Time to re-enter the dragon?

China is vast, not only in size and population but also in mineral wealth. Known to have immense reserves of coal, iron ore, base metals and gold, its potential mineral resources have intrigued the international mining community for years, but few have been successful in exploiting them. Establishing a foothold in a country that was closed to the outside world for decades has proven to be a frustrating and expensive exercise. Now, after a false start in the 1990s, further reform and a rising gold price may be pumping life back into the Red Dragon.

After Chairman Mao’s death in 1978, his successor Deng Xiaoping began moving China away from its sluggish Soviet-style centrally planned economy to a more market-oriented system. Although still operating within a political framework of strict Communist control, the gradual introduction of market-oriented reforms, decentralized economic decision making and an influx of foreign investment saw the country’s output quadruple by the year 2000.

However, despite huge changes in many areas, the development of China’s mining industry seemed to lag behind. Where other industries were quick to embrace the West, China was slow in introducing a clear regulatory framework to encourage foreign participation in its mineral sector.

It wasn’t until 1993, at a Mining Conference in Beijing, that the former Ministry of Geology and Mineral Resources (MGMR) released its first draft of regulations intended to govern foreign investment in mining, implying that the Chinese mineral sector was now open to foreigners.

The international mining community, particularly the junior gold sector, responded enthusiastically at first. But getting their hands on China’s gold was not going to be that easy. The government had always considered gold a “restricted” metal and in an attempt to clarify its position, China issued a notice in 1994 stipulating that foreign investment was permissible but only in designated marginal gold deposits (i.e., low-grade and difficult to mine deposits). Furthermore, the regulations did not allow 100% ownership by a foreign party–a joint venture with a Chinese counterpart was mandatory.

That didn’t deter everybody. Some thought that the way to tap China’s mineral wealth in the future was first to establish a foothold. If this meant joint venturing with one of the myriad of small gold mining operations that proliferated throughout the country, then so be it. But they found that the route from initial due diligence to final joint venture operation was long, arduous and fraught with pit falls.

Out of the many companies that tried, only one, Vancouver-based Asia Minerals persevered long enough and received all the necessary central government approvals to proceed with its joint venture on an existing gold mine in Shandong. It was a blow to all, that after years of jumping through the regulatory hoops, Asia Minerals terminated its joint venture in 1997, shortly after it commenced operations, citing difficulty working with its Chinese partner as the reason.

China Clipper Gold Mines, a Canadian junior, was another of the many casualties. After signing memorandums of understanding with a number of potential partners, China Clipper focused on Nancha, a refractory gold mine in Jilin province. They got a fair way through the regulatory maze only to be stopped dead in their tracks when the area was declared a military zone. Foreigners were suddenly persona non grata.

Others had similar experiences or finally realized that the development of existing mining operations was not viable because they were too small, ownership rights were unclear and the properties were plagued with environmental and social problems.

The final nail in the coffin for most was the collapse of the gold price in 1997 after the Bre-X Minerals fiasco.

And it wasn’t just the juniors that tried. Even the major companies, the likes of Barrick Gold Corp., BHP Billiton and Newmont Mining Corp., found the approval process daunting, the legal framework unclear and the taxation regime not conducive to exploration costs. All eventually gave up and moved on to newer and easier pastures.

Recognizing that it had to do something, China continued to make changes in its policies and legislation in attempts to lure foreign investment back. The government changed the rules in the late 1990s so that foreign investment was no longer limited to the low grade and/or refractory gold deposits. In 2000, China announced that foreign investors may now engage in “risk exploration” for mineral resources, either as sole proprietorships or as joint ventures with Chinese partners. They also announced, that foreign investors may purchase rights to explore and mine such mineral resources (except those forbidden by law) legally held by Chinese enterprises.

At the same time, the government directed the Bank of China to proceed more rapidly with further gold management reform. At the beginning of 2002, China allowed private individuals to purchase gold for the first time in 50 years and earlier this year the Shanghai gold exchange opened, trading half-a-million ounces in the first couple of hours. Regulatory changes were completed by the end of 2002 to deregulate and privatize the gold mining and exploration sectors, including opening the entire gold sector to foreign joint ventures.

A few companies that entered in the first rush have managed to tough it out and are still there today.

Minco Mining and Metals Corp. is one that entered China in early 1995 initially exploring for base metals. Minco has had a strategic relationship with Teck Corp. (now with Teck Cominco Ltd.) since it first started drilling at the White Silver Mountain polymetallic project in the Gansu province. Only in 2000 did Minco begin exploring for gold by acquiring the right to earn a 75% interest in the Gobi gold project in Inner Mongolia. Last November it signed letters of intent to acquire two more gold projects and plans to drill all three properties this year.

Southwestern Resources Corp. (formerly Southwestern Gold) is another that entered early but focused on gold exploration only. Southwestern currently has a joint venture in Yunnan where they can earn up to 90% of the Boka gold property and are currently drilling the property.

Pacific Minerals grew out of Global Pacific, another Canadian junior that was one of the first players. Global initially joint ventured with a small base metal operation, but as Pacific Minerals, it has moved onto pure exploration projects. Pacific Minerals now has four joint ventures that include the largest platinum-palladium-nickel deposit in China, known as the JBS deposit, in Yunnan Province. It also has an interest in a large-scale, low-grade gold project in Inner Mongolia, and the Dandong high-grade gold deposit in Liaoning Province.

Significantly, Pacific Minerals has managed to attract the attention of Robert Friedland’s Ivanhoe Mines Ltd. In 2002, Ivanhoe invested almost US$5 million in Pacific Minerals for a 42% holding.

And there are new ones.

International Barytex Resources, a Canadian company, has just completed a technical assessment of the Dulong tin-zinc property in Yunnan and is currently negotiating a joint venture agreement with the Chinese operators that would see them prepare a prefeasibility study.

Sino Gold is an Australian junior founded in 2000 that claims to operate the first and only internationally managed gold mine in China at the Jianchaling mine in Shaanxi.

In the initial rush to enter China, foreign miners had to deal with chaotic local conditions, local sensitivities, competing bureaucratic jurisdictions, a murky legal framework, and questionable economics created by government gold purchasing policies. Many got burnt and left with their tails between their legs. But some stuck it out and recently China is seeing some new blood as it continues to revise its policies and streamline its approval procedures. The lesson learned by many is that doing business in China is tough and you have to be in it for the long term…perhaps even longer if your business happens to be mining
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Ron Hall is a metallurgical consultant and freelance writer based in Vancouver, BC. He may be reached at minmet@canada.com.