Vancouver-based Dynasty Gold (TSXV: DYG) was one of the first Canadian juniors to explore for gold in China. It entered into a cooperative joint-venture in December 2003 with a Chinese state-owned enterprise to explore for gold on a 1,000 sq. km property called Hatu in remote northwestern Xinjiang province.
Hatu — in China’s portion of the prolific Tienshan gold belt — hosts over 300 gold occurrences, some of which have been mined by local Chinese, and includes the Qi2 deposit, an area of known gold mineralization with a history of small-scale production that became the focus of Dynasty’s exploration efforts.
In June 2005 Dynasty completed a resource estimate on Qi2, calculating the deposit held an inferred resource of 16.9 million tonnes grading 1.68 grams gold per tonne for 912,600 oz. gold at a cut-off grade of 1 gram gold per tonne.
That estimate was revised in July 2007, putting the inferred resource at 8.7 million tonnes averaging 2 grams gold per tonne for 560,000 oz. gold at a cut-off grade of 2 grams gold per tonne. In 2009 the estimate was revised a third time, setting Qi2’s measured and indicated resource at 4.85 million tonnes grading 2.73 grams gold per tonne for 426,000 oz. gold at a 1 gram gold cut-off grade, with an inferred resource of 1.44 million tonnes at 2.41 grams gold per tonne for 111,000 oz gold. The resource estimate was based on a gold price of US$600 per oz. and an open-pit mine plan.
At that point Dynasty had invested US$12 million to earn a 70% stake in the joint venture and a 70% stake in the Qi2 resource. Its Chinese partner, Xinjiang NonFerrous Metals Industrial Group, held the remaining 30% interest in both the joint venture and the Qi2 resource, Dynasty Gold says.
Ivy Chong, Dynasty Gold’s president and chief executive, recalls that the early years of the partnership went well. “At the beginning it was okay,” she says. “When we came in they welcomed us and we were written about in the press and appeared on their evening news broadcasts.”
But then suddenly, Chong says, things “hit a brickwall” when Dynasty Gold pushed the Chinese partner to fulfill its commitments to apply for a mining permit. In 2008, she says, Xinjiang NonFerrous Metals became uncommunicative.
“As soon as the resource was defined they became very difficult to work with,” she says. “All of a sudden they didn’t want to talk to us anymore. They wouldn’t give us permits anymore. In many instances, they stopped communications altogether.”
Chong says her team made repeated attempts to contact Xinjiang NonFerrous and continued to pay salaries to their partner’s employees. But the joint-venture partner never made itself available.
“We tried to see them — we’d go to Xinjiang and they would either not be in their office or they would be away on a business trip,” she says. “They know there is nothing you can do about it. They know that you can’t bring the resource home, and if they delay you long enough you won’t be around, because they know you live and die by the market.”
Then, in early February 2010, Chong says, Xinjiang NonFerrous published on its website its intention to pursue an IPO on the Shanghai Stock Exchange with 100% of the Qi2 deposit. And in May this year, Chong found that the prospectus for the IPO was listed on the China Securities Regulatory Commission’s (CSRC) website.
“They never acknowledged our 70% ownership,” Chong says incredulously. “And because they are a state-owned enterprise, their IPO will be fast-tracked.”
Chong has complained to the company, the Shanghai Stock Exchange and to the CSRC in Beijing, but to no avail. Letters from The Northern Miner requesting comment from Yuen Ze, chairman of Xinjiang NonFerrous Metals, and Yao Gang, vice-chairman of the CSRC, remain unanswered.
Gordon Chang, a lawyer, television commentator and author of the 2001 book The Coming Collapse of China, believes that Dynasty Gold’s story is a cautionary tale for anyone doing business in China. “The joint-venture partner will never get an enforceable decision against the gold miner in Xinjiang, there’s just no way that is ever going to happen,” he says. “The Chinese realize they are completely immune because they can do whatever they want.”
Chang also argues that as an economic superpower, China feels it can push its weight around. “The Chinese are now arrogant beyond belief,” he says. “You can see the arrogance — they do not need foreign money and they don’t like the idea of profits being sent offshore.”
Dynasty hired a Chinese law firm to fight back. But the firm, Chong says, can only do so much on the company’s behalf.
“The Chinese lawyer we engaged was fine,” she explains. “But when something like this happens they can’t go against the government. When they wrote a letter of complaint to the Chinese authorities they didn’t send it on their law firm’s letterhead. We had to send it on our letterhead because the Chinese law firm doesn’t want its name out there. I guess they have to work with the environment that they are in.”
