Beyond Fair Trade

by Mark Pendergrast

  For their joint ventures, Darch and Wright created Canadian Crew Energy (later renamed Crew Development) in 1985. That same year, James Hamilton called from London. “I have a client in Australia buying a mine in Aurora, Nevada, looking for a Canadian shell company and investors. Can you help out?” Darch knew that there were innumerable “shell companies”— the remains of failed public ventures that still retained a legal status as businesses—available for a song, since Vancouver mining ventures suffered a huge casualty rate. He and Wright found such a shell, renamed it Nevada Goldfields Corporation, and became directors and officers in October 1985, holding 10 percent of the shares from the shell corporation. A prospectus featuring a youthful-looking Darch as vice president and Wright as a director boasted: “With three precious metals projects on the verge of production—all in the heart of America’s historic gold mine country—Nevada Goldfields Corporation has, in less than a year, succeeded in fulfilling its plan to become a significant contributor to the world’s gold reserves.” Investors pledged over $20 million.

  Also in 1985, Darch and Wright were approached by employees of BC Hydro about a geothermal project in northern British Columbia called Meager Creek. During the oil crisis of the 1970s, BC Hydro had drilled several deep test wells that found temperatures of up to 275°F. But with declining oil prices in the mid-1980s, BC Hydro abandoned the project and planned to plug the hole. Darch thought, This is the way the world will go, with alternative energy like geothermal power.

  As part of the deal, Canadian Crew Energy owned half of the shares and persuaded the Canadian government to grant a thirty-year renewable geothermal lease in 1987. New development began in 1991, but was suspended in 1995, then resumed in 2001, with drilling on three more test wells in 2004 and 2005. Darch’s company sold the South Meager lease to Ram Power Corporation in 2010. Although the geothermal resource had yet to be successfully developed, he made money on the venture by judiciously selling shares along the way, as he did with many other enterprises.

  Darch’s personal life was also evolving at this time. He divorced Dorothy in 1986, and in February 1987, married Louise. The day the couple closed on their new home, the stock market collapsed. It was October 19, 1987, which came to be known as Black Monday. By the end of October, stock markets in North America had fallen by a fifth of their value. “I was lucky I had to sell a lot of my shares in Nevada Goldfields in order to buy that house, just before the crash,” Darch said. “God must have been looking after me.”

  The consulting partners’ next adventure took them to Texas, where an investor and gas operator named Michael Gustin persuaded them to help raise venture capital for an oil and gas project. Darch and Wright pulled in Brian Johnson, an Australian billionaire who agreed to help fund the Texas project.

  The investment failed to flourish. The gas and oil never flowed, Gustin couldn’t account for much of the money, and Brian Johnson’s other projects went belly up at the same time. He went from being a billionaire to bankruptcy in three short years, but the two Canadian partners survived without much damage. “It’s always better to do business with other people’s money, I’ve found,” Darch’s banking mentor David Giddings wryly observed. Darch and Wright specialized in “junior” mining operations that were in the exploratory or development stages, and as one of their documents for potential investors warned, “Few properties which are explored are ultimately developed into producing mines… Mining operations generally involve a high degree of risk.”

  Anyone who invests in penny stocks has to understand that start-up mining companies have a high casualty rate. “Generally, there is a one in a thousand chance of going from a discovery to taking it to exploration,” Darch observed, “and then one in another thousand to become operational. You could call it legalized gambling, if you look at the odds. All such young companies will disappear—either because nothing will come of them, or because they will be taken over by a larger corporation. My investors hung in with me because they knew that if I fell over, I’d get up and continue with something else. So you may have invested in Crew and it didn’t work, but the shares were not just wallpaper. I’d be looking for something else.” Also, share prices would go up as well as down, and wise investors who sold at the right time could make a handsome profit.

  Fortunately, Darch and Wright had been careful to insulate themselves from personal risk. They had also invested in a shell company called Asia Pacific Resources that Brian Johnson had begun and put $5 million into because he was interested in the region and wanted to explore possibilities there. “We did a deal with the receiver for Brian Johnson’s company to buy their controlling shares of Asia Pacific in 1988,” Darch said, “and now we were not just consultants but majority shareholders of a shell company.”

