Gold

by Matthew Hart

  Only two years old when the Japanese invaded, Gong had researched his account of Linglong by talking to men who had worked at the mine under the Japanese. One of the men he interviewed had infiltrated Linglong for the communists.

  “He helped steal gold from the Japanese,” Gong told me through Feng Tao. “There were many of them. That was their job. They were sent by the party. The party had a lot of farmers in its membership, so the men looked like farmers, and the Japanese hired them. In fact they were guerrillas. They had a hidden smelter at Linglong where the gold was poured into molds and cooled in water. They shaped it into bars that could be sewn into clothes and smuggled out.”

  It obviously gave Gong pleasure to think of Linglong in a patriotic light. A moral relish infused his writing. A collaborator named Jiang Qixu, for example, “was steeped in iniquity, with hands stained with the people’s blood all over.” Sadly, the literature of mining does not abound in such accounts.

  The occupation of the Linglong mine ended in style in a storm of gunfire, with the cornered Japanese commander defiantly flinging his sword at a Chinese officer, who shot him dead. The collaborator Jiang was dragged from hiding and executed. “The crisp shot echoed among the Linglong Mountains.”

  The retaking of the Linglong mine marked the end of the world war, but four years of fratricidal combat remained as the Chinese fought each other to a finish in the civil war. Although Linglong’s production fell, the mine contributed 7,000 ounces a year to Mao’s treasury. When the communists won the civil war in 1949, Linglong might have been written into a triumphant history—a mine from imperial times turned to the service of the people! Instead, gold fell under a pall. In the wars of ideology that followed, even to be associated with the metal was to risk contamination.

  GOLD EMBODIED THE IDEA OF personal wealth. This presented communists with a dilemma: was gold a blessing for the desolated postwar state, or a threat to socialist purity? In 1957 this question seemed to have been answered when the premier, Zhou Enlai, backed a directive aimed at “organizing broad masses of the people to produce gold.” The broad masses were probably already at it, but now it would be legal, part of a plan to revive the mines and stimulate the production of a valuable resource. No sooner did this initiative appear, however, than it was swept away in the purges that convulsed China: the Anti-Rightist Campaign, the Four Clean-Ups, and the scourge sometimes called the war of the young against the old—the Cultural Revolution.

  Approved by Mao Zedong to root out what he saw as capitalist sympathies in the leadership, the movement sent brigades of young Red Guards into the country to hunt out “deviationists.” In a decade-long rampage, gangs of zealots brutalized the educated, ruined the legal system, destroyed families, raped, murdered, maimed, and burned. In this poisonous milieu, gold was a target too. The Chinese characters for gold became a synonym for the hated bourgeoisie. Geologists stopped looking for gold. The China National Gold Group Corporation, the country’s main producer and itself a creature of the state, was labeled a “bourgeois trust,” and dismantled. Officially, the Chinese gold industry ceased to exist.

  ONE OF THE MEN WHO later transformed China’s gold industry into the powerhouse it is today was at first purged and persecuted himself. When I met him, Zhu Fengsan was eighty-two. Erect and trim, he had thick hair combed straight back, and his characteristic expression was a wry, appraising smile. When I visited he was recovering from an accident. He’d crashed his new electric-powered bicycle. In the collision he shattered his patella. He pulled up his pant leg so I could see. We studied the yellow bruise and eight-inch scar in silence for a moment. “They think it was my fault,” he said, “because I am in my eighties and should not be trying new electric bicycles.”

  The youngest son of a Shanghai banker, Zhu was born in the city of Hangzhou. Marco Polo called it “beyond dispute the finest and noblest city in the world,” and the Chinese agree. “Above is heaven,” goes the saying, “below is Hangzhou.”

  Zhu went to a high school attached to Saint John’s University, a prestigious Church of England institution in Shanghai. After high school he attended the university for a year, studying architecture. He hoped to finish his studies in the United States, but in the Chinese civil war he could not get a passport. After the communist victory, university admissions were restricted, and the courses limited to subjects considered useful to the state. Zhu picked geology, and graduated from the top-rated Tsinghua University in 1952. His fiancée and classmate, Zhou Mingbao, also a geologist, graduated at the same time. While Zhu was wondering what to do with himself, Emily, as he always called her, took a job as a teacher.

