Gold fever reaches Upper Rock Creek

On his recent journey from Atlanta to Missoula, Dan Hollis found himself at a Holiday Inn somewhere between Idaho Falls and Dillon. A flight mishap left him stranded in Chicago, he was detoured through Salt Lake City, and then, instead of waiting overnight for a flight to Missoula, he decided to rent a car and drive. It was a trying couple of days, he said, but he was hoping there'd be a pot of gold at the end of the rainbow.

And there might be.

Hollis is the CEO of Dutch Gold Resources, a small, Atlanta-based mining company that has its sights set on a claim about 15 miles west of Philipsburg, in the hills above Upper Rock Creek, the blue-ribbon trout stream that feeds into the Clark Fork. He was headed to the site, known as Basin Gulch, to monitor the progress of his company's exploratory drilling, which the Montana Department of Environmental Quality approved in February. "We've had a reserve report completed that shows that there's an exceptionally large gold body on the property," he says.

click to enlarge Drumlummon miners drive pneumatic drills into rock. - PHOTO BY CHAD HARDER

He's also coming in search of other mining prospects, because, he says, Dutch Gold is seeking "a significant presence" in Montana.

"We're doing drilling for the purpose of defining the resources that could be high-grade underground mines," he says. "Our hope would be that over the next six months we're able to identify and develop, consistent with permitting and regulatory issues, a small-scale mine that could be into production—let me emphasize, test production—next year."

Proposals like Dutch Gold's don't signal the kind of boom that had people heading for Sutter's Mill in 1849 or the Klondike in 1897—or even Montana in the 1860s—but Hollis could be in the vanguard of a new, 21st-century-style rush for Western metals.

From a regulatory standpoint, the Basin Gulch Mine hasn't even been officially proposed, but Dutch Gold already has bet $4 million in exploration costs, according to the company's annual report, that it will be able tap "several million ounces" of gold in the rugged terrain above Upper Rock Creek. And that gold is as valuable as it's ever been: On May 2, two days before Hollis departed for Missoula, the price of an ounce reached an all-time high of $1,575.79, topping records that had been set in 11 out of the 12 previous trading sessions.

"We've been very, very excited," Hollis says, "and we think it's going to continue to go up at a reasonably modest pace...We think gold's made a base somewhere between $1,000 and $1,200 now, and at that price, we can build what we hope will be a very profitable operation at Basin Gulch. And if gold prices continue to go up, we'll be much happier."

Gold prices began to spike with the onset of the recession in 2008, and they've generally inched upward since, propped up by low interest rates and unease about inflation.

"A lot of this is just the fear in the world and the country about the economy," says economist Larry Swanson of the O'Connor Center for the Rocky Mountain West at the University of Montana. "We've spent about three years where we've been in terror about what's happening to banking, what's happening to housing, and what people do when there's a lot of fear, particularly when the stock market is plummeting, is they invest in gold."

The Missoula Gold and Silver Exchange, on Brooks Street, has seen its business nearly double in recent months thanks to the record-high gold prices and 31-year-high silver prices, says owner David Hakes. "We've been absolutely swamped over the past two months with people buying and selling," he says. "Oh boy, have we." Kevin Pfaul, owner of the pawn shop Liquid Assets, in downtown Missoula, has seen a surge in the number of customers selling jewelry, gold nuggets, placer gold, and even dental fillings. "The gold market's been real active now for about two and a half years, and doggonit, actually, I hope it doesn't go much higher," Pfaul says. "It doesn't bode well for our economy. It shows the weakness of the dollar, and all in all, that's just not good for America."

click to enlarge Atlanta-based Dutch Gold says it’s spent about $4 million in exploration costs on its Basin Gulch prospect, which sits about 15 miles west of Philipsburg and about two miles away from Upper Rock Creek. - PHOTO COURTESY OF U.S.G.S.
  • Photo courtesy of U.S.G.S.
  • Atlanta-based Dutch Gold says it’s spent about $4 million in exploration costs on its Basin Gulch prospect, which sits about 15 miles west of Philipsburg and about two miles away from Upper Rock Creek.

But it's certainly good for mining companies, which dismays many environmentalists.

Dutch Gold's interest in Basin Gulch "is one of a number of [prospective mines]," says DEQ Environmental Management Bureau Chief Warren McCullough. "And in fact, I would say that the immediate future of mining in Montana, as far as new projects go, will probably focus mainly on relatively small, high-grade, underground gold mines."

Like in Marysville, where the 140-year old Drumlummon Mine—a rough model, Hollis says, for Basin Gulch—has come back to life.