  But what could they do with it? The year before, Robert Anderson, a geologist, had approached Darch and Wright, looking for a job. Having once worked for Broken Hill Proprietary Company (BHP), one of the world’s largest mining enterprises, Anderson knew that there was potash potential in Thailand. “You fellows need a world-class project,” he said, “not these piddly bits you’ve been dealing with.” Now, with Asia Pacific Resources, they had an appropriate name for an operation in Thailand.

  The Potash Project

  MINED POTASH IS the primary source for the potassium in chemical fertilizer, the “K” in NPK (nitrogen, phosphorous, potassium). Before the industrial mining era, potash was made by soaking wood ashes in water, which explains why it was called “pot ash” (and it’s the source of the word “potassium”). Until the late nineteenth century, much of the world’s potash came from Canadian ash-leaching processes, but then German mining of mineral salts containing potassium chloride superseded the ash process. In the 1950s, a major potash deposit was discovered in Saskatchewan, putting the Canadians back into competition.

  Most of the world’s potassium was deposited when seawater in ancient inland oceans evaporated, leaving a mixture of sodium chloride (table salt) and potassium chloride (potash ore). As the millennia passed, these deposits were covered with dirt, so that many deposits are far below ground level. Consequently, most potash mines feature shafts going down thousands of feet.

  Potash deposits have been found around the globe, most notably in countries such as Canada, Russia, Belarus, Germany, China, Chile, and Brazil. With China’s economy and population growing, it was clear that there was a market for Asian potash. While China had some deposits of its own, it had to import most of its potash, primarily from Canada, Belarus, and Russia. A cheaper source in nearby Thailand would find a ready market.

  Darch, Wright, and Anderson flew to Thailand for the first time in 1987 and met Dr. Anant Suwanapal, who had been working to develop potash and other rock salts in Thailand for ten years. Dr. Anant suggested that they talk with the principal executives of the Metro Group, a conglomerate of 200 prestigious Thai companies. The group was active in numerous areas, including steel, flour, agro-chemicals, and fertilizer, and was part of a partnership that had secured the only concession from the Thai government for a potash mine. In 1992, Darch and Wright finally acquired a 62.5 percent interest in the project in return for raising the necessary money.

  “By 1996 we had raised $70 million,” Darch said, “but of course it didn’t all happen at once.” First, they had to prove that there were indeed major potash deposits in Thailand. They conducted a test drilling program in the Udon Thani province of northeastern Thailand, with some hundred drill holes proving that there was a continuous bed of potash deposited there. Not only that, it wasn’t several thousand feet below ground but a mere 300 meters, about 1,000 feet, and it had a billion ton potential. At the beginning of the project in 1992, Asia Pacific was a typical penny stock, selling for 15 cents a share. As the test drilling proceeded, the price climbed to $4 in 1994, shooting up to $11 by the spring of 1996.

  As the stock price rose, Darch and Wright prudently sold what Darch called “bits and pieces” of their shares, building their cash po
rtfolios. That turned out to be a good thing. In early December 1996, the bottom fell out of the Asian stock market, starting in Thailand. The value of the Thai baht collapsed when it was unpegged from the US dollar. The Metro Group, with its 25 percent interest in Asia Pacific Resources, held $500 million in international debt—due in baht. Consequently, the Metro directors were eager to liquidate their assets. Darch and Wright saw an opportunity to improve their holdings from 62.5 percent to 90 percent of Asia Pacific, with the Thai government holding the other 10 percent, as arranged by Dr. Anant. He also instigated changes to Thai laws, which took effect three years later, so that mines 100 meters or more below the surface were not required to purchase surface land, only to pay compensation in the event of damage on the surface.

