn’t a Texas Gulf employee to stake and claim Crown lands around Timmins for their own benefit. In February, he told Holyk of a barroom conversation that had occurred in Timmins one gelid winter evening, in which an acquaintance of his had let fall that he’d heard rumors of a Texas Gulf strike nearby and was therefore going to stake a few claims of his own. Horrified, Holyk, as he recalled later, told Darke to reverse the previous policy of avoiding Kidd-55 like the plague, and to “go right into the … area and stake all the claims we need;” also to “steer away this acquaintance. Give him a helicopter ride or anything, just get him out of the way.” Darke presumably complied with this order. Moreover, during the first three months of 1964 he bought three hundred shares of Texas Gulf outright, bought calls on three thousand more shares, and added several more persons, one of them his brother, to his growing list of tippees. Holyk and Clayton were somewhat less financially active during the same period, but they did add substantially to their Texas Gulf holdings—in the case of Holyk and his wife, particularly through the use of calls, which they’d scarcely even heard of before, but which were getting to be quite the rage in Texas Gulf circles.

  Signs of spring began to come at last, and with them came a triumphant conclusion to the company’s land acquisition program. By March 27th, Texas Gulf had pretty much what it needed; that is, it had either clear title or mineral rights to the three remaining segments of Kidd-55, except for ten-per-cent profit concessions on two of the segments, the stubborn owner of the concession in one case being the Curtis Publishing Company. After a final burst of purchases by Darke, his tippees, and his sub-tippees on March 30th and 31st (among them all, six hundred shares and calls on 5,100 more shares for the two days), drilling was resumed in the still-frozen muskeg at Kidd-55, with Holyk and Darke both on the site this time. The new hole—the third in all, but only the second operational one, since one of the two drilled in November had been the dummy intended to create a diversion—was begun at a point some distance from the first and at an oblique angle to it, to advance the bracketing process. Observing and logging the core as it came out of the ground, Holyk found that he could scarcely hold a pencil because of the cold; but he must have been warmed inwardly by the fact that promising mineralization began to appear after the first hundred feet. He made his first progress report to Fogarty by telephone on April 1st. Now a gruelling daily routine was adopted at Timmins and Kidd-55. The actual drilling crew stayed at the site continuously, while the geologists, in order to keep their superiors in New York posted, had to make frequent trips to telephones in Timmins, and what with the seven-foot snowdrifts along the way the fifteen-mile trek between the town and the drilling camp customarily took three and a half to four hours. One after another, new drill holes, begun at different places around the anomaly and pitched at different angles to it, were plunged into the earth. At first, only one drill rig could be used at a time because of a shortage of water, which was necessary to the operation; the ground was frozen solid and covered by deep snow, and water had to be laboriously pumped from under the ice on a pond about a half mile from Kidd-55. The third hole was finished on April 7th, and a fourth immediately begun with the same rig; the following day, the water shortage having eased somewhat, a fifth hole was inaugurated with a second drill rig, and two days after that—on the 10th—a third rig was pressed into service to drill still another hole. All in all, during the first days of April the principals in the affair were kept busy; in fact, during that period their buying of calls on Texas Gulf seems to have come to a standstill.

  Bit by bit the drilling revealed the lineaments of a huge ore deposit; the third hole established that the original one had not gone “down dip” as had been feared, the fourth established that the mineral vein was a satisfactorily deep one, and so on. At some point—the exact point was to become a matter of dispute—Texas Gulf came to know that it had a workable mine of considerable proportions, and as this point approached, the focus of attention shifted from drillers and geologists to staff men and financiers, who were to be the principal object of the S.E.C.’s disapproval later on. At Timmins, snow fell so heavily on April 8th and most of
the 9th that not even the geologists could get from the town to Kidd-55, but toward evening on the 9th, when they finally made it after a hair-raising journey of seven and a half hours, with them was no lesser light than Vice President Mollison, who had turned up in Timmins the previous day. Mollison spent the night at the drill site and left at about noon the next day—in order, he explained later, to avoid the outdoorsmen’s lunch they served at Kidd-55 which was too hearty for a deskbound man like him. But before going he issued instructions for the drilling of a mill test hole, which would produce a relatively large core that could be used to determine the amenability of the mineral material to routine mill processing. Normally, a mill test hole is not drilled until a workable mine is believed to exist. And so it may have been in this case; two S.E.C. mining experts were to insist later, against contrary opinions of experts for the defense, that by the time Mollison gave his order, Texas Gulf had information on the basis of which it could have calculated that the ore reserves at Kidd-55 had a gross assay value of at least two hundred million dollars.

