Gold Reserve’s board rejects Rusoro’s takeover bid

Calling Rusoro Mining’s (RML-V, RMLFF-O) unsolicited bid “opportunistic” and “financially inadequate,” Gold Reserve’s (GRZ-T, GRZ-x) board of directors has unanimously recommended that shareholders reject the offer, which it says “significantly undervalues” the company.

J.P. Morgan Securities and RBC Capital Markets, Gold Reserve’s financial advisors, have each provided a written opinion that the offer is inadequate from a financial point of view.

Based on the closing price of Rusoro shares on the TSX Venture Exchange on Dec. 29, 2008, the last trading day before the date of the board’s recommendation, the implied offer price of the Rusoro offer was C$1.86 per Gold Reserve share, Gold Reserve says.

Gold Reserve formed an independent committee to consider the terms of the offer and its value to shareholders and concluded that the Russian-controlled company’s bid does not represent a premium because it doesn’t value the company’s world-class Brisas deposit, a development-stage gold and copper open-pit project in Venezuela’s Bolivar state, or the company’s cash assets.

According to its calculations, Gold Reserve would contribute 84% of the combined company’s proven and probable reserves, 100% of the combined company’s cash and investments, and advanced project engineering, site analysis and drill data.

All it would receive in exchange, it argues in a statement, are Rusoro’s “liquidity and operational problems, substantial reserve impairment and a weak asset base.” (Douglas Belanger, Gold Reserve’s president, could not be reached for comment before press-time.)

Rusoro’s president, George Salamis, said the company would respond in detail to Gold Reserve’s allegations in an official press release, but in the interim called Gold Reserve’s assertions “a smokescreen that impedes their shareholders from getting a chance to view a decent bid that’s on the table.”

“There are too many allegations – and they’re all way off base — and we’ll provide an official response soon,” Salamis told The Northern Miner. “All they’re trying to do is provide a distraction from a bid process that was done in an open manner according to the rules and regulations.”

Among Gold Reserve’s long list of arguments against the offer are Rusoro’s “weak” financial position and its “lackluster” operating performance, both of which “present significant risks” to its shareholders.

Gold Reserve points to Rusoro’s “negative cash flow, working capital deficit and near-term debt repayment obligations.” For the nine months ended Sept. 30, Rusoro incurred a loss before income taxes of about $74.1 million, Gold Reserve noted, and Rusoro has long-term debt of $80 million, which is due in full on June 10, 2010.

When Rusoro’s $80 million debt is aggregated with Gold Reserve’s own obligations under its 5.5% senior subordinated convertible notes, the total equates to an annual interest obligation of about $14 million.

Rusoro’s claim that Gold Reserve shareholders would own roughly 30.4% of the combined company is also “misleading,” Gold Reserve’s board argues. “If Rusoro’s options and warrants are exercised and the Hambro/Endeavour Loan converts into shares in the future, Gold Reserve shareholders would only own about 22% of the combined company,” the board argues.

Furthermore, Rusoro has a history of growth through acquisitions financed by issuing additional shares and Gold Reserve estimates that Rusoro would need to issue a significant amount of additional equity in the combined company, which would further dilute the collective ownership of Gold Reserve shareholders.

Gold Reserve also points to Rusoro’s “poor operational results” at its Choco 10 mine, where the cost of production surpasses the price at which it sells its gold.

Finally, Gold Reserve argues that the bid was timed to deprive Gold Reserve shareholders of the benefits of the expected near-term announcement and implementation of mining sector reform in Venezuela, and that there is no reason to believe that its shareholders stand to gain from Rusoro’s claim that it has an “established” relationship with the Venezuelan government.

As proof, it cites a Venezuelan government entity, Ferrominera del Orinoco, that has started legal proceedings against a Rusoro subsidiary, Promotora Minera de Guayana, demanding an annulment of a shareholders meeting in which its equity stake in PMG was watered down to 0.02% from 30%.

In addition, Rusoro has not received all of the permits that are required for its Choco 10 mine, while Cooperativa de Molineros El Callao II RL has commenced a court action against Rusoro claiming possession of Choco 10 and US$10.5 million in damages for its eviction from the mine site.

“Our plan is to continue to work with the Venezuelan government to finalize the necessary pre-production permits for the Brisas project,” Gold Reserve says. “We expect to meet with the Venezuelan government in January 2009 to address anticipated mining sector reforms and the potential impact on our Brisas Project.”

Gold Reserve released the news after markets closed on Dec. 30. In early afternoon trading on Dec. 31, Gold Reserve shares were trading up 3¢ per share at $1.03, while Rusoro shares were trading at 65¢, down 2¢ from its Dec. 30 close.