Gold (14 page)

At first Munk's bankers balked. If Goldstrike were so great, they asked, why hadn't Newmont bought it? Surely with mines surrounding
Goldstrike, Newmont understood the ground. Munk got the bank onside, but faced another threat to the deal: a fast-closing tactical window. The drill hole into the deep deposit had gone down in October. At the end of that year, 1986, a capital gains tax provision important to Barrick's calculations would expire.

In Denver, lawyers for both parties worked straight through the holidays, the deadline hanging over them. They broke only for Christmas Day. On December 26 they were back at it. At the last possible moment on December 31, “and I mean minutes before midnight,” one participant recalled, the lawyers realized that Goldstrike had not properly constituted its board. The directors on hand could not execute the agreements legally. Barrick's down payment of $10 million to seal the transaction was waiting on the table. With the minute hand on the clock almost touching twelve, Goldstrike lawyers gave Barrick verbal assurance of a quick approval as soon as they could constitute the board. The check slid across the table, and Barrick got the Goldstrike mine.

Today it is hard to imagine the struggling property that changed hands that night. One day I went to look at it with Dean Heitt. We drove up a little road along Sheep Creek, looking at the hundred-year-old stone dams of the original miners. The hillside was speckled with yellow flowers. We passed an abandoned adit and came out on a hilltop in the Tuscarora range at 7,000 feet, and there under a fresh blue sky spread the panorama of the mines—the Pete and the Carlin, North Lantern, Beast, Genesis, Goldstrike, Bootstrap. Eight million ounces of gold a year was coming out of that single swath of carved-up mountainsides. Huge, flat-topped artificial hills of tailings ranged above the pits, and miles of leaching heaps. The ocher and red of the upper strata gave way to the black pay dirt below. Mine trucks loaded with gray ore beetled out of the Goldstrike pit.

Munk paid $62 million for Goldstrike and got an Elko office hung with cobwebs, mine trucks missing doors, and problems with production. When extraction costs such as the autoclaves were factored in, Barrick had paid $300 an ounce for gold that was then selling for less than $400. According to Barrick's in-house chronicler, Newmont watched with “cool scepticism” as the Barrick newcomers arrived. The only road to Goldstrike passed through Newmont land. Barrick staff called it the Ho Chi Minh Trail, after the wartime supply route used by North Vietnam. But Goldstrike's new owners were on fire. They had a million-dollar drilling budget, and conviction. “We knew we'd find a lot more,” said Hill. “The previous owners had one of the best holes ever drilled. They had
not
had the money or the knowledge or the want to look at the sulfide ore. We were ready for anything. We were hungry.”

Three months after moving onto the property, Barrick drilled a hole that intersected 600 feet of high-grade ore. It contained 0.36 ounce of gold per ton—a result so good that they checked it twice. The next hole was even better, and still another hole recovered 450 feet at a sensational grade of 1.089 ounces a ton. “We found a great big anomaly,” said Hill, “right across [the] ore body.” They drilled to the west and found the anomaly's extension. They started drilling holes closer together, to fill in their understanding of the size and richness of the target. Everywhere they put a drill, they hit ore. In one of the most intoxicating passages in contemporary exploration, Barrick's geologists were finding a million ounces of gold a month. Sixteen months after the midnight signing in Denver, Goldstrike's reserves had grown from 600,000 ounces to 15 million ounces, and with this staggering jackpot came a fresh, new, urgent challenge: finding miners, and a town to put them in.

Barrick was enlarging the deposit by the day. “We were finding
the equivalent of a small gold mine every week,” said Hill. They needed miners immediately. Hill knew where to find them, but where would they live? Elko was a small town with little surplus housing. Moreover, the prospective employees would bring problems of their own. “We wanted experienced people,” said Hill, “and a lot of them came from mining towns that had gone bust. Those people had houses and mortgages that they'd had to walk away from. So they didn't have good credit.”

