Spokane Journal of Business

Gold Reserve adjusts to life without Venezuelan mine

Company seeks arbitration from international tribunal after Brisas project seized

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Gold Reserve Inc., a Spokane-based mining exploration company that has spent nearly $300 million on a mining project in Venezuela, says now that the Venezuelan government has seized its property there, its focus will be on fighting to get whatever value it can from that long-standing asset.

In its recently released 10-K annual report, Gold Reserve said it has discontinued development of its Venezuelan properties and no longer reports mineral reserves on its books for what's been known as the Brisas mining project after the government there took over the potentially large mineral resource last fall.

The Brisas property, located in southeastern Venezuela, is envisioned to become an open-pit gold and copper mine, and Gold Reserve has explored it and moved it close to construction.

The company's most recent operating plan for Brisas listed proven and probable ore reserves of about 10.2 million troy ounces of gold and 1.4 billion pounds of copper, and it estimated annual production from the proposed mine of 457,000 ounces of gold and 63 million pounds of copper.

Gold Reserve estimated that it would cost about $731 million to construct the mine and get it into production, and that the mine would have an estimated life of about 18 years.

Two years ago, however, the Venezuelan government began reversing earlier regulatory approvals for the mine, and then became unresponsive to Gold Reserve's requests to resolve the matter. Last fall, the government there signaled its intent to cancel the company's mining concession there, and Gold Reserve filed a request for arbitration with the World Bank, in Washington, D.C., "to seek compensation as a result of the expropriation and other violations of treaties between Venezuela and Canada." Although Gold Reserve's corporate offices are in Spokane, it legally is a Canadian company. Its shares are traded in the U.S. and Canada.

Among other things, the World Bank helps settle international investment disputes.

In its annual report filed late last month with the U.S. Securities and Exchange Commission, it said, "The Brisas Project has been expropriated by the Venezuelan government, and we no longer have control or physical access to the project."

Soon after Gold Reserve's filing to seek compensation from Venezuela, government personnel from that country arrived at the Brisas site, claimed ownership of the concession, seized the assets there, expelled Gold Reserve's personnel, and took physical possession of the property, the company says in its annual report.

Gold Reserve says it is seeking "full market value of the legal rights to develop Brisas," and currently is working with technical, legal, and financial experts to prepare for an initial meeting with the Venezuelan government and a three-member arbitration tribunal established by the World Bank and to prepare initial pleadings in the case.

That initial meeting is scheduled for later this month.

Reached earlier this week, Gold Reserve President Douglas Belanger said that if the company is successful in arbitration, it will have remedies backed by the World Bank to lay claim to Venezuelan assets to recoup what the tribunal determines it is owed. He says Venezuela likely would want to comply with the World Bank's decision.

Belanger says the tribunal that has been established to arbitrate the case includes three judges, one each from France, Italy, and New Zealand. He says the amount of money Gold Reserve ultimately will seek will be determined in the arbitration process, which could take two to four years to complete, but the amount could be in the billions of dollars if it includes the potential value of the mineral deposits there.

The company says it has spent close to $300 million on the Brisas project since 1992, on such costs as exploration and drilling, equipment, engineering, and a host of studies, including a formal feasibility study.

In its 2009 results, Gold Reserve posted a $150.7 million noncash write-off of the capital costs associated with the seized assets in Venezuela.

Gold Reserve also leases another potential mining property in Venezuela called the Choco 5, but has ceased exploration activity at that site until the Brisas dispute is settled.

The company has no commercial production and thus no revenue or cash flows. So far, it has financed its activities through issuance of equity securities and convertible debt.

For 2009, it posted a net loss of about $165.4 million, or $2.89 a share, which included the $150.7 million write-down related to the Brisas property. It recorded a loss of $19.7 million, or 35 cents a share, in 2008.

The company lists total assets of $119.9 million, including about $81 million in cash and short-term investments.

The company says little in its 10-K about its plans to seek other mining opportunities, except to say that acquiring and developing other properties will depend on its ability to finance such activities.

"Our main focus for now will be the arbitration," Belanger says.

Meanwhile, Gold Reserve says it also is looking into "redeeming, restructuring, or otherwise modifying the terms" of subordinated notes it has on its books that carry a face value of $103.5 million and an annual interest rate of 5.5 percent.

  • Paul Read

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