  Darch and Wright could have raised the necessary $40 million to buy out Metro in 1997 by issuing more shares of stock, but that would have diluted the value of their own shares. Instead, they took a convertible debt loan from the Olympus Group, based in Hong Kong, which meant that Olympus retained the right to purchase Asia Pacific shares for a set price, even if the share prices declined. But Darch and Wright were sure that wouldn’t happen. Besides, they were negotiating with Norsk Hydro, a huge Norwegian conglomerate, to acquire an equity position in order to get the Thai potash for its fertilizer.

  A senior executive for Norsk Hydro signed a contract with Asia Pacific to purchase equity in the joint venture, subject to board approval. Then, to everyone’s shock, in March 2001, after more than two years of discussion and planning, the Norsk board members nixed the deal, saying that they did not want to be involved in potash mine development in Asia after all. They thought it was too risky.

  In the midst of this tumult, six of the eight board members of Asia Pacific, on which both Darch and Wright served, approached Darch and demanded that Wright resign because his behavior had become erratic and he had become “impossible to deal with,” as one board director said. Reluctantly, Darch agreed, and on March 21, 2001, Gerry Wright resigned. The previous year, Wright had also resigned as cochairman of Crew Development, as part of the deteriorating partnership/friendship between Darch and Wright.

  In 2002, when the Olympus Group took over management of Asia Pacific, Darch resigned from the board but retained 2.5 percent of the shares.

  In the Meantime, Diamonds, Tin, Gold, Nickel…

  DURING 1992–2002, JOHN Darch had been busy with other mining and energy ventures around the world, in addition to Thai potash. In 1997 the partners changed the name of Canadian Crew Energy to Crew Development, because the focus was changing to include exploration, development, and income properties, which would lead to investments in gold in Greenland, tin in the United Kingdom, nickel in the Philippines, and diamonds in Botswana and South Africa, among other ventures. “It was the period when my former partner Gerry and I were most active,” Darch recalled. “For me it was a very exciting, challenging, and rewarding time. When people asked me why and how I did all these things, my honest reaction was that I never thought I could not.” Although it may be hard to believe, he asserted that his primary motivation wasn’t money. “I truly believed in the projects and what they could be. I could visualize them up and running.”

  Sometimes his visualizations came true, but often they did not. There were moments of controversy and one horrific tragedy. In 1993, Darch and Wright became involved in diamond exploration in Botswana with geologist Norman Lock, who had grown up in Botswana and had previously worked for De Beers, the venerable diamond firm. Together, Darch, Wright, and Lock formed a new entity called Botswana Diamondfields. But exploratory drilling failed to find diamonds. Consequently, in 1996 they acquired the Rovic mine in South Africa, which had begun as an open pit operation in the early 1900s, then became an underground mine. With Lock’s advice and leadership, they engaged Metorex, a South African mining company, to manage Rovic, with the intention of upgrading the mine to increase production. Initial results were encouraging. By summer’s end, a large 17-carat diamond had been found.

  Darch and his wife, Louise, flew to South Africa in early November 1996 to examine the Rovic mine and meet with Norman Lock and the Metorex executives. Darch remained aboveground to talk to the mining manager, while Louise donned coveralls, boots, gloves, and a hardhat to go down 200 meters into the mine. “I wasn’t afraid,” she recalled, “but the enclosure we were in rattled all the way down.” She and other visitors were escorted by miners, who wore helmets but no shirts, down a ladder from which she could make out huge holes leading to offshoots.

  Two weeks later, a main beam in the Rovic mine collapsed, flooding the mine with an avalanche of water and mud. Twenty miners were trapped inside. Only four of the bodies could be recovered. The other sixteen victims remained entombed in the mine, which was sealed and never reopened. Darch’s company agreed to a million dollar settlement. “Those deaths haunted me for years and years,” Darch said. “Metorex, our subsidiary, had fine people who had intended to improve the mine. So it had nothing to do with reckless exploitation of the workers. Of course, I would never have allowed Louise or anyone else to go down there if I had had any idea of the danger.” The experience did not put him off mining, however. “It didn’t make me think that mining was a terrible thing. It just made me aware of how fragile life is, and how little control you have over it.”

