Stronger Chavez can’t tarnish Gold Reserve’s lustre

North American gold companies operating in Venezuela were spared the sting from increasing powers for Latin America’s most notorious socialist leader, as a healthy rise in the price of the yellow metal saved the day.

Historically, Hugo Chavez’s sweeping socialist charges have taken value away from companies like Gold Reserve (GRZ-T) and Crystallex (KRY-T). But on Jan. 31 the strong price of gold trumped Chavez’s winning the power to enact laws by decree.

In New York gold reached US$652.40, sending Gold Reserve shares up 13% or 55 to $4.74 on 175,000 shares. Crystallex managed to climb 2 to $3.41 on 1.1 million shares.

“We’re very leveraged to gold prices,” says Gold Reserve president Doug Belanger. “We’re in the top five of companies for gold ounces per share.”

Gold Reserves has 10.4 million oz. in proven and probable reserves and just 41 million shares outstanding. In comparison, Crystallex has 13.6 million oz. in reserve, but roughly 245 million shares outstanding.

Those reserves come from Gold Reserve’s Brisas gold and copper project in southeastern Venezuela. The company describes the project as potentially an open pit mine with the ability to produce 486,000 oz. of gold per year and 63 million lbs of copper per year.

But Gold Reserve, like Crystallex, needs to get its environmental permit before it can go into production something that Belanger, like Crystallex president and chief executive Todd Bruce, says will come in due course.

Gold Reserve has been in the permitting process for 16 months, while Crystallex completed feasibility at its massive Las Cristinas project in 2003 and has continually had to re-adjust guidance for when its permit would come.

Despite the negative financial press that Venezuela has received, Belanger remains upbeat on the future of foreign direct investment in the mining sector.

“We’re working with the objective of establishing a modern industry,” Belanger says. “We have a very strong relationship with the government. We’ve been working with them for more than eight years now and we’ve got more done with them than the previous three administrations.”

He says Chavez has not mentioned the mining industry as a target for nationalization in recent speeches because it is still a fledgling industry in Venezuela, and he believes, Chavez can see benefits of factors such as increased employment coming from the current arrangement.

In addition, Belanger says, it’s appropriate that Chavez’s new powers didn’t shock the market and take a toll on Gold Reserve’s share price. That’s because Chavez already had full control of congress, making it unlikely that any of his economic reforms would meet resistance anyway. So, Belanger says, the decree simply means that changes will be made more quickly.

“The bottom line is the government has a set of policies and it will be implementing them,” says Belanger. “If they’re going to implement something, let them do it efficiently.”

But an analyst who covered Crystallex in the past — only to end coverage after being frustrated by the permitting issue — says while there is a slight possibility that Chavez’s increased powers could result in the speeding up of the permitting process, a high political risk remains tied to mining ventures in Venezuela.

Only time will tell how foreign direct investment will fit in with Chavez’s drive to usher in a new era of what he calls a “maximum revolution” towards a socialist state.

But his determination to nationalize large parts of the utilities, telecommuications, oil and natural gas industries — even though the government has said it will compensate companies who’s projects are nationalized — is giving many pause.

All that is known for now is that Chavez will have his new powers for 18 months and will use them — according to Chavez — to transform state institutions, reform banking, tax, insurance and financial regulations, decide on security and defense matters, and change legislation with the aim of bringing a more equal distribution of wealth.