Odds ‘n’ Sods: Playing high stakes poker for Fruta del Norte

The following is the second of two parts of the abridged first chapter of an upcoming memoir entitled “The Last Great Adventure,” for which any profits will go to the Baca Ortiz Hospital for Children in Quito, Ecuador. Part one appeared in our Aug. 22–28/16 issue.

Geologist Keith Barron is co-discoverer of the exceptionally rich Fruta del Norte high-grade gold deposit in southeastern Ecuador — a feat for which he was co-winner of our “Mining Persons of the Year” award in 2008. He is currently president of Aurania Resources (TSXV: ARU). For the unabridged version of this story plus much more, please visit his personal blog at straighttalkonmining.com.

The Emperador area of southeastern Ecuador, where we had just obtained an exploration concession in April 2001, happened to be smack in the middle of an area that had been the subject of a small border war. It sounds nasty but it was the greatest set-up ever for a mining play.

The international border between Peru and Ecuador had been until 1998 the subject of a long running dispute between the two countries. The problem dated back to when the province of Gran Colombia was broken up after independence from Spain. The coastal areas and the Andes were precisely divided between the two countries, but the international border in the largely unknown area of the “Oriente” (the East) was only loosely defined.

Nobody really cared until the late 1800s when rubber harvesters moved into the Amazon Basin. Suddenly the area had value and both countries claimed each other’s territory. In 1904, the King of Spain mediated an uneasy truce that lasted until 1941, when both neighbours invaded each other, hoping the world’s great powers would be too busy with World War II to interfere.

But the U.S. was appalled and set up the Organization of American States to oversee the redrawing of the border. This work was aided by the U.S. Air Force who, unfortunately, took faulty high-altitude photographs of the area.

When surveyors went on the ground to erect the border monuments, they found that a river that appeared on the Air Force photos did not in fact exist. Perhaps it had been a hair or other artifact on the negatives.

The result was that for a swath of ground 78 km long, there was no official border, and thereafter maps in Ecuador had to show — by law — the phrase “Zona en la Que el Protocolo de Rio de Janeiro es Inejecutable” (more or less: “Zone where the Peace Treaty is not in Force”).

Mining companies in Ecuador were reluctant to explore close to what they considered to be the border, because they might inadvertently be in Peru.

In 1995, the border dispute again erupted in violence and about 100,000 troops were sent into the area after an alleged incursion into Ecuador by the Peruvian army. Over six weeks, about 300 soldiers from both sides were killed in what was called the Cenepa War.

The U.S. also sent Marines into the area under “Operation Safe Border” and, after a mediation by Brazil, Chile, Argentina and the U.S., the border was mutually agreed as the continental divide between waters running into the Atlantic and Pacific oceans. Border monuments were erected in 1998 and the historic dispute was finally settled.

In my first visit into this area, I saw small groups of people vacuum-dredging for gold in the river only 4 km or so west of the border. This was significant because the source of that gold had to be somewhere in the belt between these miners and the continental drainage divide. Gold couldn’t have leapfrogged from Peru into Ecuador.

My plan was to grab as much territory along the border as I could get, eventually resulting in a swath 98 km long on the Ecuador side of the border.

There were other compelling geological reasons, too. In the Society of Economic Geologists newsletter I received for October 2000, the border area was discussed as an inverted graben. In this case a fault basin had been filled with sediments and then the faults had reversed so that this area was now uplifted by over a kilometre into the air. Most of the gold occurrences were found on or adjacent to these faults, so it was another reason the border area was a great place for us to explore.

Minga

Early on, we had many run-ins with illegal miners.

NGOs tend to portray illegal miners in a soft diffused light as people making minimal impact on the environment, hand panning for gold in the rivers and streams. Indeed these people existed and we left them alone.

The problem was organized teams of men from outside the area who used excavators and other heavy equipment, or explosives and diesel-powered Chilean mills. These teams were usually persons with little experience in mining who would go out and buy the largest piece of equipment they could find, and borrow money to do so from the gold buyers at 5% interest per week.

In no time these people found themselves to be indentured labour at the bottom of a debt hole, literally and figuratively.

I was sympathetic to these folks. However, they were squatters, putting tailings into the rivers and freely using mercury to recover gold, and then carelessly releasing it into the environment. They had to go.

On many occasions I was personally threatened, with these threats being financed by the gold buyers. Sometimes it was through a loudspeaker mounted on a car, sometimes in the press, and often on the radio where I was called a “narco-trafficante.”

They were persistent but couldn’t run me off.

In the village of La Zarza I heard from the local schoolteacher that a community meeting was to be held that weekend and a “vote taken to decide whether or not to let the company stay.” This really had no teeth in law, but in practical terms it was a big deal.

