Gold Reserve does the job in Venezuela

Having recently attained the environmental permit for its Brisas copper-gold project in Venezuela, Gold Reserve (GRZ-T, GRZ-X) has reminded the world that mining projects operated by foreign companies can still go ahead in Hugo Chavez’s Venezuela.

On a recent conference call, company president Doug Belanger, highlighted the keys to its success.

“We have kept a lower profile. We’ve spent fifteen years in Venezuela and we understand how things work there,” Belanger said. “We didn’t want to say the permit was coming sooner or later, because you don’t know when that might be. You don’t do your celebrating on the five-yard line, you do it when you’ve crossed the goal line.”

While the comments weren’t made in direct connection to Crystallex International (KRY-T, KRY-X) — a company that’s still waiting for permits for its Las Cristinas gold project, located a stone’s throw away from Brisas — it’s not much of a stretch to see how applicable they are to the Toronto-based company.

Crystallex has grabbed most of the headlines associated with mining in Venezuela for repeatedly — and erroneously — predicting that its key environmental permit for its massive Las Cristinas project was imminent.

Rather than making such public assurances, Gold Reserve focused solely on developing its relationship with the government.

“You have to have direct involvement with the government,” Belanger said. “Our people can be in government offices on a day-to-day basis because you have to understand what the government wants, and then what you need to do about it.”

The environmental permit — which also covers the social aspects of the project — enables Gold Reserve to begin construction of the mine, something Belanger estimated would take roughly 30 months at a cost of about US$638 million.

But with rising nickel and copper prices, he concedes the project will likely be subject to the same increase in capital costs that are being seen across the industry.

Belanger also took time to clear up any confusion regarding further permitting and the company’s connection with Crystallex.

On the permitting front, Belanger emphasized that while important, the environmental permit was not the last permit the company will need to secure.

“We now have an ability to start construction, but we’ll be getting permits until we close the mine down twenty years from now,” he said.

Like most other mining jurisdictions, separate permits are needed for things such as building roads, using explosives and for exporting, but he doesn’t anticipate any difficulty in securing them.

As for Gold Reserve’s connection with Crystallex, Belanger was adamant that there isn’t one.

He addressed reports published on the Internet that said Gold Reserve would not be able to develop Brisas unless Crystallex was given the permits for Las Cristinas.

“There is no limitation on us going forward as it relates to Crystallex,” Belanger said. “It was made clear with the Ministry of Mines that these are two distinct projects and the permits are not linked.”

With the environmental permit in place, and a distinction drawn between itself and Crystallex, Gold Reserve is now turning its energy toward securing financing for the project — no small feat for a company with a $320-million market capitalization, or roughly half of what it will need to raise.

In securing funds for the project, Belanger said shareholders’ wishes must be weighed against stakeholders’ interests — and clarified that both the Venezuelan government and local communities are considered stakeholders.

“Our record speaks for itself,” Belanger said, regarding the issue of possible share dilution to raise money. “Our management are all shareholders and we’re concerned with dilution, but we’ve done well to get this far with only forty-two million shares outstanding.”

Belanger said that the forward sale of copper production and gold hedging, while not popular with the Street, would be considered. But he said the company would be wary of selling forward before it started production, as delays in construction could wreak havoc on forward sales.

As for the possibility of the company being sold to a major with pockets deep enough to bring the project into production, Belanger would only say:

“The company is not for sale, but that doesn’t mean that the company can’t be sold. . . you cannot induce these people to buy your company even if you wanted to sell it.”

He referred to Gold Fields’ (GFI-N, GOF-L) purchase of Bolivar Gold, which operated the Choco 10 mine in Venezuela, as an example of a sale that was conducted properly.

Belanger said Gold Reserve would not want to give the government mixed signals, in this case, the impression that it was looking to flip the project.

Brisas has a proven and probable reserve of 446 million tonnes grading 0.7 gram gold per tonne and 0.131% copper, for roughly 10 million oz. gold and 1.2 billion lbs. copper.

At presstime, Gold Reserves shares were trading at $8.23, up 60% since news of the permit on March 28.

Crystallex shares have risen roughly 39% over that same time period, to about $4.88 at presstime.

On April 5, Crystallex announced a private placement of roughly 14 million common shares at $4.25 per share.

The company says it will use the funds for pre-construction costs and post-permit expenses at Las Cristinas and to repay some existing debt.