Australian gold diggers move a mountain in China

By Lucy Hornby

ZHENFENG COUNTY, CHINA (Reuters) - Deep in the mountains of southwest China, an Australian mining company is digging out a steep hillside to create what is expected to be the second largest gold mine in China.

Sino Gold Ltd. hopes to prove to Beijing that it is in China's interests to open up mining to foreign companies willing to introduce stringent safety standards as well as better social and environmental practices.

But the grey-and-white striped ore sought by Sino Gold lies beneath a region that is poor even by the standards of rural China. Average annual income is 1,200 yuan ($155.50), child mortality is high and hepatitis and tuberculosis are common.

In this corner of Guizhou, most of the hopes for the local economy are pinned on Sino Gold's Jinfeng mine, raising expectations that the company will provide jobs and a range of social services that Zhenfeng county lacks.

"Right now, they think we are the government," said Stuart Gula, who manages the project.

Sino Gold is one of two foreign miners with gold mines in China, the world's fourth largest producer.

The other, Canadian rival Eldorado Gold Corp., began commercial production at a gold mine in the remote western province of Qinghai earlier this year.

Beijing wants foreign capital for remote mines, while keeping the most valuable deposits for Chinese firms.

Most of China's gold mines are small affairs that pump poisonous arsenic into the air or leak cyanide into the water, killing fish and animals.

But Sino Gold says its processes to reuse water, reclaim land and neutralize cyanide in waste will set a new standard for China's unsafe and polluting mining industry. It is using sulphur-munching bacteria that require a careful equilibration of temperature and oxygen to help isolate the gold.

LESSONS LEARNED

In developing Jinfeng, Sino Gold is drawing on experience operating a gold mine in Shaanxi, which it sold last year once reserves were depleted.

The $130 million Jinfeng project will produce 180,000 ounces of gold a year once it reaches full operations, and could be further expanded, the company says.

The operation is now running at minimal level while it extends the lining of its tailings dam to comply with stricter requirements after a dam breach at a nearby Chinese mine released cyanide-tainted waste.

Sino Gold is also developing a new project in northeast China, and exploring elsewhere.