VHeadline editor & publisher Roy S. Carson writes: Vancouver-based Rusoro Mining's CEO Andre Agapov has spoken exclusively about his company's "excellent relationship" with the Venezuelan government and the much-heralded concept of a "Socialist" 50/50 joint venture with Venezuela following its June 19 (2008) acquisition of USA-Idaho-based Hecla Mining's Venezuelan assets (including the Block B - Isidora mining leases and the La Camorra mill facility) in southeastern Venezuela.
Speaking in London-England, Agapov said the Hecla deal had been done for US$20 million in cash and $5 million (4,273,504) in Rusoro shares. The transaction secured a second tranche ($52 million) in $80 million forecasting "an exceptional growth profile to target an annual production rate of 220,000 ounces by year's end.
Of Rusoro's "very good relationship with the Venezuelan government," Andre Agapov says: "Yes, that is correct, we arrived in Venezuela in the summer of 2002. We were actually the first Russian investors in any kind of business ... let alone mining ... and we established first contact with the Ministry of Energy & Mines (MEM) -- the predecessor to Basic Industries & Mining (Mibam) -- which covered oil and mining!"
- "Over the past 6-7 years we've met 6 ministers and in 2004 we met President Chavez who said he actually liked the fact that Russians are involved in the Venezuelan economy and that we were investing in gold mining and another non-metallic business."
Rusoro's non-metallic Venezuelan interests are in the domestic extraction of kaolinite (china clay),which he says is very high quality, and -- interestingly enough -- to be found in a huge quantities between Crystallex' Las Cristinas contract and Gold Reserve's claim of a concession at Las Brisas de Cuyuni in the very much larger mining district of Kilometer 88 in southern Bolivar State. "You'd think it was snow on the ground, surface deposits ... it's a white patch!"
While the company's mining interests are NOT entirely focused on kaolinite, Agapov (pictured left!) and his father (Rusoro chairman Vladimir Agapov) say that it is a particular favorite of President Hugo Chavez, who has mentioned the Russian Agapov family's ties to Venezuela on more than one occasion, recently telling television viewers of the strategic importance of china clay (kaolinite) to Venezuela's economy. Rusoro is scheduled to go into kaolinite production in March 2009 to help supply Venezuela's huge need for construction materials in an ambitious program to build some 350,000 houses per year ... all the more interesting since about 20-25% of any new home requires kaolinite for wall and floor tiles, white paint, sanitary ware and even plates, cups and saucers.
"Venezuela's ceramics and construction industries will benefit most from that mine since they are currently importing china clay from the United States and Colombia, and it is nowhere near the quality of domestic Venezuelan kaolinite which is probably the best in the world ... my father says it is THE best!"
Agapov admits that it was NOT his intention to cause such widespread controversy when he granted an interview to a reporter from Bloomberg at the beginning of last month (November). Somehow, a recounting of Mibam Minister Rodolfo Sanz' expression of interest in Rusoro's participation in the development of the massive Kilometer 88 region was uniquely focused on the continuing saga of Las Cristinas, and cited as a possible "nationalization" of the Venezuelan government's own gold resources, which are subject to a mine operating contract between the state-owned Venezuelan Guayana Corporation (CVG) and the Toronto-based Canadian miner Crystallex International Corporation. The confusion could, possibly, have stemmed from a corporate buy-out offer made to USA-Spokane-based Gold Reserve, which was rejected as per an August 27 press release related to Gold Reserve's claim of a mining concession at Las Brisas del Cuyuni, adjacent to Las Cristinas.
- Rusoro has seen positive in a buy-out of Las Brisas as part of a general consolidation of assets in a broader Kilometer 88 scenario, including access to the kaolinite deposits situated between the two objects of international controversy.
So the Minister (Sanz) was talking about the whole of the mining sector rather than a specific area like Las Cristinas/Las Brisas? "That is correct! That is correct! Every mining company in the world is closely looking at the situation, especially in Russia, since there are such significant deposits and it is perhaps the last undeveloped gold resource of that magnitude in the world."
