MINERAL EXPLORATION — CASE STUDIES — McVicar Minerals sets sights on Chinese potential

The notion, expressed by Kipling, that East is East and West is West is being increasingly challenged in today’s global economy. Indeed, the twain appear not only to be meeting but forming business deals, partly through the efforts of men like Gang Chai, president and driving force behind Toronto-based junior McVicar Minerals (MVR-A).

Chai has unique insight into the world of Chinese mining. Born and raised in China, he completed his doctorate in economic geology in Toronto and, in the process, became one of a handful of Western-trained experts familiar with the poorly documented Chinese nickel scene. Before starting up McVicar last year, Chai spent five years working as a consultant for several Western majors looking for mining opportunities in China.

Chai cites three reasons why China holds great promise for Western mining companies: the country’s vast mineral wealth; its burgeoning demand for all metals, which exceeds domestic production; and recent government initiatives to open up the minerals sector to foreign investment by amending the highly restrictive 1986 Mineral Resources Law.

In commenting on the new Chinese mining regulations, which he had a hand in formulating, Chai notes that in Chinese culture negotiation is emphasized far more than in the West, where strict adherence to contracts is stressed.

This openness to negotiation is reflected in the new regulations, which are are full of loopholes and negotiable points.

“Legally, the amendments are good, but in practice there are still problems,” says Chai. For instance, the underlying ownership of a deposit in China could be disputed by the regional geology departments (which have traditionally been given the task of exploring for minerals) and the regional or national mining departments (which have traditionally mined the deposits found by the geology departments).

While the activities of geology and mining departments have begun to overlap in recent years, Chai says many of the former are starved for cash and thus eager to sign deals quickly with foreigners, even if the underlying ownership of a deposit is not made clear.

“If you get into one of these grey areas, you’re in trouble,” says Chai, citing the example of Zen International Resources (ZQP-V), whose Zinjinshan gold-copper project was scuttled during the summer because of one such conflict. “Zen got too good a deal when they first came into China — when you get too good a deal in China, that’s a warning sign.”

As well, Chai says some of the first Western companies coming to China were unrealistic in assuming their Chinese counterparts had evolved sufficiently to negotiate in Western, market-oriented terms. He says such companies as Asia Minerals (AMP-A) and Barrick Gold (ABX-T) “made a big noise and then left big damage” for subsequent companies entering the Chinese exploration sector.

Chai also blames the Chinese for those first failures, describing as “chicken bones” the deposits that were initially offered to foreigners. He says the motivation for the Chinese to offer only refractory or low-grade deposits to Westerners was based both on a desire to take advantage of the Westerners’ overeagerness to reach a deal and on an over-estimation of the ability of Western technology to exploit marginal deposits profitably.

Asked why he feels McVicar will succeed where others have failed, Chai responds: “It is a different time — the Chinese are realizing that there are problems and that they are hurting opportunities for foreign investment.” He notes that many Chinese companies are in dire straits now that the government is beginning to cut subsidies. As well, companies holding land in China are now required to pay fees based on acreage. And with many geology departments holding large, expensive tracts of land, Chai expects more prospective ground will become available.

During the summer, McVicar worked out an affiliation agreement with mining giant Broken Hill Proprietary (BHP-N) to explore for nickel and associated platinum group metals (PGMs) in China, with BHP agreeing to invest up to US$10 million in McVicar in stages (T.N.M., Aug. 31-Sept. 6/98).

McVicar will focus its attention on the Jinchuan nickel belt in northwestern China. More than 80% of China’s nickel production comes from the Jinchuan nickel mine, near the city of Jinchang in Gansu province, where the Jinchuan Nonferrous Metals Corp. (JNC) — itself a subsidiary of the Chinese National Nonferrous Metals Industry Corp. — has been mining nickel and related metals since the early 1960s.

Jinchuan, a magmatic nickel-sulphide deposit associated with mafic-ultramafic intrusions in a marginal fault zone, is the third-largest nickel-copper deposit in the world, after Sudbury and Noril’sk. Reserves at Jinchuan are estimated at 500 million tonnes grading 1.2% nickel and 0.8% copper plus cobalt and PGM credits. Recent drilling at the 1,500-metre level outlined an additional 100 million tonnes.

Today, the mine produces roughly 30,000 tonnes of refined nickel annually, short of a 40,000-tonne target made possible by expansions carried out in the 1990s. This failure to meet production targets can be attributed to run-down equipment, outdated management, poor ground conditions, and a lack of capital.

