Venezuela’s Chavez to nationalize gold industry

Having already nationalized most of Venezuela’s main industries, including oil, banking, telecommunications, power and hundreds of thousands of acres of agricultural land, president Hugo Chavez’s announcement on Wednesday that he will soon introduce a decree to take over the country’s gold sector came as little surprise.

As the price of gold climbs ever higher, the erratic president blamed “mafia and smugglers'” control over the gold industry in Venezuela as one of the reasons behind the move, while also saying it will boost international reserves. Speaking on state television via telephone, Chavez vowed to stamp out illegal mining while calling for the country’s military to secure control over the underdeveloped sector.

More importantly, Chavez is looking to repatriate much of Venezuela’s foreign exchange reserves held in the United States and Europe, according to a recent report by The Wall Street Journal. The report alleges the Venezuelan government plans to transfer billions of dollars of reserves held abroad – including about 90% of its gold reserves – to banks in more “friendly” countries such as China, Russia and Brazil. Some estimates have placed the total value of Venezuela’s international reserves at around US$29 billion, of which about US$11 billion is held in gold. That amounts to roughly 211 tons of bullion according to the WSJ, which cited opposition congressman Julio Montoya as the recipient of leaked copies of the proposal.

Montoya has questioned whether the government was pressured into transferring its reserves because of growing financial ties with China and Russia. Last year, Venezuela received a US$20-billion credit line from the China Development Bank for a large-scale social housing program, while this year Chavez announced an additional US$8 billion of credit lines from Russia, a portion of which are earmarked for military and arms supplies.

Transferring Venezuela’s sizeable gold reserves might put pressure on those banks which have lent out the metal for trading purposes, consequently affecting world markets for gold bullion.

As for the gold mining sector, only one international mining company currently produces gold in the country, that being Vancouver-based Rusoro Mining (rml-v). Rusoro closed down 2.5¢ to 12.5¢ on 592,000 shares traded following Chavez’s announcement, having already fallen almost 75% from its 52-week high of 44¢ in December 2010 and from $4.50 in 2007. The company produced 17,742 oz. of gold in the first quarter of 2011, down from 27,986 oz. in the same quarter last year. It has to sell about half of its production at reduced prices to Venezuela’s central bank. Rusoro received US$1,292 per oz. sold in the quarter but had cash costs of US$1,294 per oz., resulting in a US$2 loss per oz. produced.

In a telephone interview with Dow Jones Commodities News, Rusoro’s chief executive officer, Andre Agapov, said he is not worried much about Chavez’s announcement. He said it was targeted toward the many illegal mining operations in the country that work without government permits and use environmentally damaging practices such as clear cutting and mercury dumping.

“All the gold is being sold illegally, and of course the central bank, the minister of mines and the president said enough is enough, especially considering the current gold price,” Dow Jones reported Agapov as saying.

Of the few other mining companies with properties left in Venezuela, two deserve special mention.

Toronto-based Crystallex International (kry-t) owned the rights to the 27-million-oz. Las Cristinas gold deposit located in Bolivar State before the Venezuelan government terminated its claims in February 2011. It is now seeking around $3.8 billion in compensation or reinstatement of its rights in what will likely be long-running arbitration proceedings.

In a similar vein, Spokane-based Gold Reserve (grz-t, grz-n) has been in arbitration with the government since it seized the company’s gold-rich Brisas project in late 2009. Gold Reserve has been demanding $2.1 billion in return, but so far it has only managed to rack up costly legal fees.