"Talking about Las Cristinas and Brisas together, all I can say is that the proper way to do it is NOT to wait for both companies to default on their operations contract or concession. It is more of a corporate transaction; but we are very far away from that and we now at the end of the year and with the world financial crisis it is not so easy for us. We are a company of small size, but some Russian giants or some international giants can afford it."
- "I have to point out that Rusoro Mining is the first company to have entered into a 50/50 joint venture with Mibam -- Mibam is a 50% participating partner! That's never been done before, so it is a platform that will be used for further development!"
While it is, of course, rather in line with what President Chavez wants particularly for Venezuela's oil sector, I asked Andre Agapov is he thinks it is a way forward for other companies in the area? "Well, if they wish to ... yeah! We all want to work together with the government. Its not a requirement if you own a concession. You can develop it by yourself."
As regards the possible abrogation of concessions, Andre Agapov says that Venezuela's Mining Law has not been changed or edited since it was first promulgated in the early 1990s so terminology such as "CVG contract" and "Concession" remain different but still exist -- " we have CVG contracts and own Rusoro concessions as do other private and public companies in Bolivar State -- I don't foresee any problems!"
Click on the picture for a larger imageAgapov is very happy with production at the new "socialist" 50/50 joint venture which combines all of Hecla's former assets: the La Camorra concession, the La Camorra mine, Camorra plant and four or five surrounding concessions La Nina 1, 2, 3 and 4, the Carabobo and Isidora contract mines in El Callao's Block B. "It is a fantastic mine, maybe one of very few in the world where the average grade is one ounce per tonne. We're looking forward to 2009 and to grow our production organically within our resources -- we are a small company with greater potential. At the moment next to La Camorra we have adjacent concessions at San Rafael and El Placer which we own 100%. We're developing underground mines and should be finished in the third quarter of 09 to bring us approximately 120,000 ounces in annual production with a grade of half an ounce per tonne. Oh yes, absolutely!"
The sites that are 100% owned are NOT a part of the JV, but I asked Andre Agapov is there was any possibility that they could be included in a joint venture at a later stage?
"No!" he says emphatically. "It was ours from the beginning, so anything in the future that might be included in the joint venture is something we don't know of right now." Even if the Venezuelan government turned round and said that everything must be included in the 50/50 joint venture, Andre Agapov says he is NOT a pessimist and that everything would be 'grand-fathered' into whatever contract or concession they own right now. "So for any future development with us, or with any other companies that operate, or are yet to arrive in Venezuela in a 50/50 joint venture, its an area that belongs to the government right now. Of course areas are repossessed; it often happens when owners of the concessions don't pay their taxes -- I'm sure you know, it is very difficult in Venezuela, some private families own a group of concessions and have NOT paid surface taxes for sometimes eleven years ago, so, of course, like in any country, not just Venezuela, if you forget to pay your taxes for so many years, I think there is probably a case for it to be taken away from you!"
Such concessions, and there are a lot of them that were often awarded illegally as political favors during past presidencies, would probably be rescinded in due process of time. Would Rusoro consider itself to be in line to put in a bid for them as they come up?
"Well, of course, we would have to consider it on a case by case basis depending on the geological value ... we have a lot of concessions already and if it makes sense, and we see some geological value of course we'd be (interested)."
Meanwhile on a political front, Presdient Chavez has recently been making overtures to the Russian State, but isn't there a suspicion that the Agapov "family" as such may indelicately be seen to be part of the Russian oligarchy, also considering that "oligarchy" is such a buzz-word in President Chavez lexicon as a simile for the democratic opposition to his 21st Century Socialism and Bolivarian Revolution?
- "No, no ... I think that oligarchy as such, as a term, is overblown and that the oligarchy is more closely defined as a multi-billion $ oil or industry complex where some individuals are still billionaires despite having lost their shirts in the world financial crash ... but the Agapov family was never part of that! We bought a very small business and developed it well and then played our cards right politically so..."
So how would Rusoro define itself within the Russian framework? "I would say we are a run-of-the-mill, medium-sized business and that, unfortunately, as a result of the financial crisis, it has been down-sized by the market ... but we are very optimistic in our gold and china clay businesses."
