Rusoro Takeover of Gold Reserve is Best Case Scenario


It is a widely understood fact that doing business in Venezuela is tricky, to say the least.

It is a widely understood fact that doing business in Venezuela is tricky, to say the least. Toronto-based Crystallex International (TSX, NYSE:KRY) management and shareholders know first-hand just how devastating the government attitude towards foreign ownership of valuable natural reserves can be. The company has seen its share price collapse from a high in 2006 of CA$7 to its current level of $0.15.

The future of its Las Cristinas gold deposit, estimated to contain some 14 million ounces of gold, was thrown into serious doubt when an environmental permit crucial to begin construction was rescinded.

The same fate befell Gold Reserve Inc. (TSX, NYSE:GRZ) on its Brisas Project, which is in the same general area as Las Cristinas. Its share price in during the same time frame fell from over $10 to its present level of CA$0.68. Brisas is estimated to contain nearly 12 million ounces of gold and 1.6 billion pounds of copper.

According to the Ministry for the Environment, concerns over environmental sensitivity of the Imataca Forest Reserve in the Kilometre 88 region of southern Bolivar State caused the permits to be revoked.

Observers of the situation suggest that the environmental issue is really a thinly veiled political ploy designed to position Venezuela more favorably in the ownership of that mineral wealth.

Rusoro Mining (TSX.V:RML) on the other hand, has successfully advanced the projects it acquired from the takeover of Mena Resources in March 2007 to the point where it is presently producing 100,000 ounces of gold per year from two mines, with two more mines expected to come on-stream early next year.

Since its founding in 2006, the company has also acquired the producing assets of Hecla Mining (NYSE:HL) in a 50/50 joint venture with the Venezuelan government in a model of ownership that is consistent with president Hugo Chavez’ interest in creating “Socialist Mixed Partnerships” between resource producers and the people of Venezuela.

Rusoro’s chairman and biggest individual shareholder is Vladimir Agapov, a Russian national with strong ties to major players within the Russian industrial oligarchy. With the foundation of their business relationship predicated on a shared historic ideological identity, its no small wonder that the Venezuelan Ministry of Mines and Basic Industries declared Rusoro its “partner of choice” for the development of gold mining opportunities in Venezuela.

Venezuela and Russia have been strengthening ties progressively for the last several years, with Russia providing military equipment to Venezuela and Venezuela reciprocating by opening up its mineral wealth to Russian business interests.

Which is why Rusoro felt sufficiently emboldened to launch an all-share hostile takeover bid for Gold Reserve on December 15th after friendly overtures were rebuffed earlier this year. Rusoro is offering three of its shares for each one of Gold Reserve, a 209% premium over the weighted average 30 day trading price.

Gold Reserve responded on December 16th with a court injunction against Rusoro and its financial advisor, Endeavour Financial (TSX:EDV) restraining Rusoro and Endeavour from proceeding with the unsolicited offer and seeking significant monetary damages. According to the press release from Gold Reserve:

“On Friday, December 12, 2008, the Board of Directors received a non-binding proposal from Rusoro and received calls from representatives of Rusoro's legal counsel and its financial advisor, Endeavour regarding the proposal. On Sunday, December 14, 2008, Gold Reserve sent letters to each of Rusoro and Endeavour regarding improper access to, and use of, Gold Reserve's proprietary and confidential information. Endeavour also provides advisory services to Gold Reserve and has in depth knowledge of confidential and proprietary information about Gold Reserve. Gold Reserve has not received a response to these letters, but received an email from Endeavour on Monday December 15th, purporting to terminate Endeavour's financial advisory agreement with Gold Reserve.”

It is understandable that Gold Reserve’s management team would refuse to give up the asset it has worked so hard to develop and finance. The company has been operating in Venezuela the longest among all the companies mentioned here, and with CA$65 million in the bank, there is every reason to maintain hope.

But the company began selling the equipment it had purchased for the development of Brisas, which, from a shareholder’s point of view, certainly suggests that management is not exceedingly confident in the likely outcome of continuing efforts to lobby the Ministry of the Environment in its favour.

Rusoro’s status as “preferred” partner reinforces its position as the company best suited to navigate the difficult waters of the Venezuelan political archipelago. At least, that is the position I would support if I were a Gold Reserve shareholder at this point.

If Brisas was successfully put into production, according to the feasibility study by SNC Lavelin, it would produce 457,000 ounces each year. Added to Rusoro’s 100,000 ounces per year, the combination of the two companies would result in a mid-tier mining company producing 650,000 ounces a year and with a resource base of nearly 20 million ounces.

With investment demand for gold strengthening and expectations for sustained pricing well over US$1,000 an ounce going forward, it is strongly within shareholder interest to see the project put into production sooner rather than later.

Not only would that be a near term win-win situation for shareholders of both companies, it would provide the impetus for Rusoro to continue making acquisitions of advanced projects from companies with whom the Venezuelan government is disinclined to do business with. Certainly Crystallex comes to mind, and there are a great deal of other opportunities in the mineral-rich country.

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