Rusoro: Venezuela’s odd man in

VANCOUVER — Rusoro Mining (RML-V, RMLFF-O) is the exception that proves the rule: While most mineral exploration in Venezuela has ground to a halt, Rusoro just arranged a US$80-million exchangeable loan to fund its activities in the South American country.

“We’ve got a very loyal band of shareholders, believers in Venezuela if you will, who regard Rusoro very much as the go-to mining vehicle for those who want to invest in gold in Venezuela,” says Rusoro president George Salamis.

Many of those believers are Russian. And Rusoro’s Russian connections are one of the reasons the company has fared so well in Hugo Chavez’s country.

A Russian family, the Agapovs, put Rusoro together several years ago and took it public in 2006. In addition to the Agapovs, who are “far and away” the largest Russian contingent, Salamis says there are a number of other very large Russian shareholders. Two Agapovs still head the company — Vladmir Agapov is the chairman and Andre Agapov is the CEO — and they are the key players in Rusoro’s relations with the Venezuelan government.

Salamis shied away from commenting directly on the importance of Rusoro’s Russian component but instead said: “We wouldn’t be anywhere in Venezuela if it weren’t for the great connections we’ve built with the Venezuelan government at all levels.”

The Russian connection clearly continued with the latest financing. The entirety of the loan is exchangeable into Rusoro shares but major investor Peter Hambro Mining (POG-L) could end up with a large chunk of the Vancouverbased company. The AIM-listed company is providing US$20 million of the loan, exchangeable into Rusoro shares at $1.25 apiece.

Peter Hambro, the second-largest Russian gold mining company, operates two mines in the Amur region of Russia’s Far East. In 2007, the company produced 297,000 oz. gold. In a statement, executive chairman Peter Hambro said, “We have always said that any investment outside of Russia would need to have a Russo-centric rationale and the Rusoro investment is just such an opportunity.”

The remainder of the Rusoro loan will be financed by a syndicate; each lender can also exchange its portion of the loan into Rusoro shares at $1.25 each. Peter Hambro has entered into an option agreement with those lenders for the right to acquire their shares at $2.20 per share.

If Peter Hambro exchanges all of its initial US$20-million investment into Rusoro shares, the Russian company would hold 4% of Rusoro. Should Peter Hambro exercise the option agreement fully, the company would acquire 14.2% of the junior.

The slightly unusual financing agreement developed out of the negativity around Venezuelan mining, that is, the government’s rescinding of environmental permits for Crystallex International’s (KRY-T, KRY-X) Las Cristinas gold project and Gold Reserve’s (GRZ-T, GRZ-X) Brisas copper-gold project next door. Although Rusoro has so far avoided such pitfalls, Venezuelan mining pessimism dragged its share price from just under $3 one year ago to its current price around $1.

“We were looking to do something that wasn’t straight equity, with our share price where it is,” Salamis says. “Putting together a convertible aspect to this quasi-debt issue — it gives Hambro and some of the other investors a means of participating in the company’s success going forward.”

The initial US$28 million is available immediately. And although Rusoro is burning through cash rapidly with what is perhaps the largest drill program in the world, Salamis says this US$80 million is earmarked for acquisitions.

“Rusoro went public on the basis that the company would be the consolidator of gold opportunities in Venezuela,” Salamis says. After his interview with The Northern Miner, Salamis was heading to the airport, off to Venezuela. “I’ve promised all these acquisitions — now I have to go make good on my promises.”

Indeed, at presstime, the company announced that it had just bought Hecla Mining’s (HL-N) assets in Venezuela for US$20 million in cash and US$5 million in shares. As a result of the announcement, the second tranche of its $80-million financing ($52 million) was released. Rusoro says the deal, which includes Hecla’s Block B-Isidora mining leases and the La Camorra mill, in Bolivar state, eastern Venezuela, will increase its gold production by 83%.