Chinese exploration in the mine’s periphery has virtually ceased because of a lack of funding and incentives on the part of the region’s geology departments, and Chai says JNC is not interested in pursuing more reserves.

However, he still sees tremendous exploration potential in the Jinchuan belt, particularly along the eastern extension of the Jinchuan uplifted terrain, which is covered by the Gobi Desert. Here, he says, modern geophysics can be applied, for the first time, to search for mafic-ultramafic bodies.

Geological information about the Jinchuan region, and China generally, is still difficult to obtain, as much of it is retained by the regional geology departments. In some cases, the information is the only real asset of these departments, so they are reluctant to provide it to outsiders for free.

If McVicar’s proposals are accepted by the Chinese, the upcoming winter months will be spent reviewing Chinese nickel data — work that will be contracted out to local Chinese partners. One task will be to pull out information and standardize it at one scale for the first time.

When asked to consider the quality of information about the Jinchuan area, Chai says the geological, geochemical and drilling data are good but adds that the Chinese are weak in geophysics and prone to include too much detail in their mapping.

As well, he says, there is considerable variance in the quality of Chinese geological work over the past 40 years. Work performed in the 1960s and 1970s is best, because the Chinese followed closely the Soviet model of exploration. The quality declined in the 1980s, however, and Chai has little confidence in data accumulated in the current decade, when geology departments began to come under severe financial distress.

Other nickel-mining regions with exploration potential for McVicar include Kelatongke in the Xinjiang autonomous region, Hongqi in Jilin province, and Huili in West Sichuan province. One McVicar project with a chance for a quick payoff is the Xiaojin gold property, 100 km southwest of Chuxiong City, in southwestern Yunnan province.

McVicar has signed a letter-of-intent with the Yunnan Bureau of Geology and Mineral Resources (YBGMR) to form a joint venture to explore and develop the asset.

Owned and operated by YBGMR, the Xiaojin has been the target of exploration work since 1991, and an open-pit, heap-leach mine has been operating there since 1993. Annual gold production is about 1,000 oz. with a 77% recovery rate.

Gold mineralization at Xiaojin is associated with a northwesterly striking fault zone that crosscuts late Triassic limestones and clastic sedimentary rocks. It can be traced for more than 3.5 km by three major geochemical anomalies, two of which have been explored by surface trenching, drifting and 10 drill holes.

The well-oxidized main orebody is 10-50 metres
thick and continuous to a depth of 110 metres, where it remains open. So far, grades have averaged more than 2 grams gold per tonne using a cutoff of 0.5 gram, and Chinese geologists have estimated a resource in excess of 700,000 oz. gold in a zone measuring 2 km long and 100 metres deep.

By arranging the financing for further exploration and completing a feasibility study, McVicar can earn a half-interest in the property. If the deposit proves to be economic and the company arranges all financing for mine development, it will boost to 75% its stake in the project.

Chai is currently focusing on the Xiaojin project and expects to spend the rest of the year in negotiations with the Chinese, as well as with potential Western partners and investors.

He estimates that at least US$1 million is required for drilling, particularly in the two largest surface exposures — the Shanwei and Datian zones.

One major hurdle to overcome is China’s requirement that gold production be sold to the government for US$300 per oz. The figure is above today’s gold price, and Chai predicts this restrictive policy will probably be abandoned within two years.

McVicar’s other Chinese venture is the Juiqu copper-gold project in the Yinshan area of southeastern Jianqxi province, near the country’s largest open-pit copper mine at Dexing.

Last fall, McVicar signed a letter-of-intent with Jiangxi Copper to develop jointly the Jiuqu copper-gold deposit. McVicar will prepare a feasibility study and, if the study is positive, arrange all financing for development.

In return, McVicar will obtain 90% of the cash flow until its investment is paid back, at which point each partner will have a 50% interest.

Copper-gold mineralization at Juiqu is associated with a crater filled with andesitic tuffs and breccias. Reserves exceed 135 million tonnes grading 0.53% copper, 0.61 gram gold and 7.2 grams silver to a depth of 380 metres, based on 44,000 metres of drilling and 3,400 metres of drifting on three levels. As well, both sides of the Juiqu deposit contain zones of lead-zinc mineralization.

Currently, the deposit is being mined by open-pit methods at a daily production rate of 800 tonnes.

McVicar intends to raise at least $1 million to explore its Chinese projects in the coming year. The company has about $800,000 in the bank and a burn rate of $10,000 per month.