"Of course, it was a super-high risk when we decided to make a move in Venezuela in 2002, but we were driven by the price of gold, because we were looking at levels between $260 and $270 that particular year ... we all though it was ridiculous that an ounce of gold was being priced at that level and since gold
was poised to run higher and higher year by year, we went to Venezuela with a fantastic team from Russia. I guess we made the right geological discoveries for Venezuela, as a country, has improved immensely on an annual basis from 2002 when there was the coup attempt. Maybe it was not an easy time in Venezuela. We saw some soldiers and armored vehicles in downtown Caracas and at times it was tough getting fuel for the cars and generators. It wasn't a two or three days thing; it was a week or more and it was a real test start after which it has been improving."
Agapov says he has traveled mostly throughout the south of Venezuela. "I don't go to the oil fields in the Maracaibo area or anything like that, but all of Bolivar State and some of the beautiful parts in Orinoco Delta. I think I must have been to every mine and concession in Bolivar State. I speak a bit of Spanish but, fortunately for me, everyone speaks English very well these days so no one bothers to speak Spanish with us. Even the miners, especially when it comes to grades or depths, you find they speak perfect English everywhere now."
What's Agapov's view of recent dissent from local miners? "Well I think it is somewhat overblown because, again it's on region by region and area by area basis. I know there are a lot of unemployed miners in Kilometer 88 and this has to be addressed ... we're talking about thousands ... I don't think anyone knows how many there are ... but all other issues with the small miners are very localized and small-scale ... there are no issues in El Dorado or El Callao ... I know we inherited some when we bought (South African) Gold Fields' assets in El Callao but we dealt with it in the first two months ... it's not rocket science to deal with them."
Agapov says he wants to see Rusoro Mining advance as quickly as possible and to create local employment opportunities ... "Yes, we are employing over a thousand people right now and, by growing the company, of course, we create jobs and the kaolinite (china clay) project will create a lot of jobs. Out of all gold mining companies in Venezuela right now, we're the only one that's creating jobs -.. the potential is greater now than ever before, absolutely! It's necessarily dictated by the price of gold, but now it is economically viable to develop certain deposits at even lower grades where no one even looked two or three years ago. It requires a lot of local labor, even at the exploration stage ... we can easily have 100 people in one area and then between 50 and 100 in another camp in another area ... and then there's constructing the mill and developing the mine."
Perforce, I had to bring up the subject of allegations that Rusoro's predecessor, Hecla has been accused of mistreating its labor force ... that human rights were being violated.
"I think they applied very strict American rules on mining. I don't know exactly what it means, but they were not flexible to local working environments but I'm not sure about human rights! I'm sure that security did some (strip) searches, but I think they had issues with a local union and they were not flexible. Actually, I don't understand why, because their mining operation is so beautiful ... the grades are fantastic and they should have created jobs instead of firing a lot of people ... it is a better way to find a peace accord, but I know they sliced about a third of the work force in one go, and of course it affected a lot of people in the El Callao area, a lot of families."
Getting back to the concept of 50/50 socialist joint venture ... I asked Andre Agapov if it is more a way to get the cooperation of the local communities to work together with the transnationals, to create employment and to get the economy going?
"Well it's more business. Of course, all those points included, but essentially it is a corporation with two shareholders and the government invests pro rata for their 50% and both parties are committed to take care of the social aspects!"
But what exactly does the Venezuelan government, or Mibam, bring to the table in this respect with your joint venture?
- "They bring the La Camorra concession and the La Camorra mill into the joint venture because they had expired and de facto had been returned to government ownership. Since there was no capital expenditure (Capex) needed -- touch wood -- everything works well. Their (the government's) contribution was to permit the Las Ninas goldfields. We are really looking forward to bringing Las Ninas online since we have very high hopes that Camorra trend goes into Las Ninasm spreads all over Ninas but Nina 4 will be the principal concession and once that permit is done, we as a joint venture we will have gold straight into La Nina 4 ... a fantastic geological result."
- "In this particular case, yes, but let's say if in the future we have already defined resource and it needs Capex to build the mill and develop the mine, and let's say the budget is a hundred $ million or one $ billion ... they (the government) would have to come up with half."