A whole new world

Montana designated Marysville one of its official ghost towns. About 70 people still live there, but the town does seem like an artifact. Many of its weathered, wooden buildings are boarded up. The hillsides are dotted with half-collapsed shanties and rusted-out cars. The only outward clues of its significance are the hanging wooden signs at the entrance to the town that boast of its improbable history.

In the late 19th century, gold from the Drumlummon Mine made Marysville one of the richest mining areas in the world. By 1900, it produced $30 million in gold bullion and about 4,000 people lived in the tiny valley in the mountains about 40 miles north of Helena. By one account the town supported 60 businesses, including 27 bars, seven hotels, three newspapers, two railroads, and an opera. Three mills ran around the clock. Drumlummon gold graced the Cathedral of St. Helena, Carroll College, and the Montana Capitol. But the boom was busted in 1910 when mine operators lost a key court case. Mining continued intermittently until 1951, when a fire destroyed the mine. The town would similarly flame out.

click to enlarge Workers at the revived Drumlummon gold mine in Marysville drill for core samples. - PHOTO BY CHAD HARDER
  • Photo by Chad Harder
  • Workers at the revived Drumlummon gold mine in Marysville drill for core samples.

Sixty years later, while the town remains quiet, there's a buzz up at the Drumlummon Mine. A collection of buildings and trailers are perched on the hillside, buttressed by a wall of gray rock hauled out of the earth. A couple dozen of pickups line the narrow road that leads to one of the mine's adits. The license plates reveal where these miners used to work: Virginia, Tennessee, Arkansas, Nevada. Many hail from Montana, I'm later told; they'd been waiting for the opportunity to come back.

The opportunity came with the 2008 discovery of another mother lode of gold known as the Charly Vein. Drilling by the Canadian company RX Exploration, which had acquired the claims, revealed that the Charly Vein contained more than 70,000 ounces of gold and nearly two million ounces of silver. "The Drumlummon Mine is a 'bonanza'-style epithermal deposit...characterized by very high-grade gold and silver," the company reported.

Gold prices hovered around $750 an ounce at the time. At current prices, that gold alone would be worth $110 million.

"[The Charly Vein] opened up a whole new world," says Joe Bardswich, RX's chief mining engineer.

Bardswich lends a photographer and me hard hats, headlamps, steel-toed boots, and emergency respirators. Then the three of us climb into a truck with Dave Whiteley, the mine's superintendent. Bardswich and Whiteley are both thick, raspy-voiced throwbacks. Bardswich first went underground in 1963, he says, and ever since he's worked mines in Europe, Africa, and Canada; he's from Ontario. Whiteley, whom Bardswich chides for his smoking habit, has worked mines all over the U.S. since 1983, following in his father's footsteps.

We enter the Gunsinger Decline, named for Operations Manager Mike Gunsinger. Bardswich says Gunsinger discovered the Charly Vein. The decline, completed in early April at a cost of more than $4 million, gives the mine a second route underground.

click to enlarge The entrance of the Drumlummon Mine’s Gunsinger Decline. - PHOTO BY CHAD HARDER

The truck rumbles forward. Daylight slowly diminishes behind us. We find ourselves winding through a dank, cavernous tunnel. We hear the coming-and-going throb of drills penetrating deep into rock. Whitely stops the truck whenever we encounter the bobbing headlamps of miners, to check with them on the day's progress.

Record-high gold prices have the Drumlummon Mine ramping up production. Now they're able make a profit on ore they'd typically throw away, Bardswich says. He hopes they'll soon be able to haul out 500 tons a day; out of that, they'll yield about 100 ounces of gold, which, at the current value, would be more than $150,000 worth. Then it's trucked to either the mill RX leases in Philipsburg or the Golden Sunlight Mine, in Whitehall. Ultimately, about 85 percent of the gold gets shipped to a broker in Reno, Bardswich says, and ends up at a smelter in Mexico.

Only six miners are down here during today's 10-hour shift, two fewer than normal. The Drumlummon mine employs around 140 people in some capacity or another—surveyors, assayers, carpenters, truckers, engineering consultants. It plans to hire additional experienced miners in the coming months. Wages range between $20 and $40 an hour, Whiteley says, plus production-based incentives than can double the hourly rate.

"There are an awful lot of Montanans [who are miners] spread from Alaska to Mexico and into Canada and down into South America, and a lot of them want to come home," Bardswich says. "Montana's a beautiful state and people who grew up here enjoy the hunting and fishing...they want to come back and work here."

We arrive at the No. 9 Drill Station, a hollowed-out room lit with spotlights, a short walk through standing water from the decline. Two ear-plugged contractors are at work pointing diamond drill bits into the rock in order to extract core samples. One minds the machinery's controls, driving the drill deeper and deeper. When the long, pipe-like drill extension is pulled back up, the other worker slides a tube of rock out of it, feeding the sample into the rows of a shallow cardboard box, breaking the rock with a hammer every couple of feet so it fits. The rock shimmers black, brown, and gray. It will go to the assayers on the surface.

