UPDATE:Gold Reserve feels the sting of rejection

Gold Reserve (GRZ-T, GRZ-X) has lost its status as the company that could in Venezuela.

The Spokane, Washington-based company had been building a track record that contrasted nicely with its neighbour Crystallex International (KRY-T, KTY-X) – a company notorious for claiming the issuance of its environmental and social impact assessment permit (ESIA) was imminent, only to have nothing materialize mainly by securing its own ESIA early last year.

But in Venezuela corporate victories can quickly turn to dust and on the same day that Crystallex was informed it would not receive its ESIA, Gold Reserve learned its ESIA was being revoked.

The news came after the company had spent the better part of the last year preparing to start construction at the project which boasts a proven and probable reserve of 446 million tonnes grading 0.7 gram gold per tonne and 0.131% copper, for roughly 10 million oz. gold and 1.2 billion lbs. copper.

Gold Reserve’s president Doug Belanger says he was expecting to receive the Administrative Initiation Act the last permit needed to begin construction but learned that instead of that permit the company had a letter waiting for it that detailed the revoking of its ESIA.

Belanger says he has yet to read the letter himself and didn’t want to speculate on its full implications until he had, but its contents had been made known to the company.

The markets — quick to sell on any negatives emanating from Hugo Chavez’s socialist regime predictably sent Gold Reserves shares into a tailspin. Just two days before the news was officially released the company’s shares were trading for $3.87 but at press time they had fallen to $2.02 — a 48% decrease.

The letter comes from the country’s ministry of the environment and reportedly blames environmental degradation, the presence of small miners and the protection of the Imataca forest reserve as the key reasons for the decision to revoke.

Such arguments, however, are spurious given the fact that all those issues were addressed during the ESIA process.

Anna Flores, an executive director at the Venezuelan branch of the non-government organization Conservation International, ties the move to the clamour of small scale miners in the area.

“It is a difficult situation because the government is siding with the small miners,” Flores says. “Gold Reserve and Crystallex are in the middle. They want to do things the right way but the problem is the decision to mine has to come from the government.”

Gold Reserve and Conservation International had previously announced they were cooperating on a study on the environmental impacts of mining in the area in connection with the development of Brisas.

While Gold Reserve did have to move small miners off the land some three years ago, it counters the ministry’s claim saying there are no more small-scale miners at the site.

As for the contention that the project infringes on the forest reserve known as Imataca, Gold Reserve points out the project area was approved for mining before it acquired it and that status was re-confirmed as recently as 2004.

“Prior to this, at no time during our year-long effort to obtain the administrative Initiation Acthas any environmental issue including the Imataca forest reserve been raised by (the ministry) as an impediment to proceeding with our project,” Belanger said in a statement.

The Brisas project would represent a US$1 billion investment over course of the mine’s life and would be the biggest gold and copper project in Venezuela creating over 1,000 jobs. Thus far, the company has invested close to US$300 million in the project.

“We are prepared to protect our rights to Brisas through the Venezuelan legal system and, if necessary, other avenues to protect the interests of our shareholders will be pursued,” Belanger went on the say.

And while discerning the exact motives of government decisions in Venezuela is trying at the best of times, John Ing, an analyst with Maison Placements in Toronto, says in this circumstance the picture is even cloudier due to the source of the letter.

“This comes from a bureaucrat that published a letter which Crystallex and Gold Reserve has not even seen yet.” Ing says. “It’s strange even in a country like Venezuela that not granting a permit would come from this official. Given the importance of the size of the deposits you would think it would be dealt with at a more senior level of government.”

While the two companies wait with their respective lawyers to go over the letter, what is certain is that the already frayed image of the country in terms of foreign investment has been further torn.

“This makes it increasingly difficult to look at Venezuela as a place for investment,” Ing says. “Almost every day there is yet another question mark. It makes it very difficult for mining companies and I would think most would have to look once, twice even three times before making the decision to go down there.”

That Crystallex and Gold Reserves find themselves in a similar hard place has the whiff of irony for those that have followed the stories over the last few years.

Just over a year ago Gold Reserve was touting how it knew how to get things done in Venezuela saying its strategy of keeping a low profile and not predicting when permits might come had been the right way to do business.

“We’ve spent fifteen years in Venezuela and we understand how things work there,” Belanger said at the time. “You have to understand what the government wants, and then what you need to do about it.”

And while it still may be too early to right off Gold Reserve and Crystallex completely, many eyes are turning to Rusoro Mining (RML-V) to see if any company can figure out what Chavez wants and what it needs to do about it.

Majority owned by private Russian equity, Rusoro acquired its largest project in the country, the Choco 10 gold mine, from Gold Fields‘s (GFI-N, GOF-L) for $150 million in cash, $30 million in a convertible vendor loan and 140 million Rusoro shares back in October of last year.

At the time of the acquisition Rusoro touted both its 10 year operating experience in the country and the Venezuelan government’s more favourable attitude towards Russia as keys to why it would have success where Gold Fields didn’t.

And while the company has had some success since taking over it managed to secure a permit for more water, something that Gold Fields was unable to do it still has to battle the underlying fear that nationalization could be looming for all foreign owned assets in the country.

“Obviously Rusoro is in the same boat to some degree in that they are in the same political arena (as Gold Reserve),” says Canaccord Adams analyst Jim Taylor. “But it is important to understand where Rusoro is and what its doing.”

More specifically it is where the project isn’t that Rusoro is banking on. Unlike Brisas and Las Cristinas Choco 10 is not in the Imataca forest reserve.

As for what it is doing, the operations at the project recently received a vote of confidence from the country’s minister of mines after an inspection.

Still Rusoro has not been able to escape the negative sentiment weighing down Crystallex and Gold Reserve shares. At press time the company’s shares were trading for $1.06, down 21% from the $1.30 price they were trading at before the news regarding Gold Reserve and Crystallex was released.