Dynasty did have an arbitration clause written into the joint-venture but it was designated to take place in Beijing, and Chong says she is worried about the transparency of the process given what has happened to the company so far.
Frank Turner, a lawyer and co-head of Asia-Pacific for business law firm Osler, Hoskin & Harcourt, has some advice when it comes to setting up joint-venture contracts in China.
“If I was structuring this deal, the first thing I would want to do is make sure that in the event of a dispute we did not litigate in China,” Turner says in an interview from his office in Calgary. “This would be the case in lots of different countries. You would want to find an international arbitration protocol that both parties are comfortable with and write it into the contract.”
Turner also recommends that clients get some form of local partner besides their joint-venture partner that knows the local dynamics and is exclusively representing the client’s interests.
“You’d want to have some form of representation on the ground that understands the local rules of engagement and can report back accurately and help you navigate cultural differences — a consulting company or a local employee,” he explains. “Some of my clients in emerging markets have a local partner, not their joint-venture partner, who can provide good local advice as to the norms of doing business in the jurisdiction.”
Rob Koepp, author of Betting on China: Chinese Stocks, American Stock Markets, and the Wagers on a New Dynamic in Global Capitalism,” argues that companies going into China must think very carefully about their legal strategy.
He generally advises companies to work with foreign law firms that hire former government officials or those that have strong political connections. “Lobbying is an industry on to its own and it’s a feature of political economics,” he says. “You can get people who are well-connected in government and can pull strings.”
Koepp adds that even if a foreign investor is dealing with a regional or remote company in China, it can find people based in Beijing who are superior in rank — or find local Chinese firms that have foreign-trained lawyers and whose partners themselves come from government backgrounds.
“I know of top-tier foreign law firms that have Chinese government officials who have joined the firm,” he continues. “I’ve seen them help companies and other investors who are in similar situations, where money has been taken by the partner and they often can get it back. Those are big guns, though; they’re not cheap.”
One problem, he adds, is that there can be a difference in how foreign companies and Chinese companies view contracts.
“A contract in China is not viewed as a final event,” he says. “It’s viewed as the first step in a process. That means even the terms of the contract in China often aren’t viewed as final on paper. There could be a communication gap.”Koepp says he has seen situations where North American companies first get to China, write up a contract, but might not understand Chinese interpretations of various statements. “If the Chinese side is inferring that the foreign partner is to deliver things beyond money — maybe it’s expertise or tender loving care — it could get them into trouble. The Chinese partner might feel abandoned … they don’t think they were supported, they feel like they were taken advantage of. I think sometimes the Chinese side honestly feels that way, even though their rationale is faulty.”
In addition, Koepp makes the point that sometimes investors don’t realize that the joint-venture partners they are dealing with “could be mouthpieces of other people in the background.”
“You talk to one guy at the district level, and he talks to the municipal government head, and they report to the central government head. So someone in the chain of command is pulling the strings, which is why it can be really difficult to search as much as you can ... I’m not dismissing the possibility that these guys are crooks. But how did it come about? Who is really in charge here? Who is telling them what do?”
John Gruetzner, founder of Intercedent, a Canadian consulting firm in Beijing, says what Dynasty Gold has experienced is not entirely unique. “The reality is that the current policy regime, especially in gold, is fifty shades of no.
“I don’t think you can argue that the Chinese government doesn’t want foreign investment,” he says. “I do think you can argue that China is becoming more nationalistic. When it comes to gold, I think there is a very protectionist element within the industry, the domestic industry and the government.”
And while the official line from the State Council is that China does want foreign investment — the obstacles, in resource development in particular, can be quite significant, Gruetzner says.
First, the administrative complexity of getting a mining permit in China involves at least nine different government agencies and as many as 41 different permits and there is no real administrative coordinating agency to pull together all of the different permits required, he says. Second, due to the current anti-corruption campaign in China, “people are extremely reluctant to do anything especially when it is sensitive or involves foreigners.”
For its part, Dynasty Gold is getting worn out fighting what it believes is an uphill battle.
“It’s been so many years — we’re exhausted,” Chong says. “We want to bring it to an end, even if we recoup less than our initial investment.”
But Chong says Dynasty won’t give up and has hopes in China’s leadership under President Xi Jinping, who came to power in November 2012.
Says Chong: “Let’s see whether the new leadership will live up to its promise of transparency and rule of law to all.”
In the meantime, and a lot closer to home, Dynasty is busy advancing its Golden Repeat gold exploration project in the Carlin Trend in north-central Nevada.
Dynasty shares last traded at 1¢, with 118 million shares outstanding for a $1.2 million market capitalization. In late 2003, as Dynasty was first entering China, its shares hit their all-time high of $1.20.
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