Gold Reserve feels the sting of rejection

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

The Spokane, Washington-based company had been building a track record at its Brisas gold-copper mine project that contrasted favourably with its neighbour Crystallex International (KRY-T, KRY-X) and its larger Las Cristinas gold project.

While Gold Reserve secured an environmental and social impact assessment permit (ESIA) at Brisas with little fanfare early last year, the higher-profile Crystallex was notorious for repeatedly claiming the issuance of its own ESIA was imminent, only to have nothing materialize.

But in Venezuela, corporate victories can quickly turn to dust: 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 Gold Reserve had spent the better part of the last year preparing to start construction at Brisas, 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 bad news was officially released, the company’s shares were trading for $3.87 but at presstime 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-governmental organization Conservation International, ties the move to a clamour from 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 to study mining’s environmental impacts in the area in connection with the development of Brisas.

While Gold Reserve did have to move small-scale miners off the land some three years ago, it says there are no more small-scale miners at the site.

As for the contention that the project infringes on the Imataca forest reserve, Gold Reserve points out the project area was approved for mining before it acquired the deposit, 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 Act has 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 the 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 ploughed almost US$300 million into 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 to say.

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

“This comes from a bureaucrat that published a letter which Crystallex and Gold Reserve have 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 country’s already damaged reputation as a destination for foreign investors has been further eroded.

“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 both find themselves in dire straits has the whiff of irony for those who 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 may be too early to completely write off Gold Reserve and Crystallex, 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 (GFI-N, GOF-L) in October 2007 for US$150 million in cash, US$30 million in a convertible vendor loan and 140 million Rusoro shares.

At the time of the acquisition, Rusoro touted both its 10-year operating experience in the country and the Venezuelan government’s morefavourable attitude towards Russia as key reasons why it would have success where Gold Fields didn’t.

And while Rusoro 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 an underlying fear of looming nationalization.

“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 it’s 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 Choco 10 operations recently received a vote of confidence from the country’s minister of mines after an inspection.

In the markets, Rusoro has not been able to escape the negative sentiment weighing down Crystallex and Gold Reserve shares. At presstime Rusoro’s shares were trading at $1.06, down 21% from the $1.30 just prior to the negative news regarding Gold Reserve and Crystallex.