  Darch was not involved in any other such mining disasters. In early 1997, Crew Development acquired half-ownership of Metorex, which went on to develop several other successful, money-making mining ventures in copper, coal, zinc, fluorite, gold, antimony, and cobalt, all in southern Africa. In 2002, Crew Development sold some of its Metorex shares for $12.6 million, while retaining 21 percent of the mining company.

  Darch and Wright also invested in South Crofty, the last tin mine in Cornwall, England, in August 1994, hoping to make it a profitable venture and keep much-needed jobs there. They were hailed as saviors. The worldwide price of tin had collapsed in 1985, when the International Tin Agreement lapsed, and it had never fully recovered. In mid-1995, the price of tin rose sharply, inspiring hope, but then fell again. Drilling to find more tin in the South Crofty mine uncovered ore of a lower grade than anticipated.

  Darch asked David Giddings, his old bank mentor, to go to Cornwall to assess the situation. Giddings had retired from banking and was then a “company doctor,” specializing in turning around troubled businesses. “I was horrified by the whole thing,” Giddings said. “A third of their expenses were for overtime.” To keep the half-mile-deep mine dry, 2 million gallons of water a day had to be pumped out of it. The ore contained 1.4 percent tin, which had to be crushed and separated. At the same time, the British pound strengthened in relation to the US dollar. Having to pay expenses in pounds, while taking income in dollars, was crippling them. “The operation was losing two million pounds a year,” Giddings reported, and the mine had to be closed down. “It was very sad.”

  Fortunately, Darch and Wright also made a successful investment, assuming majority ownership of Nalunaq, the first gold mine in Greenland, discovered in 1993 and located on the southern tip of the island. The Greenland gold venture came about in 1999, when Crew Development merged with Mindex, a Norwegian company that also held mining interests in the Philippines and West Africa. By that time, Darch and Wright had raised a total of $170 million for various potential projects, and Crew Development was internationally known. The Norwegians approached Darch and Wright, who saw the merger as a way to increase their holdings and gain access to wealthy investors in Norway. The merger contract contained some fine print, however, saying that once the deal was 94 percent financed, the balance had to be paid.

  “I received a short e-mail,” Darch recalled, “saying that we had reached that minimum and that $4 million was now due in cash. I flew to London, drove to Capital Group, and explained the situation, asking for half of the money. I told them that I had someone else putting up $2 million.” After receiving a stern lecture, Darch got their pledge. Then he w
ent to Equitable Life, where he explained that Capital Group had put up half of the required cash, and he got the balance a few days before Christmas 1999. “So you see, I never told a lie,” Darch explained, “but at times I shaded the truth a bit.”

  The deal left the Mindex investors with 75 percent control of Crew Development, but Darch wasn’t worried. “We were in a glorious situation, with projects all over the world. The Norwegians were hungry for our company, with exciting prospects. We were making acquisitions. If we needed $10 million, it could be done within days.”

  As the gold mine in Greenland prospered, the plans for mining in the Philippines ran into trouble. Despite having obtained a mining license from the Philippine government and having spent a great deal of money and time planning the project, the mining venture was halted before it really began by protests from a coalition of environmental groups, church organizations, politicians, and local activists.

  Plans had called for nickel and cobalt mining in the central mountains of Mindoro Island, where eight indigenous tribes, collectively called the Mangyans, lived. Like the hill tribes of Thailand, they practiced subsistence agriculture and hunting, and until recently they had had little contact with lowland civilization. In 1997, Mindex received an exploration permit; two years later, the company agreed to pay a royalty of 2 percent of sales to the Mangyan community. Striving for environmental and social acceptability, the company also paid for a free local medical clinic, road maintenance, and the construction of culverts, bridges, and schools. Crew/Mindex paid for plant nurseries to cultivate 10,000 seedlings of hardwood and fruit-bearing trees and bamboo, while supporting local cultural and sporting activities. Nonetheless, protests led the government to cancel the company’s mining license in July 2001.