Rusoro also owns the Choco 10 mine in Bolivar state, and holds a large land package in the area. The mine is expected to produce 120,000 oz. gold in 2008, provided Rusoro continues to avoid the pitfalls into which other Venezuelan mining projects have fallen.

The mine is not yet on track for its production target, though it is close. In the first three months of 2008, Choco 10 processed 616,664 tonnes of ore at an average grade of 1.41 grams gold per tonne. Recovery was over 86%, resulting in production of 25,040 oz. gold at a cash cost of US$98 per oz. It’s a dramatic change from the same quarter last year when Choco 10, then still operated by Gold Fields (GFI-N, GOFD-L), produced only 8,221 oz. gold at an average cash cost of US$748 per oz.

The company certainly plans to increase capacity at Choco 10. Scoping and feasibility study contracts were awarded in early 2008 and work is under way. A historical study conducted internally by Gold Fields showed that, with gold at US$550 per oz., a production rate of 350,000 oz. per year at a cash cost of US$337 per oz. was sustainable.

“One aspect that gets lost in people’s minds is that Choco 10 is a phenomenal asset,” Salamis says. “We’ve launched this feasibility study because we think Choco 10 has the potential to produce half a million ounces annually, or more.”

To supply feed for that added capacity, Rusoro has been drilling at a rapid pace, completing 315,000 metres over six different zones in 2007.

Choco 10 has seen drilling of all sorts of late: resource and reserve drilling at and near the Choco mine, grade control drilling at the mine, exploration drilling of regional targets, condemnation drilling for waste dumps and tailings facilities, and geotechnical drilling to collect data for a feasibility study.

In its exploration and reserve-resource drilling at Choco 10, Rusoro generated some strong results. Hole 1083 returned 14.1 grams gold over 17 metres from 94 metres down-hole, hole 945 cut 9.5 metres grading 10.78 grams gold from 238 metres depth, and hole 833 cored 15.5 metres of 5.75 grams gold from 125 metres below surface.

At Choco 10, the work program is specifically aimed at upgrading resources and reserves to support an oxide-mining strategy for two to three years as well as to support expanded production and a feasibility study.

Choco 10 currently hosts proven and probable reserves of 15.4 million tonnes grading 3.4 grams gold for 1.66 million contained ounces gold. Resources far outweigh reserves: Choco 10 holds 56.1 million measured and indicated tonnes grading 2.46 grams gold and 40.8 million inferred tonnes grading 2.2 grams gold.

At Increible 6, a larger concession roughly 10 km northeast of Choco 10, drill results in general showed longer mineralized intercepts. Hole 189 cut 37 metres grading 9.34 grams gold from 31 metres depth; hole 273 returned 8.44 grams gold over 21 metres from 65 metres down-hole; and hole 400 hit 78 metres grading 3.49 grams gold.

“I’m excited about Increible 6,” Salamis says. “We’ve announced a resource there and we’re still getting phenomenal intercepts at depth — that project is really going to grow, no question.”

The resource estimate completed in September pegged resources at 23.5 million indicated tonnes grading 2.11 grams gold and 17.5 million inferred tonnes grading 1.95 grams gold. Since that estimate, Rusoro has completed more than 80,000 metres of drilling; an update is expected later this year. At present Rusoro plans to process the oxide portion of the deposit at the Choco mine and permitting for such a system is already
under way.

The San Rafael-El Placer (SREP) deposits saw 82,600 metres of drilling in 2007. Principal targets included open-ended portions, existing orebodies both downdip and along strike, and newly identified anomalies. Intercepts were short but high-grade.

Highlights include hole 666, which cut 3 metres of 71.25 grams gold from 448 metres depth, hole 655, which returned 58.9 grams gold over 3 metres from 405 metres down-hole, and hole 555, which cored 4 metres of 48.84 grams gold from 318 metres depth.

The 2008 program calls for another 300,000 metres of drilling this year, focused on Choco 10, Increible, SREP, and Valle Hondo.