Evaluating mining acquisitions of 2008

To no one’s surprise, the Venezuela government’s preferred miner, Rusoro Mining launched an all share bid for Gold Reserve Corporation at a 209% premium to the 20-day average trading price. It would give GRZ shareholders over a 30% stake in RML. But the total bid is worth only $61.5 mm on a fully diluted share basis.

The Brisas project holds reserves of 10.2 million oz of gold plus 1.39 billion lbs of copper. Conversion to a gold equivalent using GRZ’s economic parameters gives in-the-ground reserves of 15.4 mm oz gold equivalent. So the Ruskis are offering a measly $4 per ounce of gold reserve. There is another 2.3 million ounces gold equivalent in measured and indicated resources.

But is this really a takeunder bid or not?

I have a well-stated policy of never naming names when disparaging a company or person. But I always made a caveat that the rule goes out the window when management totally disregards the best interest of its shareholders. I make that rare exception now.

Consider these facts: Gold Reserve announced in May that its construction permit had been revoked by the Venezuelan environmental ministry. In early October it announced sale of $43 mm in mining and milling equipment slated for the project for cash and settlement of remaining debt on said equipment. Therefore, I would surmise that Gold Reserve’s management has given up on ever developing the project.

And for good reasons: Capital expenditures to production are estimated at $731 mm. Where in the world of capitalism are they going to find an institution willing to fund a project of this magnitude located in the land of Chavistas?

An official from the Venezuelan Ministry of Mines said last week that the state is taking over gold production in the Km 88 district. He called for the creation of a government joint venture with Rusoro that will be responsible for exploration, mining, marketing of gold, and building of infrastructure.

I expected Gold Reserve to resist the bid, but to this analyst’s surprise, Gold Reserve management has chosen to file a $550 million lawsuit alleging, among other transgressions, that RML sneaked onto their walled compound and stole core samples.

Don’t you just love that, GRZ shareholders? Your management, after spending some $230 mm of your money since 1992 on a still undeveloped project, has decided that your working capital is better spent on a protracted proxy battle and paychecks to Bay Street lawyers, bean counters, advisors, consultants, and court costs.

Km 88 has been a veritable Bermuda Triangle for 20 years for all Canadian juniors, most notably Crystallex and Gold Reserve. At some point don’t you just give up, walk away, and give your long-suffering shareholders a chance of seeing a major mine developed by the previously announced Venezuelan government’s preferred strategic joint-venture partner, Rusoro Mining?