The sign at the camping site relates to the public fossicking area established by the Louis Creek Mining Society, which as a distinct permit type is subject to the restrictions of the 'fossicking' definition in the Crown Minerals Act. Whereas the permit held by the Rotoiti District Community Council is in fact a mining permit and thus not limited to hand tools and non-motorised methods. If someone has been operating a dredge within the area covered by the later then it may well be legit, that is provided they have the permit holders permission.
As for those people who break the rules and scalp the fossicking areas with dredges - well lets just say I don't have any sympathy if the long green arm of DOC catches up with them. If you see someone dredging in a fossicking area do something about it for fucks sake. Provide photos, car rego, dates, times and a description of their equipment to the local DOC office as well as Crown Minerals as soon as possible. The more information you can provide the better.
Nothing against people who push the boundaries a little - but not at the expense of Joe Average taking their kids panning for a little colour in the holidays. And certainly not at the expense of people who have gone to the effort and expense of obtaining a mining permit.