  “At that time,” Zhu said, tapping my knee for emphasis, “no one wanted to be a teacher! Emily was the only one. She was the only one who applied.” He sighed and shook his head. “I loved her, so of course I was obliged to follow.”

  They moved to Changchun, a long train journey northeast of Beijing, and took up posts at the Geological College. Six years later, in 1958, the Red Guards sniffed him out.

  As he told me his story, Zhu never criticized his country, and always called the communist victory of 1949 “the liberation.” Yet however blandly he described events he must have suffered anguish. He had been dean of his faculty for four years when the Red Guards tore him from his family and exiled him to the countryside to be “reeducated” by the peasants. He worked on roads and labored in the mines. He returned to teaching in 1962, but in 1969 he was denounced again. This time his wife and children went with him, and for three years toiled on a farm.

  When the state allowed him to return to teaching in 1972, it still considered him politically unreliable. His school would not let him teach about strategic minerals, such as uranium. Gold, on the other hand, was ideologically inert. Lenin had defined its place in socialist thinking in 1921 when he said, “When we are victorious, we will make public toilets out of gold.” Even a doubtful character like Zhu could be allowed to teach about such a lowly metal. “And right away,” he said, unfolding his elegant hands as if revealing a discovery, “I found it interesting.”

  Mao died in September 1976. One month later a coup toppled the Gang of Four, the powerful executors of Mao’s policy. The reformer Deng Xiaoping took power. Gold returned to favor as a mineral with obvious attractions to a country eager for foreign exchange. In 1978 the gold price averaged $200. The next year it hit $520. Spurred by the prospect of potential gains, the Chinese military established a gold prospecting unit. The Gold Army, as this new corps was called, grew into a force of 20,000 gold explorers. Zhu became adviser to the top Gold Army leaders. In three years he jumped from the backseat of Chinese geology to the front. His rise mirrored China’s swift U-turn. Deng abolished class-based discrimination. The banker’s son was not only rehabilitated, but in the midst of a booming, reinvigorated industry. Gold officials commanded large forces and broad powers. What they lacked was knowledge.

  The transformation of China from midsize producer to the top of the gold mining world is a story Zhu helped write. By touring foreign mines and organizing a symposium for Western gold geologists, he opened the door to the technology that has helped China unlock its reserves. In its strategy for exploiting this newly fashionable resource, China demonstrated an extractive genius far ahead of its abilities in the field: a knack for mining Westerners.

  8

  THE BANDIT CIRCUS

  It’s the richest gold deposit in China. We found it, we defined it, but they just were not going to let us keep it.

  —Colin McAleenan

  IN 1993, TO ENCOURAGE EXPLORATION and expand its gold reserves, China loosened regulations and opened the door to foreign miners. Even Chinese state-owned companies could now raise exploration money by selling shares to private investors. One large foreign gold miner to take advantage of the opportunity was Placer Dome Inc., an international miner based in Vancouver. Placer Dome had been doing business in China since the 1960s, supplying copper and molybdenum to China National Nuclear Corp
oration. In 1997, through its Australian subsidiary, the company hired two Chinese geologists, formed Placer Dome (China) Ltd., and started looking for gold.

  In 1997 China was the world’s fifth-ranked gold producer. Largely unexplored by Western standards, China looked like a rosy prospect. Not only had the country loosened restrictions, but the all-important Five-Year Plan, the government’s regular economic manifesto, made the restructuring of the mining industry a key objective. Placer Dome had a five-year plan of its own: train Chinese staff to higher standards; demonstrate that “large mineral systems” existed in China; and get the clear title they would need to develop them. They did train up their staff, they found a target, and in five years had their business license. When it was time to lock up title, here’s a partial list of what they learned:

  • three different levels of government can issue title

  • not all title information was on the same register

  • access to the registers was limited

  • access to state geological data was limited

  • topographic data was a state secret

  • reserve calculations were not based on international market standards

  • owners’ share of revenue would be “modest”

  In the end Placer Dome got nothing but the doubtful pleasure of transferring expertise to China. It was a pleasure the Chinese were anxious to supply to others, as Colin McAleenan discovered.