Barrick created a plan to encourage banks to offer mortgages. The company bought land north of the Interstate in Elko, and subdivided it. A contractor in Salt Lake City agreed to build a standard three-bedroom house for $50,000. The cost of each lot to Barrick was $12,500, for a total cost per house of $62,500. Barrick would lend the $12,500 land cost to a miner on the understanding that if he stayed with the company three years, Barrick would forgive the sum. With secure employment and 20 percent down payments in their pockets, the miners got mortgages. In five years the value of a Barrick house climbed to $80,000, and the forgivable contribution to $20,000. The subdivision grew to 700 homes.

In less than a decade Barrick outlined 30 million ounces.
Goldstrike powered the company into the ranks of the world's biggest gold producers. More than a million ounces a year came out of the mine, and still does. A year after the discovery of the Goldstrike deep zone, the gold price had climbed from $380 an ounce to $500. Yet Munk did not grow Barrick into a colossus by betting on the gold price: he bet against it. He was already offering investors protection from country risk. Now he would protect them from another menace, one that had wrecked his plans before—the whim of price.

I
N
B
ARRICK
'
S EARLY YEARS THE
gold price ranged widely. It started 1985 at $300 an ounce, hit $500 an ounce in 1987, and sank to $360 in 1989. It clawed back to above $400 by the start of 1990, but three years later had subsided to $330. Nearly ruined by his earlier brushes with the oil price, Munk evolved a system that protected Barrick from the roller coaster of price, guaranteed the company's returns, and provided the steady flow of cash that Barrick used to buy more mines and expand them. He sold forward.

In forward selling, a miner contracts with a commercial bank to deliver a certain amount of gold at a specified future date. The commercial bank then borrows that amount of bullion from a central bank, sells it in the market, and deposits the money to the miner's credit in a trust account earning interest. When the miner delivers the promised gold to the commercial bank, the miner collects the money in the account, and most of the interest. The commercial bank returns the gold that it receives from the miner to the central bank, with a small amount of interest. The commercial bank makes money on its share of the interest from the trust account, less what it pays the central bank. Everybody wins. The commercial bank profits from a low-risk transaction; the central bank earns interest that it would not otherwise have earned on its reserves; the miner protects itself from a price drop because the price it gets is the price at the time it made the deal, and it was making interest all along on a product that it hadn't yet produced. Forward selling made Barrick bulletproof to a falling price.

A single input can demolish the forward seller's math—a rising gold price. Let's say a forward contract calls for delivery in five years at $800 an ounce. If the spot price is lower, fine: that's what you were hedging against. But if the spot price is $1,400, the forward seller has “lost” $600 an ounce. Such a trap snapped shut on Barrick.

By 2009 Barrick had a massive forward hedge, trailing far behind the real value of the metal. This forward position dragged on the company's share price like an anchor. As practiced at Barrick, forward selling gave the miner the option to roll the contract forward when it came due. In other words, Barrick could delay the reckoning to give the spot price time to come back down. The price did not come down. It rose. Munk's board faced the inevitable in 2009, taking advantage of a price dip to buy out the forward contracts for a bruising $5.6 billion. In doing so they acknowledged what the rising price was saying. New buyers had arrived in the market, changing it forever.

T
HE GOLD PRICE HAD STARTED
climbing long before the banking crisis gave it orbital velocity. Two important factors drove it. One was the appearance of a class of new gold investments that made it easier to buy bullion. The other factor was the rapid opening of a market. It was a market that wanted and bought everything—BMWs, French wine, iPods, hamburgers, diamonds, an aircraft carrier, and inevitably, gold. It was the dream market. It was China.

To become the biggest gold producer, China had to subdue the natural animosity of communist ideology to a substance so quintessentially the stuff of private wealth.

I
N A TEN-YEAR EXPLORATION BINGE,
China grew from an insignificant gold producer into the world's biggest, replacing South Africa in 2007.
They were buying gold too. In 2012 Thomson Reuters GFMS, the world's leading precious metals consultants, predicted that Chinese private and government buying would amount to almost a thousand tons of gold that year, a rate of consumption that would make it a bigger gold buyer than the traditional leader—India. The story of Chinese gold tells the story of the Chinese state—its transformation from an inward-looking, xenophobic, technologically backward country into a money mill.