This has been an uncommon scene in Montana over the last two decades. Bardswich believes it shouldn't be. He says mining companies around the world have a negative perception of Montana because of its environmental regulations. The state's missing out on hundreds of millions of dollars of investment, he contends.

"[Environmentalists] are right: make sure it's done right," he says after we escape the loud thrum of the drill. "But we're not cleaning up the world's environment by shutting down mines in Montana and shipping them to China where they don't give a shit. I look at Flathead Lake and I understand there's mercury that blows over from the coal-fired plants in China, because they have no controls on it, so Flathead Lake is getting polluted with mercury from overseas. If we're the best at doing things environmentally, then we should encourage the development in our own country."

After driving more than a half-mile underground, we turn around and head for daylight. When we emerge, two men stand in front of the trailers, legs wide, hands in pockets, eagerly awaiting Bardswich and Whitely's return. They're looking for work.

'These evil miners'

Drumlummon is something of an anomaly. Its revival probably doesn't portend a return to Montana's gold mining heyday, although Robin McCulloch wishes it did. The mining engineer with the Montana Bureau of Mines and Geology, in Butte, laments that Montana's metal mining infrastructure is nearly gone, leaving a vacuum in which sky-high gold prices reap little reward.

click to enlarge Dave Whiteley, the Drumlummon Mine’s president and superintendent, says the mine plans to hire additional experienced miners in the coming months. - PHOTO BY CHAD HARDER
  • Photo by Chad Harder
  • Dave Whiteley, the Drumlummon Mine’s president and superintendent, says the mine plans to hire additional experienced miners in the coming months.

"Everybody says, 'Those evil miners, we need to get them under control,'" McCulloch says. "I hate to tell them, but they need to go out and put flowers on their graves. They're dead. There's nobody left...The major mines over the last 75 to 100 years no longer exist, and what we have left are small to medium-sized companies, mostly homegrown, that are depending on financing through the world market...We're competing for those exploration dollars with Australia and Russia and India and everybody else. It's not state-by-state. We have to compete on an international basis—and it's tough."

McCulloch, echoing Bardswich, says outside investors cringe at the thought of doing business in Montana. "Our reputation at this point for an investment dollar, we're not in the toilet, but we're close, on an international basis. Part of it isn't that the law is so severe, but the permitting cycles and the litigation is so severe as to not allow anybody to want to invest in Montana."

He points to the Fraser Institute's annual global mining survey. The most recent results, published in March, show that 83 percent of mining companies surveyed said Montana's environmental regulations are a deterrent to investment. Montana ranks eighth on Fraser's list of the 15 worst mining districts in the world for 2011.

Mining exploration projects have dropped from about 140 in 1991 to around 10 today, according to data from the Montana Bureau of Mines and Geology. The number of gold mining operations of all sizes dropped from 23 in 1989 to five in 2000, and has rebounded to seven today—"and that includes everything right down to the little guy shuffling and dancing with a backhoe," McCulloch says.

A truck passes through the Drumlummon Mine’s Gunsinger Decline. - PHOTO BY CHAD HARDER

McCulloch blames Montana's flagging mining industry partly on citizen Initiative 137 that, in 1998, banned cyanide heap-leach mining. "It wasn't the cyanide ban itself," he says, "but it harbored an attitude toward business."

The Montana Environmental Information Center (MEIC) led that effort, in response to what it said was the "abysmal track record of open pit cyanide leach mining in Montana, as exemplified by cleanup fiascos at the Golden Sunlight, Zortman-Landusky, and Kendall mines and the Montana Department of Environmental Quality's failure to adequately regulate such mines as required by state law."

Canyon Resources, the company that wanted to open a cyanide heap-leach gold mine in the Upper Blackfoot Valley, attempted to repeal the ban with its own initiative, but voters rejected it in 2004. Canyon also lost a protracted court battle. The 2011 Montana Legislature approved a bill to effectively reverse the ban, but Gov. Brian Schweitzer has promised to veto it.

"The infrastructure that went away was the cyanide-based infrastructure, and it's a good thing for Montana that it went away," says MEIC director Jim Jensen. Golden Sunlight is the only mine left in Montana that uses it, he says, "and one day it will go away, too."

Jensen says he hopes Schweitzer will also veto Senate Bill 312, sponsored by Chas Vincent, R-Libby, which eases the permitting process for mining operations and would apply to the Basin Gulch Mine. The bill stems from frustration over the years-long regulatory approval processes for the proposed Montanore and Rock Creek mines southwest of Libby, both of which would tunnel beneath the Cabinet Mountains Wilderness to access massive silver and copper deposits.