I had hired a community relations expert who advised me in the strongest terms not to return to La Zarza for the meeting because I would be killed.

I went anyway, but acquiesced to his request that I take security with me. I had five unarmed uniformed guards and stayed at a little clapboard inn.

Again against advice, I took a stroll by myself up the muddy main street on the Saturday morning and saw a group of people clustered outside a church. I went inside and a lady told me they were having a “minga” — a community event to build an addition onto the back of the church so the priest would have somewhere to stay when he came once a week to deliver mass.

She agreed to my offer of help, and I went round the back and joined a chain gang of men carrying rocks to lay in the foundation. After an hour we took a break and I collected the guards and we mixed and poured cement, fetched and carried for the rest of the day.

As we finished up I asked the men present, “How many here have no work and want to work?”

All the hands shot up.

Then one gentleman asked, “What’s the job?”

I told him it would be clearing trails in the jungle with machetes.

Another said, “We do that all day anyway.”

A third asked, “What’s the pay?”

I said $6 a day, which at the time was more than the national average. Then there were lots of murmurs. I told them to come to the Casa Comunal on Monday morning at 7:30, bring their ID card and be prepared to work.

Only 17 men showed on Monday but they all worked dutifully for the week alongside myself and another geologist.

On the Friday afternoon they all lined up for their pay, and I gave them cash. I was told later that for some of them it was the only paid labour they had done in their lives.

The following Monday I had 50 men show up, but unfortunately I could only take a couple more.

Oh yes, the village vote. I went to the meeting, which was monopolized by a young schoolteacher from outside the area who represented an NGO, who said we would bring drugs and prostitution to the area.

Geologist Brent Hendrickson gave a very honest and well thought out address to the crowd about our intentions and the reality of early phase exploration.

The teacher retorted that we would produce another “Potosi”, bereft of all flora and fauna and an environmental nightmare.

Brent pointed out that Potosi had been mined continuously for over 500 years, and that we hadn’t even been around for 5 weeks.

The crowd started to laugh and then burst into 50 different conversations. The meeting was adjourned and it seemed that everyone forgot to vote.

That seemed like a close call, but once the locals had worked for us for a while, they realized that we didn’t have horns on our heads.

One rumour that was dispelled early on was that we intended to mine uranium and supply it to “Ecuador’s enemies.” Each of our geologists carried GPS receivers and in a short time the locals realized these were not Geiger counters.

After six months of tremendous support and hard work by many of the residents we had hired, I decided that a big Christmas Fiesta was in order.

I borrowed a Santa suit from my brother-in-law and a fake beard, and we bought 250 dolls and toy trucks, and two cows.

We had the cows slaughtered and dressed, and our welder cobbled together a couple of barbeques out of half oil drums on supports.

On the appointed day we had a massive crowd in the village square of La Zarza, with parents bringing their children from five surrounding villages. Each child was placed on my lap for a photo with “Santa” and given a present. (I don’t know how my knees held out so long, and I lost about 5 kilos from the heat inside the woolen suit.)

Later we had all the photos developed into glossies and posted on the village notice board for parents to collect. Our workers got a gift basket with a raw chicken, a bag of rice, and sweets for the children.

La Zarza

One day back in the Toronto office, I got a phone call from my lawyer in Quito who said a guy wanted permission to mine on our Princesa concession. I responded, “Is this guy naïve? He can’t just mine on my property, he has to make me a formal proposal to compensate me. Besides, no one has found gold on Princesa yet.”

My lawyer said this fellow had told him he had indeed found gold and wanted to mine it.

Intrigued, I said I would fly down directly and meet with him at noon on Saturday by the big clock in Zamora.

Back on the ground in Zamora, I had brought along my geologist Fredy Salazar, who formerly worked for Newmont Mining, and his assistant Claudio Cruz.

No one showed up to meet us in Zamora, so I said to Fredy, “Let’s just drive to Zarza village nearby and ask people where the new mine is.”

When we got there, we flagged down Luis, the owner of the local inn and asked him if he knew of a new mine.

He paused and said, “Sure, I can take you there, but we have to take my boat.” He had a motorized wooden boat that he used to bring fuel upstream. On our way upstream through many twists and turns, he paused to cross himself in front of a grave on the riverbank. He said it was the grave of his brother, who had drowned the previous year. It was a sober beginning to our trip.

After another hour we pulled into the bank, and Luis told us to follow the trail for about 20 minutes and we would find the mine. He stayed with the boat.

