Gold World Resources Digs Its Heels Into China

Much has been written about the problems foreign companies face when they invest in China through joint ventures with state-owned enterprises.

Misused funds, unfulfilled contracts and unconventional business practices usually top the grievance list.

But Gold World Resources (GDW-V, GLWDF-O) had a vastly different experience with a Chinese project that went terribly wrong.

Instead of being ripped off by Chinese partners, it looks like it may have been fooled by a Canadian venture — run by members of its own board — that promised it could secure a 70% interest in a 16-sq.-km gold property in China’s Henan province.

Between October 2005 and June 2006, Gold World Resources set up a joint venture with the Canadian company, called World Fortune Enterprises. World Fortune’s principals are Richard Tong, a major shareholder who later became a director of the company, and former Gold World Resources company president, Boris Ziger.

Gold World invested $377,863 in the joint-venture company, Gold Luck, in the belief that World Fortune had acquired a 70% interest in the Xiqingganping gold property in Henan province. In March, Gold World announced that it planned to launch the first phase of a $1.2-million exploration program.

In April, Gold World’s two independent counsels began their review of the status of the company’s ownership of both the joint venture and the Henan gold property and was unable to establish one.

The TSX Venture Exchange halted trading of the company’s stock on May 31 and suspended it on July 25 to complete a review of the company. Ziger was asked to resign as president of the company on April 4.

Gold World’s initial foray into China serves as a cautionary tale to would-be investors: Beware the middleman.

“Do very careful due diligence with the people that are promoting these deals,” warns Hermann Derbuch, who took over as chief executive and chairman of the company in October 2006 and has spent much of his time since then sorting through the mess he inherited.

Despite the setback, Derbuch is bullish on operating in China and is excited about the company’s prospects at a gold and silver property in Hebei province.

The exploration licence for the area is held by the Hebei General Geological Brigade at Shijiazhuang, a unit of the provincial government.

In July, Derbuch signed a letter of intent to jointly explore the 17.5-sq.-km site with the Shijiazhuang Geological Brigade. He hopes to complete a joint-venture agreement within the next two months.

The property — about 70 km west of Shijiazhuang — is located in a recognized gold camp dating back to the Ming Dynasty (1368-1644), with Ming-period tunnels and pits.

“We witnessed the tunnels and the old excavations from the Ming period and it is quite apparent that the Ming-period excavations are shallow,” says Derbuch from his home in Toronto, “With not very much additional effort we can get to the mineralization.”

Derbuch says the company’s partner is also interested in exploring other properties it owns with Gold World in the future.

“This brigade has a number of properties and the idea is they will be offering to participate with us on any other properties that we may select,” Derbuch explains. “That makes it potentially a very advantageous situation because you don’t have to chase around and look for another property or partner. So it’s a hidden upside that is very significant. You can’t underestimate that.”

As a brigade attached to the government, Derbuch adds, they have access and “should make the relationship between the foreign company and the government easier and faster.”

Gold World’s management says the company is still committed to China, which it says offers a range of mining opportunities, exceptional infrastruucture, and low project costs.

Mining properties are often located very close to populated centres that can provide skilled labour, hydro, and equipment, the company notes. Roads are almost always nearby, cutting the cost of development and operations and raising the return on investment for shareholders.

So far, four foreign companies have successfully developed proven orebodies in China: Sino Gold (SIOGF-O, SGX-A), Jinshan Gold (JIN-T, JINFF-O), Eldorado Gold (ELD-T, EGO-X), and Silvercorp (SVM-T, SVMFF-O).