  THE famous Canadian mining grapevine was humming by now, and in retrospect the wonder is that it had been relatively quiet for so long. (A Toronto broker was to remark during the trial, “I have seen drillers drop the goddam drill and beat it for a brokerage office as fast as they can … [or else] they pick up the telephone and call Toronto.” After such a call, the broker went on, the status of every Bay Street penny-stock tout depends, for a time, on how close a personal acquaintance he can claim with the driller who made the strike, just as a racetrack tout’s status depends sometimes on the degree of intimacy he can claim with a jockey or a horse.) “The moccasin telegraph has Texas Gulf’s activity centered in Kidd Township. A battery of drills are reported to be at work,” said The Northern Miner, a Toronto weekly of immense influence in the mining-stock set, on the 9th, and the same day the Toronto Daily Star declared that Timmins was “bug-eyed with excitement” and that “the magic word on every street corner and in every barber shop is ‘Texas Gulf.’” The phones in Texas Gulf’s New York headquarters were buzzing with frenzied queries, which the officers coldly turned aside. On the 10th, President Stephens was concerned enough about the rumors to seek counsel from one of his most trusted associates—Thomas S. Lamont, senior member of the Texas Gulf board of directors, former second-generation Morgan partner, holder of various lofty offices, past and present, in the Morgan Guaranty Trust Company, and bearer of a name that had long been one to conjure with in Wall Street. Stephens told Lamont what had been going on north of Timmins (it was the first Lamont had heard of it), made it clear that he himself did not yet feel that the evidence justified bug eyes, and asked what Lamont thought ought to be done about the exaggerated reports. As long as they stayed in the Canadian press, Lamont replied, “I think you might be able to live with them.” However, he added, if they should get into the papers in the United States, it might be well to give the press an announcement that would set the record straight and avoid undue gyrations in the stock market.

  The following day, Saturday the 11th, the reports reached the United States papers with a bang. The Times and Herald Tribune both ran accounts on the Texas Gulf discovery, and the latter, putting its story on the front page, spoke of “the biggest ore strike since gold was discovered more than sixty years ago in Canada.” After reading these stories, perhaps with eyes bugging slightly, Stephens notified Fogarty that a press release should be issued in time for Monday’s papers, and over the weekend Fogarty, with the help of several other company officials, worked one up. Meanwhile, things were not standing still at Kidd-55; on the contrary, later testimony held that on Saturday and Sunday, as more and more core came up from the drill holes full of copper and zinc ore, the calculable value of the mine was increasing almost hour by hour. However, Fogarty did not communicate with Timmins after Friday night, so the statement that he and his colleagues issued to the press on Sunday afternoon was not based on the most up-to-the-minute information. Whether because of that or for some other reason, the statement did not convey the idea that Texas Gulf thought it had a new Comstock Lode. Characterizing the published reports as exaggerated and unreliable, it admitted only that recent drilling on “one property near Timmins” had led to “preliminary indications that more drilling would be required for proper evaluation of the prospect;” went on to say that “the drilling done to date has not been conclusive;” and then, putting the same thought in what can hardly be called another way, added that “the work done to date has not been sufficient to reach definite conclusions.”