Accompanied by Luis’s dog, we followed the path until it opened into a large clearing where we found some ramshackle buildings, a Chilean mill with an ore pile next to it and what looked like the portal of a tunnel into a hill.

Claudio and Fredy rushed over to the ore pile, and I yelled, “Jesus, Fredy, you’re going to get yourself shot.”

At that moment the shutters opened on a second story window and a woman’s head emerged. Did she fire off a string of abuse! It was in Spanish but I recognized most of the curse words.

Fredy told her to settle down and informed her I was “El dueño de la propiedad” — the owner of the property.

Immediately she ran downstairs and asked for forgiveness. She said she had been meaning to go to Quito to see me and she knew they were mining illegally but it was “only enough to feed the family.” (Always the case, no matter how rich.)

She brought out some Kool-Aid for us and then her husband returned from hunting, shotgun in hand. She hastily explained to him who we were.

He said we were free, of course, to look around and take samples, but there were much richer mines farther up the trail — one an hour in one direction, and the other an hour the other way.

The ore pile at Las Peñas, where we had been, looked very impressive, and you could pan a nice stream of gold from the crushed material from the mill, but nothing was to prepare me for what I saw next.

We got to the top of a ridge that looked directly down on a 100 metre long trench with a large quartz vein exposed in it.

We climbed down off the ridge onto a series of elevated wooden planks on which miners were pushing wheelbarrows of broken rock to three separate mills. There were clapboard houses around the site and we were told there were 75 people working there.

Their eyes were like saucers — clearly they had never had visitors before.

But unlike Las Peñas, here the miners were hostile to our visit, and after we grabbed a few samples we hastily retraced our steps to the boat where Luis was waiting.

We quizzed him about what we had seen, but he knew very little. The miners kept to themselves.

The next day in Zamora we met again with the regional director of mining Daniel Philco, and I plotted the positions of the mine workings we had looked at on topographic maps.

It quickly became obvious we had not been on the Princesa concession at all, but on the adjacent La Zarza concession which was not my property.

We decided to go in that afternoon by car to the Princesa concession from the south, through the village of San Antonio. In no time at all we found a crew of five men pouring the cement foundations for a new mill on my property.

I yelled at them and they scattered into the bush, leaving their tools behind. (I was told that no one came back for five weeks.) There were some open workings with exposed quartz veins which we sampled.

That evening when I plotted all the spots we had been to on the topo map, they all lined up in a row like a string of pearls.

I knew we were on to something major and I got Fredy to take me to the telephone exchange in Zumbi, the closest little town.

Fredy had visited the Zarza concession some years before when he worked for Newmont. In fact, he had prepared a presentation for his bosses recommending that they pick it up, but the very next morning he and a number of other employees had been let go in a retrenchment. Fredy had always wanted me to see La Zarza, but we had never had the time.

Anatoli

Working through a series of old phone numbers, it took Fredy almost four hours to track down Anatoli Gatsalov, the owner of the Zarza concession, who agreed to meet with us at 11 the next morning in Quito.

It was a pretty safe bet that Gatsalov had no inkling there were illegal miners taking high grade off his property. In turn, I had no inkling of what was coming next.

Anatoli had been a career diplomat with the Russian foreign service, but when the Soviet Union broke up, he was left abandoned in Quito without a job or a plane ticket home.

Together with three partners, also from the Embassy, they decided to stake a large concession in the border area. Why they happened to choose that specific area, I don’t know.

But what happened next was most strange. A group of Colombian businessmen approached the partners to lease the concession and put it into production. Anatoli said no one had found any gold up to that point, but the Colombians acted as if that wasn’t important.

The Colombians imported a wash plant and some heavy equipment and proceeded to mine alluvial gravels along the Rio Blanco.

Luis, my boatman from La Zarza, told me a year later the whole thing had been a dummy operation, set up to launder Colombian drug money. The Colombians were buying raw gold from the local gold buyers, over the spot price with dirty drug money, and then declaring the gold as production from the plant. This in turn was sold to the Banco Central for sucres, which could easily be exchanged for pesos and repatriated to Colombia.

All the Colombians needed was a convincingly real mining project in a gold rich area where there was lots of mining activity.

Meanwhile Anatoli and his partners were getting a cash payment every month, so they were happy. And no one ever went down south to Zamora-Chinchipe to check out the operation, which suited the Colombians just fine.

Luis was present on site a few weeks into the mining operation, on a day that changed everything. One scoop of the excavator exposed the bedrock, which was covered with “chispas de oro” (nuggets) scattered like rice. The Colombians were amazed.

Further testing down to bedrock showed gold just about everywhere in the basal gravels. The Colombians hastily ordered more equipment and within a couple of months had 11 excavators on site mining a whopping 8 to 13 kilos of gold (up to 416 oz.) every week.