  McAleenan, an Irishman, had studied geology at Trinity College Dublin. When he graduated, he worked in far-flung parts of Canada, until he settled in Vancouver. He was an experienced field geologist and exploration executive when in 1994 he made his first trip to China to scout for targets. In the next few years he examined a gold prospect in Szechuan and traveled to Inner Mongolia to look at properties.

  In 1999 McAleenan visited the glittering port city of Dalian for China’s first international mining conference. Backing him were a pair of American investors: Robert Kiyosaki, the creator of the bestselling Rich Dad Poor Dad series of motivational books; and Frank Crerie, an Arizona-based financier who had made fortunes in uranium and oil.

  With the Dalian mining conference, the Chinese government hoped to attract foreign mining capital to the country. McAleenan represented money looking for ground to drill. “It was the first year they’d held the conference,” he said. “They wanted to create the hottest mining event in Asia, but at first it was poorly attended. They gave technical talks on China’s mineral endowment and the country’s open-door policy, but there were only two or three booths where provincial government entities were showing off their projects.” One of these properties caught McAleenan’s eye. It belonged to the Bureau of Mineral Resources of Liaoning, the province Dalian was in. “They had paper on a number of projects, and one was intriguing. I brought it away with me, and we thought about it, and then I came back for a look.”

  McAleenan flew into the provincial capital of Shenyang and took the expressway down the spine of the Liaodong Peninsula. The road was one of the first of China’s now ubiquitous multilane highways. It had been built by Bo Xilai, the mayor of Dalian and one of China’s fastest-rising politicians. Bo’s career blew up later in a scandal fed by corruption charges, Communist Party infighting, and his wife’s alleged involvement in the murder of a British businessman. But in 1999 he was in the forefront of China’s speed-of-light emergence into the modern world, and the expressway symbolized the sense of opportunity and commercial vitality that China’s leaders wanted to project.

  The terrain of the peninsula was rough but not mountainous. A sparsely covered sawtooth range of hills extended into the Bohai Gulf. McAleenan reached the exploration target, at a place called Maoling, or Cat Hill. The provincial geology bureau had drilled some holes on a quartz-vein target. “They were using pretty old equipment,” McAleenan said. “They had these massive Russian drills that could drill a vertical hole hundreds of meters deep, but that’s it. If the vein dipped steeply [descended at an angle] they couldn’t intersect it. It was antiquated.”

  McAleenan took rock samples from outcrops, including material from the veins and between the veins. He took the samples back to North America for assay, and waited to see what he would find. When the results came back, he was amazed. “Not only were the narrow veins rich, but the material between the veins had gold too.”

  McAleenan thought that the best way to tackle the deposit would be to mine the whole hill in an open pit bulk operation, instead of trying to follow the veins. Such a method would result in a lower grade overall, but since capital costs and operating costs were low in China, and he expected the gold price to rise, he believed such an operation would be profitable.

  On behalf of the American financiers and Mundoro Mining Inc., a company set up to exploit Chinese targets, McAleenan negotiated a deal with the corporate arm of the Liaoning province minerals department. In July 2001 the parties formed a joint venture to exploit Maoling. Under the agreement, Mundoro would earn a 79 percent share of profits in return for funding and directing all the exploration and carrying the project to production.

  For two years Mundoro worked flat out. They drilled sixty-two holes, pulled 20,000 meters of drill core from the hill, and trenched for 13,000 meters. They analyzed the soil chemistry, translated earlier Chinese documents about the site, and sank some pits. In the end they had enough evidence to report to the market a deposit containing 1.1 million ounces of high-probability “indicated resource,” and more than 4 million ounces “inferred,” meaning ground that they expected to raise to the “indicated” level with more drilling. In November 2003 they took the company public and raised $13 million.