- "Well it's amazing, because last year. or the year before, when we did a road-show for financing or something else, the first thing every hedge fund or investment bank asked our (Rusoro) president, George Salamis, was about was Las Cristinas. Like, I guess, people are so anxious and it's been going on for so many years. I think it will be resolved quite soon ... how it will be resolved is completely up to the (Venezuelan) government, but Bob Fung is a veteran of Venezuelan mining and so is Doug Bellanger. So how it will be worked out, I have no clue. As you know, we tried to buy Gold Reserve in late August but the bid was unsuccessful. They think they'll get the permit themselves! There was, however, a press release recently where they said they might go somewhere else, some other businesses elsewhere, NOT in Venezuela. Crystallex, I don't really know, I don't know their cash position, but they have an operating contract and maybe they will come to terms with the government."
- "Oh, if they were to walk away ... yes, if they surrendered their concession it would become the property of Mibam and then it's up to Mibam what they want to do with it, to do it themselves or make it a joint venture with some company."
- "I think Kilometer 88 is a wait and see situation in general!"
There's a hell of a groupie following to Crystallex which, I think you know, hang on every tiny thread and extrapolate the tiniest detail to make mountains out of molehills. What I want to know is if you are going to make a hostile bid for Cristallex or if you're going to try to force the government into giving Crystallex 'the kick.'
- "Oh no, we're not going to be aggressive or pressing, or asking, government to do anything in our behalf ... this is absolutely clear ... there's no need for that. I think that time will resolve all the issues and in this particular case it will not take ten years. I need to emphasize that I'm NOT part of the management of Gold Reserve and/or Crystallex, I'm just an unrelated third party, so it is my personal opinion ... maybe they're already in talks with someone, how would I know?"
- "Yes, well I don't know how to explain that paradox; but first of all, Doug Bellanger and Bob Fung have been in Venezuela more years, many more years in fact, before we arrived. So I really don't know, I really don't know who handles their communications between Mibam and any other governmental agencies ... it is difficult to explain, honestly, but darn it they've been there for ever. Gold Reserve was incorporated in 1994, 1993, I think ... I'm not sure!"
- "The reason I am mentioning it is because we have a group of concessions of our own in that area. That area is fantastic and it's important to stress that without any acquisitions in Venezuela, and growing the company organically, the potential is incredible. All that El Choco (which we bought from Gold Fields) needs for growth is just a larger mill and we could easily triple production, which the mine allows, and of course San Rafael and El Placer ramps go into production in 2009 and, with the Isidora mine, it will take us to a different level in 2009 ... maybe up to 10,000 ounces more ... so its incredible! Our goal for 2009 is to produce close to 200,000 ounces and in 2011 to produce half a million ounces with projects we can afford."
As regards taxation and commitments of bullion gold sales to the Banco Central de Venezuela (BCV), Agapov says that on a case-by-case basis they should sell 15% of production to the BCV but that, otherwise, Rusoro is selling its gold domestically in Venezuela at spot international prices.
"We have a lot of choices and there are a lot of buyers in local jewelry businesses. We are NOT (yet!) producing a million ounces and, if you produce up to 50,000 ounces a month it is easily sold in El Callao. If you go there now, you'll see how many jewelry shops they are and they can easily consume 50,000 ounces if not more. El Callao has really changed!"
Procurement of heavy machinery? "We had some issues with supplies in August and delays. Capex is obviously required to complete our underground mine next to La Camorra (about $20 million) to get it into production and to triple production at El Choco that's about $85 million!"
Foreign exchange problems? "The fixed foreign exchange rate doesn't really affect us because all our costs, with the exception of two or three items of supplies, are in domestic currency, not to mention the fact that diesel is 1 and a half cents per gallon or something like that! Problems with electricity supplies were fixed ... CVG-Edelca fixed all the problems all the way to El Callao and beyond. It's not a problem any more. The power lines go all the way down to the Brazilian border and Venezuela exports electricity to Northern Brazil from the Guri hydroelectric dam. The last issue we had with electricity was in 2004."
"Cellular phones work right now and they all have international services. Everybody carries a Blackberry, and its a different world from before, so we're absolutely in Venezuela to stay. They've been good to us all along ... and we're very comfortable in Venezuela and the future looks good!"
Roy S. Carson
vheadline@gmail.com
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