They have 10,000 gold mines, or maybe 60,000. I was told both. No one seems to know the number. Chinese gold is as much a frenzy as an industry. Some mines are no more than a single family with
gold pans and a stretch of river; others exploit large deposits from Burma (now Myanmar) to the Mongolian border.
All together, they produce more than 300 tons of gold a year. I wanted to see these mines, especially the fabled Linglong mine, and flew to Yantai on the Yellow Sea.

The night I arrived, Tropical Storm Meari came ashore and battered the Shandong Peninsula. Rain poured through faulty seals around the windows. The lights went out. I stood at my thirty-eighth-floor window and peered out. I could see taillights crawling on the coastal road, that was all.

In the morning everything sparkled and glittered in the fresh, cool air. Packs of black clouds charged across a bright sky, dragging trails of rain. Happy at the prospect of visiting the ancient goldfield, I devoured breakfast in my room, put the tray aside, and turned to my prize—a big yellow book on the gold mines of Shandong.
My attention settled on a picture of an imperial minister setting out for Linglong in 1007. He rides a white horse, his gold cape trailing behind him. The emperor watches him depart. A retinue of miners, loaded with spades and baskets and carrying sacks of tools, trudges through a forest. At ten o'clock my cell phone rang and I went down to meet my guides.

They arrived in a tiny purple car, dodging a pile of storm detritus in front of the hotel and pulling to a halt across two parking slots. A large and cheerful woman named Pang Min beamed at me from the wheel. The backseat was stuffed with children's toys. Wedged among them was Feng Tao, a solemn gold geologist who had flown in from Beijing to be my interpreter. Feng had come to me through an introduction, and had already made me understand, with some firmness, that without such introduction all of China would be shut against me, and certainly that part of it that contained the splendid and
chaotic Shandong gold industry. Pang Min herself was the fruit of this same process. And, so Feng made clear, her sizable daily fee was a trifle to be swallowed without complaint.

“Fine,” I said as I folded myself into the front seat, “but we need a bigger car.”

“Yes,” said Feng. “She has agreed to change it.”

We shot away from the hotel with every sign of purpose. There followed half an hour of spirited navigation among the abandoned streets that surrounded the hotel. Buoyant with gold revenues, and anticipating growth, the local government had filled an enormous tract with eight-lane thoroughfares, a riverside park, two stadiums, and a convention center. The parking lots were empty. Nothing was going on inside the stadiums. Streets ran for miles through empty scrub. Happily there was no traffic, so that when Pang Min coasted to a puzzled stop in the middle of this concrete prairie, we were not in anybody's way. At last we found our way out, got a bigger car, and set off westward through the sodden countryside to see the celebrated Linglong mine.

Linglong gold mine lies in the jumbled granite of the Shandong Peninsula, China's storied goldfield. Probably a hundred other gold mines thread the nearby hills with narrow, dangerous tunnels. Many are centuries old, and small. China produces more than 300 tons of gold a year yet does not have a single large mine. The story of Chinese gold production is a parable of China's transformation. To become the biggest gold producer, it had to subdue the natural animosity of communist ideology to a substance so quintessentially the stuff of private wealth. Linglong's story is a tale of changing hopes and fortunes driven by the evolution of the Chinese state. As the state changed, so did its posture to gold mining. From suspicion of gold as a symbol of private wealth threatening the communist ideal,
China has concluded, as its growing bullion holdings show, that gold might be a useful hedge in a shaky-dollar world.

All morning the rain came and went, sweeping in from the sea in thick black packages of weather that drummed on the car roof and promptly blew away. There were torn-up trees along the road. We left the main route and climbed through a slot in the hills. Pine trees cloaked the hillside. The storm abated. The tops of the pink granite slopes vanished into a mist. We drove past a line of pale yellow houses and arrived at the famous mine. A cantonment of white buildings stood against the mountain. We parked the car and climbed out and Pang Min pointed up the hillside to the place where the main tunnel entered the rock. The scene looked less like an industrial site than like a Chinese landscape brushed onto a scroll.