  An eager wind was blowing through the Chinese gold scene. The open-door policy to foreigners had sent junior exploration companies fanning out into the country looking for property to drill. One of the most hyped of these was the Boka prospect, a target in Yunnan. Villagers had discovered gold in the hills; the regional gold brigade had drilled it; a Vancouver junior called Southwestern Resources Corp. had swept in and grabbed the license. “Junior” means a small mining company focused on exploration. Southwestern drilled sixty-seven holes and estimated a resource of 150 tons. At the grades they claimed, the deposit would hold 5 million ounces. Promoters started calling Boka the highest-grade gold deposit in the country, and talked about a windfall of $40 million for the local economy. Southwestern’s market capitalization grew to more than three quarters of a billion dollars. “The problem,” said an official, after several years went by, “is that at the moment, nobody knows when the first piece of gold will be found.”

  Alas, somebody did know. Southwestern’s Canadian CEO knew. He knew that the first piece of gold wasn’t coming up anytime soon, because he’d been falsifying the drill results. Southwestern’s share price later collapsed and in 2013 the executive went to jail, but in the heady Chinese gold rush scene of 2003, with the whole country flung open like some fantastic oriental Yukon, the news about the Boka strike was pumping helium into everyone’s balloon. “It probably helped our financing,” McAleenan said.

  What helped even more was that all of McAleenan’s holes were hitting gold. “We couldn’t miss. We had long intersections [where the drill was passing through gold-bearing rock].” Mundoro’s home page showed a panorama of the site, and if still there it’s worth a look. The ore body stretches from a little loop of road cut into the top of Cat Hill on the left, all the way across the hills to the right and out of frame—a strike of half a mile. You can see the exploration tracks hacked through the vegetation. The gold price was rising. Mundoro’s share price was rising. After two years of intensive exploration Mundoro went back to the market for more cash. They raised another $25 million. The shareholders were confident. McAleenan was confident. The American financiers behind Mundoro must have been confident too. Then the business license came up for renewal. It didn’t get renewed.

  The date came and went. At first there seemed no cause for worry. “We sent our peo
ple to ask why we didn’t have the license,” McAleenan said, “and got answers like ‘It’s nothing—just the way things work in China,’ ‘Things move at their own pace,’ ‘They’re always late,’ so we didn’t worry. But when months passed, we started to get concerned. We could get no action from the Liaoning province officials, so we went to Beijing.”

  There were two licenses Mundoro needed. The first was the local business license, and the second was the exploration permit. To continue work at all, that permit was essential. Issued in Beijing, the permit called for a regular accounting of money spent on exploration. “We had exceeded the minimum requirements,” McAleenan said. “We’d drilled 40,000 meters. We’d done environmental and geotech studies. We’d advanced the project on a number of fronts simultaneously. We had developed two scenarios: one for a 30,000-ton-a-day mill and one for 50,000 tons. We were calling it the largest undeveloped gold deposit in China, if not in Asia. Our share price at the initial offering had been $1.25 and now it was more than $4.00.”

  In Beijing, Mundoro went to the land resources ministry and asked if their permit would be a problem. No, said the officials, it would not . . . as long as Mundoro got the business license. Without the license, the ministry said, Mundoro did not exist legally.

  You can see where this is going: McAleenan’s dawning realization that they were going to get screwed; the appeals to diplomats in Beijing; trade attachés getting cold-shouldered at the ministry. Up in the Liaodong Peninsula provincial bureaucrats were sitting on the business license, and if they were sitting on it, someone had told them to sit. Mundoro’s title to the property, like Mundoro’s joint venture, just “did not exist.”

  McAleenan left the company at the end of 2006, after a year of futile attempts to preserve Mundoro’s entitlement. Five years later the company managed to recover $13.5 million, the amount raised by the initial stock offering. Instead of 79 percent of profits, they were reduced to 5 percent.