Rusoro Mining goes after Gold Reserve

Rusoro Mining (RML-V, RMLFF-o) says an unsolicited take-over bid for Gold Reserve (GRZ-T, GRZ-x) offers a “compelling premium” and would create the “premier” gold company in Venezuela.

 

Rusoro’s chief executive, Andre Agapov, a well-connected Russian entrepreneur, described the proposed take-over in a statement as a “logical combination” that would create “real and valuable synergies.”

 

The Russian controlled company wants to acquire all of the outstanding shares and equity units of Gold Reserve in exchange for three shares of Rusoro for each Gold Reserve share or equity unit.

 

The offer values Gold Reserve at C$1.08 per each Class A common share and each equity unit, and represents a premium of 140% based on the Dec. 12 closing prices for Rusoro and Gold Reserve on the TSX Venture Exchange and the Toronto Stock Exchange, respectively. (Gold Reserve’s shares listed on the TSX closed at C$0.45 on Dec. 12 and on Amex at US$0.39.)

 

The offer is also a 209% premium over the 30-day volume-weighted average trading prices for Rusoro and Gold Reserve on the TSXV and the TSX, respectively.

 

If the deal goes ahead, Gold Reserve equity holders would collectively own about 30.4% of the combined company on an issued share basis.

 

Gold Reserve’s Choco 5 project is adjacent to Rusoro’s Choco 10 operations in the historic El Callao mining district, about 180 km south of Puerto Ordaz.

 

Gold Reserve’s Brisas project, a development stage gold and copper open-pit project, is about 10 km south of Rusoro’s Yuruan property – all in Venezuela’s Bolivar state.

 

The combined company would have a total of 12.2 million oz. gold in the proven and probable reserve category. Measured and indicated resources, including reserves, would add up to 18.9 million oz. gold, with additional inferred resources of 9.3 million oz. gold.

 

News of the offer sent Gold Reserve shares up 28¢ apiece, or 62.2%, to close at 73¢ on a trading volume of 634,036. Rusoro shares fell 10.5¢ apiece, or 29.2%, to 25.5¢ on a trading volume of 2.8 million.

 

Rumors of an acquisition have circulated since August, when in a confidential letter to Gold Reserve’s board of directors, Rusoro wrote that it was “prepared to offer to acquire 100 percent of Gold Reserve shares through a business combination by which Gold Reserve shareholders would receive two Rusoro shares for each Gold Reserve share.”

 

The letter also stated that if Gold Reserve made the letter’s contents public, the proposal would become null and void. Gold Reserve released the letter to the public anyway.

Gold Reserve’s Brisas project is in one of the world’s great gold mining regions: southeastern Venezuela’s KM88 region, about 30 km from the border with Guyana.

 

Brisas has proven and probable reserves of 10.2 million oz. gold and 1.4 billion lbs. copper. Gold Reserve expects Brisas will have a mine life of about 18.25 years and produce about 457,000 oz. per year when it starts production in 2011.

 

In a press release following the offer, Gold Reserve said it had retained RBC Capital Markets and JP Morgan as financial advisors and Fasken Martineau DuMoulin and Baker & MacKenzie as its legal advisors, but urged shareholders to wait for the board to make its recommendation before making a decision.

 

It also encouraged shareholders to review Rusoro’s interim financial statements. Rusoro suffered a net loss of US$12.49 million in the three months ended Sept. 30.

 

Gold Reserve noted that it was also concerned about the role Endeavour Financial is playing in Rusoro’s offer. Endeavour is Rusoro’s financial advisor but also provides advisory services to Gold Reserve “and has indepth knowledge of confidential and proprietary information about Gold Reserve”, the company said in a statement.

 

Rusoro has quietly carved out a significant land position in all of the major gold mining districts in Venezuela’s Bolivar state. In October 2007 Rusoro bought Gold Fields’ (GFI-N, GOF-l) Choco 10 gold mine.

 

It then picked up Hecla Mining’s (HL-n) Isidora mine for US$25 million. (Production from the Isidora mine will ultimately be subject to a 50-50 joint venture with the Venezuelan government that will go into affect before the end of the year.

 

So far Rusoro has accumulated resources of more than 7 million oz. gold in the measured and indicated category and more than 7 million oz. gold in the inferred.

 

The Vancouver-based company has 2 million oz. gold in proven and probable reserves and expects to produce more than 100,000 attributable gold oz. this year.

  

If the offer is accepted, Rusoro plans to speed up development and expansion of its Choco 10 mine and its Increible 6 project; develop Gold Reserve’s Choco 5 project; permit and develop its San Rafael/El Placer project, moving it into commercial production in 2010; and nail down the permits necessary to start construction again at Brisas. (The Venezuelan government rescinded the company’s permit in April citing environmental concerns.)

 

Rusoro’s management has strong relations with the Venezuelan government and the company has spent more than US$100 million on developing its gold projects in the South American country since 2002.