The shuttered Zortman-Landusky Mine, south of the Fort Belknap Reservation in north-central Montana, stands out as perhaps the most environmentally harmful gold and silver mine in the history of the state. In 1982, three years after it opened, about 50,000 gallons of cyanide spilled, poisoning the community of Zortman's water supply. There were several other spills between then and 1997, when the mine closed. A year later, the company filed for bankruptcy, leaving the state with the liability. The total cleanup tab through 2010 amounts to $55.9 million, according to the DEQ. The mine will require water treatment in perpetuity.

Golden Sunlight, which produced 28,000 ounces of gold in 2009, still uses cyanide because it was grandfathered in. Its track record includes the leak of 19 million gallons of cyanide solution in 1983. Vancouver, B.C.-based Placer Dome Inc. opened the mine in 1974. Toronto-based Barrick Gold Corp., the largest gold mining company in the world, acquired Placer Dome, and Golden Sunlight with it, in 2006 for $10.4 billion. Two weeks ago, Barrick reported that its first quarter adjusted net earnings rose 32 percent to $1 billion. "First quarter operating results exceeded our expectations and combined with strong metal prices and good cost control, resulted in significant growth in earnings and operating cash flow," said Aaron Regent, Barrick's president and CEO.

To be sure, the environmental impacts of vast, open-pit, cyanide heap-leach mines like Golden Sunlight are far more severe than the impacts of, say, the arsenic-tainted water coming out of the underground Drumlummon Mine. "Some companies are doing a very good job," says economist Larry Swanson, "and others do as bad a job as you possibly can."

Montanans familiar with gold mining's toxic legacy in the state tend not to make a distinction.

'A nightmare for these guys'

Dutch Gold's Dan Hollis insists the Basin Gulch Mine's environmental footprint would be minimal.

"I know that there are people who are worried about the environment, frankly, based on some of the things that have happened in the state of Montana in the past," he says. "I understand their concerns, but the technology's changed, and one of our core values is sustainability. It's not lip service, it's something that we really believe."

Hollis says Dutch Gold doesn't have "any plans any time in the near future" to pursue open-pit mining, even though the exploration focuses, according to the company website, on "identifying a large open-pit minable reserve."

"Our intention is to stay underground so that any impact on Rock Creek could certainly be minimized," he says, "and frankly, we wouldn't enter into a program that was going to have any negative impact on Rock Creek. I mean, it's one of the most beautiful areas in the world, and when I talk about being environmentally conscious, and serving all of the stakeholders, one of the stakeholders are the fishermen."

Bruce Farling, the director of Montana Trout Unlimited, doesn't buy it. He says Dutch Gold, whose portfolio consists of three properties, none of which are operational mines, is "trying to mine investors as much as they're trying to mine gold."

click to enlarge The Basin Gulch mine would sit in the hills above Rock Creek, a blue-ribbon trout stream. - PHOTO BY MATT GIBSON
  • Photo by Matt Gibson
  • The Basin Gulch mine would sit in the hills above Rock Creek, a blue-ribbon trout stream.

"It's a real mistake to do it in Rock Creek," Farling continues, "and [Hollis] ought to know that...Trying to permit a mine on Rock Creek is just going to be a nightmare for these guys."

Farling promises that Trout Unlimited will fight the mine whenever it's officially proposed. And it won't be alone. Groups like MEIC, the Clark Fork Coalition, and the Rock Creek Protective Association will also vigorously oppose it. The RCPA has concerns about the mine sending sediment downstream and exacerbating whirling disease. Says MEIC's Jensen: "It's a real bad idea to have a mine at the headwaters of Rock Creek. Period."

"High prices encourage scoundrels in the gold mining industry," Jensen continues. "They always have and apparently always will...It's a time for people to be very cautious about small operators like this that make a mess and go away, and leave the mess. I guess I'd hark back to Mark Twain's prescient analysis on the subject, and that was this: 'The definition of a miner is a liar with a hole in the ground.' It seems to be a truism for the ages."

Jensen is in Helena. Closer to Basin Gulch, at least some are less wary of mining. One Philipsburg-area resident, Barbara Clark, says, "Floaters do more damage to the river than the mine would."

Hollis maintains that his company can mine in an "environmentally prudent way." "This isn't greenwashing," he says. "We think that Montana is a great place for us to do business, and our hope is to find additional properties in the area and that we can build a significant presence in the state, and be a real contributor to the tax base and an employer that people want to come work for."

Historically, that's been an irresistible proposition in the Treasure State, and it's essentially no different today.

Farling says it's a haul he'd rather let get away: "If we actually need gold for real things, like industrial purposes and stuff, there's plenty of gold to be mined in the pawn shops of America. There really is—especially now."

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