Venezuela terminates Gold Reserve’s rights at Brisas

In the last few months Venezuelan strongman Hugo Chavez has nationalized the assets of oilfield-services providers, announced plans to take over the hot-briquetted iron industry, and taken control of a pasta plant owned by U.S. foodmaker Cargill Inc.

This week the government dissolved Gold Reserve‘s (GRZ-T, GRZ-X) rights to part of the Brisas project in southeastern Venezuela, 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.

“The Venezuelan government and the state mining companies already have near control over bauxite, coal, iron and nickel and with this they have added gold to that group,” Patrick Esteruelas, a Latin American analyst at Eurasia Group in New York, said in an interview.

“The government already announced last fall that the state mining company, CVG-Minerven, would recover and mine the giant Las Cristinas gold deposit and also hinted that Brisas would be next on the list.”

Canadian gold miner Crystallex International (KRY-T, KRY-X) and Gold Reserve have concessions to develop adjoining gold deposits. Crystallex had tried to move the Las Cristinas project into production since it acquired it in 2002 but failed to get the required environmental permits.

Esteruelas argues that the government wants to take over both deposits and develop them as a giant joint-venture project with Vancouver-based Rusoro Mining (RML-V, RMLFF-O), which is owned by the Russian Agapov family.

Rusoro “has been piggy-backing on Venezuela’s desire to reach out to U.S. diplomatic and economic rivals and tighten relations with Russia,” Esteruelas wrote in a research note late last year. “Rusoro has agreed to partner with the state to develop these projects as joint ventures, with the state paying nothing for its stakes, in order to protect itself against union worker demands and better navigate Venezuela’s complex and unpredictable regulatory structure.”

In late 2007 Rusoro purchased the Choco 10 gold mine from South Africa’s Goldfields (GFI-N) and in June 2008 picked up the Venezuelan operations of U.S.-based Hecla Mining (HL-N).

Esteruelas notes that Venezuela has been working on a new mining law since 2006 that will force all existing and prospective private investors to set up new joint ventures with the state “where the government will exercise full control while the companies do all of the heavy lifting.”

The mining law was passed by the National Assembly in its first debate in June 2006, Esteruelas says, but has since “fallen off the legislative agenda” and awaits ratification by Congress. In the meantime, the government has not granted concessions and has reevaluated existing projects. The result: “Weakening private property rights have taken a toll on private mining participation, which has dwindled to next to nothing.”

Douglas Boulanger, Gold Reserve’s president, told The Northern Miner his first choice was to settle the dispute “amicably” but if that wasn’t possible he would “go through the arbitration route.”

The company expects to make a claim for in excess of US$5 billion representing the fair market value of its investment.

Boulanger added that companies are having “unbelievable problems” in Venezuela getting access to foreign currency needed to import supplies and said a new law on gold sales passed three weeks ago has made it even more difficult for gold producers. The new law allows the central bank to buy 60% of a gold company’s production in local currency. At today’s exchange rate that would be equivalent to about US$312 per oz. gold, he calculated.

“We’re not a producer but [if we were] …this law effectively would eliminate any profitability.”

Venezuela has also increased its VAT, Boulanger said, which is currently 12%. “The effect is that sellers are offering a 12%-15% discount off the international gold price,” he explained.

Before Gold Reserve acquired the Brisas property in 1992, the area had been worked on a small scale by local owners and also by illegal miners. Shallow pitting and hydraulic methods were used to mine the upper saprolite zone, and coarse gold was recovered by gravity concentration. Since then Gold Reserve has conducted a major exploration drilling program on the concession and defined a large gold-copper resource.

In Toronto, Gold Reserve shares closed down 5 apiece or 7.25% to close at 65.

The junior has a 52-week trading range of 29-$2.05 per share.

Apart from Rusoro, Anglo American (AAUK-Q, AAL-L) is one of the few foreign mining companies remaining in Venezuela. The company has a 91% interest in the Loma nickel deposit.