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MOSCOW –

Charles Ponzi, an Italian immigrant to Boston, gave his name to a scheme in which he promised a 50% return to investors within 45 days of their giving him money; or double their money within 90 days. About 40,000 people invested $15 million in 1920 dollars; today that would sum to $150 million.

In essence, the Ponzi scheme pays initial investors their return out of funds subscribed by those who follow, until the market gets wind; there are no new subscriptions to pay claims; and the scheme collapses. From Ponzi, only a third got their cash back.

Junior gold miners can promise something similar; but usually not quite so quickly; and sometimes more reliably.

The rapid return can never depend on real gold mining, because that takes money and time to realize its return. But if the stock market adds value to a miner’s share price, based on the future value of reserves in the ground, projected mine production, and upward velocity for the gold price, then it’s possible the miner will generate a very rapid return out of stock market gains — long before he’s obliged to spend a penny digging out the reserves, and running his production targets through the mill and the refinery.

But once the market sniffs the suspicion that the reserves aren’t quite so numerous, and the investment to lift them not there yet, the trajectory can turn unpleasantly downwards.

The federal licence inspection agency in Moscow, known as Rosprirodnadzor, has been crusading for a year now against over-valuation on the stock market of reserves that have yet to be approved by the State Reserves Committee; and production targets, fixed in mine licences, which the mining companies keep missing.

Highland Gold, Peter Hambro Mining, and Ovoca Gold have all been hit by public challenges from Rosprirodnadzor. Market skepticism has also hit Celtic Resources and GV Gold.

A downward pressure has also been felt by the sector leader, Polyus Gold, whose market capitalization reached $9.4 billion at the start of the year. It is $8.3 billion this week, having lost 11% in the past three months; and gained 11% in the past month. An unfortunate mistake in reporting turned Monday’s share price decline of just 1.1% into the report of a crash of 11% — before Bloomberg and others realized their error, and corrected it. Another day of trading on Tuesday saw the Russian market eat into the Polyus share by another 1.6%.

When Polyus issued its 2006 financial results at the start of June — the first full annual financials since its listing in May 2006 — it was able to report 55% year on year growth of revenue to $735 million; 56% pickup of Ebitda to $299 million; and 78% growth in profit from operations to $212 million.

The company also announced that it plans to spend $3.2 billion from cash in hand, cash flow to come, and debt, in order to reach a target of 3.9 million oz of gold production by 2015. This is a brighter picture than was suggested by the flat production level of 1.1-1.2 million oz, reported by Polyus for 2005 and 2006, with no change forecast for 2007.

The brightness of the future also diverted attention from a 33% jump in operating costs last year. “Although we consider the deterioration of financial performance disappointing,” reported Vladimir Zhukov, precious metals analyst for Alfa Bank in Moscow, “in the long term we see the most value in the successful launch of the company’s greenfield projects and organic growth.”

How long is long turned out to be one month. On Monday, chief executive Pavel Skitovich told an audience in Krasnoyarsk, where Polyus’s principal producing mine is located, that he expects the 4-million oz production target to be more realistic for 2015 than for 2012, which is when his predecessor, Yevgeny Ivanov, had fixed it in a speech last December. Never mind that Moscow analysts had already moved the target date from 2012 to 2015 last September, following the Polyus board’s strategy formulation at the time.

Skitovich also said this week that his company will “concentrate on cost-control and separating production and development”, and on spending more to boost reserves with new discoveries. He didn’t say whether he puts a higher priority on buying new reserves from asset consolidation than finding them the old-fashioned, geological way.

Skitovich also didn’t mention that it is proving hard to cut costs at the most expensive of Polyus’s operations, Lenzoloto, where total cash cost per oz in 2006 was $462, more than double the $210/oz cash cost of Olympiada, the leading mine. The Polyus board has decided to try to get rid of Lenzoloto altogether, but there have been no buyers at any price.

A month ago, Renaissance Capital was predicting a trajectory for Polyus of 34% upward to $55 per share, with gold averaging $660/oz in the interval. Alfa Bank is forecasting a trajectory for Polyus of 48% upward to $59 per share. For a month the Polyus share price followed gold upward — but it has stopped. The correlation between gold and the Polyus share is jagged, with serious disconnections. The market appears to think that when there is good news from the company, it should keep company with gold. But if there is suspicious news, gold can’t keep the company from falling.

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