Rusoro Makes Formal Bid For Gold Reserve

Rusoro Mining (RML-V, RMLFF-o) says its unsolicited takeover bid for Gold Reserve (GRZ-T, GRZ-x) offers a “compelling premium” and would create the “premier” Venezuelan gold company. But Gold Reserve isn’t happy and is launching a court injunction against the all-share offer.

Rusoro’s chief executive, Andre Agapov, described the proposed takeover in a statement on Dec. 15 as a logical combination that would create “real and valuable synergies.”

The Russian-controlled company is offering three shares of Rusoro for each Gold Reserve share or equity unit.

The offer values Gold Reserve at $1.08 for 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 closed at 45¢ on Dec. 12 on the TSX and on the NYSE Alternext U. S. at US39¢.)

Based on 30-day volume-weighted average trading prices for Rusoro and Gold Reserve on the Venture board and TSX, respectively, the offer represents a 209% premium for Gold Reserve.

“It is a phenomenal premium,” George Salamis, Rusoro’s president, told The Northern Miner. “Tell me where you see premiums like that in the market these days.”

Salamis adds that the offer gives Gold Reserve shareholders immediate exposure to gold production, “something they have been waiting for, for over fifteen years.”

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

News of the offer sent Gold Re-serve shares up 28¢ apiece, or 62.2%, to close at 73¢ on a trading volume of 634,000. Rusoro shares fell 10.5¢ apiece, or 29.2%, to 25.5¢ on a trading volume of 2.8 million.

The markets might have liked the news, but Gold Reserve wasn’t impressed. A day after the offer was made public, Gold Reserve filed an action in the Ontario Superior Court of Justice against Endeavour Financial International and Rusoro seeking an injunction restraining the two from proceeding with the offer and demanding monetary damages.

Endeavour is Rusoro’s financial adviser, but also has provided advisory services to Gold Reserve. The injunction is based on the argument that Rusoro and Endeavour had in-depth knowledge of confidential and proprietary information about Gold Reserve. In an email to Gold Reserve on Dec. 15, Endeavour said it would terminate its financial advisory agreement with the takeover target.

In a statement released immediately following the offer, Gold Reserve urged its 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’s president, Douglas Belanger, could not be reached for comment, but Rusoro’s Salamis denies allegations of impropriety.

“Their allegations are completely unfounded,” he says. “When we hired Endeavour to launch a bid, we knew there was a mandate existing from the past and we said (to Endeavour): ‘Is going down this track with you going to create a conflict for your previous relationships, whatever they were?’ and the answer was an unequivocal, ‘no.'” Salamis says. “My understanding was that it was a past mandate that they had to raise debt.”

Rumours 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 per cent 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.

If the acquisition goes ahead, 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.

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, churning out about 457,000 oz. gold per year when it starts production in 2011.

Rusoro, meanwhile, has quietly carved out a significant land position in all of the major gold mining districts in 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 Isidora will ultimately be subject to a 50-50 joint venture with the Venezuelan government that will go into effect 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 nail down the permits necessary to start construction again at Gold Reserve’s Brisas project. The Venezuelan government rescinded the company’s permit in April, citing environmental concerns.

Calling the offer a win-win for both companies, Salamis emphasizes that Rusoro has the experience, track record, and relationships in Venezuela to get the Brisas project moving again.

“Can I make a guarantee that we’re going to get a permit tomorrow? No. But do we have a track record that is better than any other’s? Yes.”

As proof, Salamis points to Rusoro’s Choco 10 gold mine, which it acquired from Gold Fields. The mine had been fraught with problems, he says, including labour issues that had shut the mine down for at least 90 days in 2007.

“The government said: ‘Look, you are inheriting all this. You have to work with us to resolve it,’ and we’ve had few problems since we took it over,” Salamis says. “We’ve increased production.”

The same goes for its Isidora mine, Salamis continues. Under Hecla, the mine had been on care and maintenance for about four or five months.

“We resolved all the labour and community relations issues and in our first month of commercial production, we were very successful in mining gold out there at a very low cost.”

Indeed, despite considerable uncertainty for foreign companies in the country, Rusoro’s management has succeeded in developing strong relations with the Venezuelan government and the company has spent more than US$100 million developing its gold projects since 2002.

“Over the past few years, Rusoro’s management has operated in the country with the apparent support of the authorities,” Steven Butler, an analyst at Canaccord Adams, wrote in a June research report.

At presstime in Toronto, Gold Reserve shares were trading at 75¢ apiece in a 52-week range of 29¢- $6. The company has 56.8 million shares outstanding.

Rusoro, meanwhile, traded at 29¢ per share in a 52-week window of 23.5¢-$1.93. Rusoro has 365.2 million shares outstanding.