Vancouver-based Rusoro consolidating Venezuela's gold industry

George Salamis is confident about Rusoro Mining Ltd.'s ability to get gold mining done in Venezuela. So confident, in fact, that he believes his company can break the industry's most famous political deadlock.

Southeast Venezuela is home to Las Cristinas and Brisas, two of the world's best undeveloped gold deposits. They sit side-by-side in the Kilometre 88 district and hold more than 30 million ounces of measured and indicated gold reserves.

Crystallex International Corp. and Gold Reserve Inc. have spent years trying to get permission to develop these projects, but have run into well-publicized opposition from Hugo Chavez's government. That has created room for Vancouver-based Rusoro, which is consolidating Venezuela's gold industry and now has its sights firmly set on Kilometre 88.

Last month, the company launched a $120-million hostile offer for Gold Reserve (which controls Brisas) and has also expressed interest in Las Cristinas, where Crystallex has its mining contract. "The government has said vocally that they're not happy with the situation down there," said Mr. Salamis, Rusoro's president. "They've got massive unemployment, and what I would call one of the top five mining environmental disasters on the go at Las Cristinas."

After emerging out of nowhere in late 2006, Rusoro bought Venezuelan gold mines from Gold Fields Ltd. and Hecla Mining Co., which tired of the political and operating challenges in Mr. Chavez's country. Rusoro managed to fix some problems surrounding those projects, and appears to be the government's preferred partner for gold mining. The company sees no reason why it cannot resolve the problems at Kilometre 88 as well.

Rusoro has a big advantage in that its backers -- Russia's Agapov family and Canadian mining magnate Frank Giustra -- have very strong government relations. The Agapov connection also allows Rusoro to capitalize on the political ties between Russia and Venezuela. But Gold Reserve is proving to be a less willing partner for Rusoro than either Gold Fields or Hecla. The company firmly rejected the takeover offer and kick-started an ugly war of words that continues to this day. "If you look at this offer, Gold Reserve would be providing 84% of the cash, 84% of the gold reserves, and 100% of the copper reserves for 22 to 30% [of the combined company]," said Doug Belanger, Gold Reserve's president. "It's nowhere near enough."

Gold Reserve accuses Rusoro of enough ethical lapses to make Rod Blagojevich blush. It hired veteran forensic accountant Al Rosen to investigate Rusoro, and Mr. Rosen issued a savage report that raised questions about Rusoro's financial viability and the large number of related-party transactions on its books. Rusoro, for its part, firmly rejects any claims of problems with its finances or its governance. "Anyone can poke holes in someone else's financial statements and create clouds around issues that are non-issues. We don't lend any credence to what they've said at all," Mr. Salamis said.

More fireworks are expected in the coming days, as Rusoro's offer does not expire until Jan. 21st and Gold Reserve does not plan to go quietly. But Mr. Salamis is confident that Rusoro will win out in the end, and prove it has what it takes to operate in Venezuela's most controversial gold district. "We seem to be successful at getting things done in Venezuela. Our track record speaks for itself," he said.