  The idea thus couched, or perhaps one should say bedded down, evidently came across to the public when it appeared in Monday morning’s newspapers, because Texas Gulf stock was not nearly so buoyant early that week as it might have been expected to be if the enthusiastic Times and Herald Tribune stories had gone unchallenged. The stock, which had been selling at around 17 or 18 the previous November and had crept up over the intervening months to around 30, opened Monday on the New York Stock Exchange at 32—a rise of nearly two points over Friday’s closing—only to reverse direction and sink to 30⅞ before the day’s trading, was over, and to slip off still further on the following two days and at one point on Wednesday touch a low of 28⅞. Evidently, investors and traders had been considerably impressed by Texas Gulf’s Sunday mood of deprecation. But on those same three days, Texas Gulf people in both Canada and New York seem to have been in quite another mood. At Kidd-55 on Monday the 13th, the day the low-keyed press release was reported in newspapers, the mill test hole was completed, drills continued to grind away on three regular test holes, and a reporter for The Northern Miner was shown around and briefed on the findings by Mollison, Holyk, and Darke. The things they told the reporter make it clear, in retrospect, that whatever the drafters of the release may have believed on Sunday, the men at Kidd-55 knew on Monday that they had a mine and a big one. However, the world was not to know it, or at least not from that source, until Thursday morning, when the next issue of the Miner would appear in subscribers’ mail and on newsstands.

  Tuesday evening, Mollison and Holyk flew to Montreal, where they were planning to attend the annual convention of the Canadian Institute of Mining and Metallurgy, a gathering of several hundred leading mining and investment people. Upon arriving at the Queen Elizabeth Hotel where the convention was in progress, Mollison and Holyk were startled to find themselves greeted like film stars. The place had evidently been humming all day with rumors of a Texas Gulf discovery and everyone wanted to be the first to get the firsthand lowdown on it; in fact, a battery of television cameras had been set up for the express purpose of covering such remarks as the emissaries from Timmins might want to make. Not being authorized to make any remarks, Mollison and Holyk turned abruptly on their heels and fled the Queen Elizabeth, holing up for the night in a Montreal airport motel. The following day, Wednesday the 15th, they flew from Montreal to Toronto in the company, by prearrangement, of the Minister of Mines of the Province of Ontario and his deputy; en route they briefed the minister on the Kidd-55 situation, whereupon the minister declared that he wanted to clear the air by making a public announcement on the matter as soon as possible, and then, with Mollison’s help, he drafted such an announcement. According to a copy that Mollison made and kept, the announcement stated, in part, that “the information now in hand … gives the company confidence to allow me to announce that Texas Gulf Sulphur has a mineable body of zinc, copper, and silver ore of substantial dimensions that will be developed and brought to production as soon as possible.” Mollison and Holyk were given to believe that the minister would make his statement in Toronto at eleven o’clock that evening, over radio and television, and that thus Texas Gulf’s good news would become public property a few hours before The Northern Miner appeared early the next day. But for reasons that have never been given, the minister didn’t make the announcement that evening.

  At Texas Gulf headquarters, at 200 Park Avenue, there was a similar air
of mounting crisis. The company happened to have a regular monthly board-of-directors meeting scheduled for Thursday morning, and on Monday Francis G. Coates, a director who lived in Houston, Texas, and who hadn’t heard of the Kidd-55 strike, telephoned Stephens to inquire whether he ought to bother to come. Stephens said he ought, but didn’t explain why. Better and better news kept filtering in from the drill site, and some time on Wednesday, the Texas Gulf officers decided that it was time to write a new press release, to be issued at a press conference that would follow the Thursday-morning directors’ meeting. Stephens, Fogarty, and David M. Crawford, the company’s secretary, composed the release that afternoon. This time around, the release was based on the very latest information, and moreover, its language was happily devoid of both repetition and equivocation. It read, in part, “Texas Gulf Sulphur Company has made a major strike of zinc, copper, and silver in the Timmins area … 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.” As to the striking difference between this release and the one of three days earlier, the new one stated that “considerably more data has been accumulated” in the interim. And no one could deny this; a reserve of more than twenty-five million tons of ore meant that the value of the ore was not the two hundred million dollars that was alleged to have been calculable a week earlier, but many times that much.