New royalties rattle Gabriel investors

Investors in Gabriel Resources (GBU-T) were hit by post-holiday blues after the Romanian government announced that it would be doubling royalties on gold production in the country.

In its Dec. 27 release, the government said royalties on gold and other precious metals would be boosed to 8% from 4% of production value. On top of that, water costs could also rise: the government says that companies using water for mining would now pay €6 per 1,000 litres, which is up from €4 per 1,000 litres.

The changes could bring US$85 million into government coffers within the year.

Gabriel says it is in talks with the government to see if the changes will affect the company.

Gabriel has an 80% stake in the Rosia Montana gold-silver project in western Romania, with the Romanian government holding the remainder, and the company says it is negotiating a new ownership structure.

The controversial project received a key endorsement this past summer when it was issued its archaeological discharge permits. 

Other positives for the project have been growing public approval – it is now at 50% in polls, compared to 19% three years ago – and President Traian Basescu’s public endorsement of the project in August.

However the royalty and water price issues flush out, a key missing component to any substantial success for Gabriel remains an environmental permit that has yet to be issued. 

The company is confident that the permit will be issued in the near future.

Gabriel estimates that it will cost $1 billion to build a mine at Rosia Montana that would turn out 500,000 oz. gold per year, with cash costs of US$335 per oz. and an initial 16-year mine life.

The projected cash costs put the project into the lowest quartile of gold development projects, and could help the project generate free cash flows of $500 million a year over 16 years.

The large cash flows would be extracted out of proven and probable reserves of 215 million tonnes grading 1.46 grams gold and 6.88 grams silver, for 10.1 million oz. gold and 47.6 million oz. silver.

These reserves are part of a larger measured and indicated resource of 350 million tonnes grading 1.3 grams gold and 6 grams silver, for 14.6 million oz. gold and 64.9 million oz. silver.

News of the royalty change sent Gabriel shares down as much as 9% to $5.55 in early trading on Dec. 29, but by market close shares recovered somewhat and traded for $5.99 on 185,000 shares traded.