Anatoli was oblivious to all this, and only became aware of the scale of the mining when he got a letter from the government, demanding the partners, as the concession owner, clean up the many stagnant pits of water and gravel piles left after the Colombians had decamped a few years later. It must have looked like the battlefield of the Somme.

More years later, the Ecuadorian manager of the mining operation was tossed into prison by the leaders of the local town of Los Encuentros, because no taxes had ever been paid to the municipality. The company, though, had long since dissolved and after a month they let him go.

Anatoli’s partners had taken off back to Russia when the reclamation order was made, leaving him holding the bag. He told me he had spent $1 million restoring the site with bulldozers. This had to be an exaggeration, but he felt like he had been swindled and wanted to make me pay for it.

(Years later it would all get torn up again by illegal miners, after my company Aurelian Resources was sold to Kinross.)

Looking back, the gold the Colombians had been mining was only coming from satellite deposits around Fruta del Norte, which itself is a blind deposit and does not come to surface.

In 1997, Anatoli managed to convince Climax Mining of Australia to explore the Zarza concession. Early into the exploration, however, the Bre-X fraud in Indonesia was exposed, crushing junior mining internationally.

Climax held on for a short while by joint venturing the project with an Argentine outfit but they soon gave up after a drilling campaign and left Ecuador in 1999.

It was David Shatwell, a consultant working for Climax, who sampled the discovery outcrop at Fruta del Norte. It yielded high levels of arsenic and antimony but little gold.

In 2006, Steve Leary and his team would sample the same outcrop, but added mercury to the assay requests. It was off the charts. But I am getting ahead of myself.

(I visited Andean Resources’ Cerro Negro property in Patagonia in 2010 and wanted to shake David’s hand but he was on field break. He’s responsible for that discovery, now in production by Goldcorp. Clearly he’s a great exploration geologist.)

Fredy Salazar and I drove all through the night, after we had first contacted Anatoli by phone. We finally got to the port of Machala and boarded a flight to Guayaquil, then a second flight to Quito in time for our 11 o’clock meeting.

Climax

Anatoli still held the Zarza concession, but now his chief business was selling medical equipment. His secretary escorted us to his office past a glass-walled conference room. There on the big table were spread out dozens of maps that were being carefully scrutinized by a gentleman Fredy recognized.

“That guy’s a mining engineer,” Fredy whispered.

“Yikes,” I thought.

After our introductions, Anatoli said, “Isn’t it curious that after years of nothing, two people show up the same day with offers to buy my mining concession?”

The engineer was going through all the Climax Mining reports. This was a fine kettle of fish.

It turns out the engineer had a suitcase with $160,000 in it, and wanted to buy the concession outright. He was working for the illegal miners!

After my surprise visit to the property, they must have realized the jig was up: either they had to stop mining and run off, or buy out the concession.

I couldn’t very well tell Anatoli that this money was the illegal proceeds of gold from his own concession. As far as anyone knew, Climax had found nothing worthwhile and that was pretty much the end of it.

The two new discoveries, one of which I saw with the 75 miners, I named “Aguas Mesas Norte” and the other “Aguas Mesas Sur”. (Aguas Mesas is a nonsense name that I borrowed from the “Aguas Mesas Lode” in a B-movie released at the time named “Eight Legged Freaks.”)

These discoveries I suspect were unknown to Anatoli as we sat in his office, but I’ll never know. He was a pretty canny character.

Anyways, Anatoli told me I had 24 hours to come up with a better offer and it had to be “in cash.”

That night I didn’t sleep one wink. It was the greatest piece of exploration ground I had ever seen in my life and the doughnut hole in the middle of my (then) 46,000 hectare concession.

This was mid-2002. I was already 18 months into exploration and everything was being funded out of my hip pocket. I had enough money banked to top the other offer, but then I’d have nothing left to operate.

That’s when I called my dad. My parents were in Las Vegas of all places, with another couple. Dad was playing poker at the aptly named Golden Nugget Casino.

He must have been on a winning streak and was in a great mood. I told him I had just seen the most exciting gold prospect of my career and had to have it, and “could I please borrow $200,000?”

The phone went quiet for a second and then he said, “If you really think it’s that great then I trust your instincts.”

The next day I had my stake and my own poker game of sorts to play with Anatoli. He certainly played hard ball with me, but finally accepted $250,000 — a cash payment of $50,000 and the rest in stages over the next year and a half. Hallelujah! Later over vodka shots he said he would have taken $200,000.

Little did we know that four years later, almost $20 billion in gold and silver would be discovered on the concession.