Gold Reserve rebuffs Rusoro’s advance (September 08, 2008)

VANCOUVER–With a letter to Gold Reserve (GRZ-T, GRZ-X) suggesting a friendly merger, Rusoro Mining (RML-V, RMLFF-O) made another move in its gamble to pull most if not all of Venezuela’s major mining projects into one company.

And while most of Rusoro’s moves of late have panned out well, this proposal was met with an unequivocal “no.”

The letter, dated Aug. 21, proposed that Gold Reserve amalgamate with a Rusoro subsidiary. In return, Gold Reserve shareholders would receive two Rusoro shares for every one Gold Reserve share held.

Given that Rusoro’s shares are currently trading at 80 and that Gold Reserve has roughly 57 million shares issued, the proposal values Gold Reserve at roughly $90 million. Gold Reserve’s board of directors quickly decided the proposal was inadequate.

News of the rebuffed offer boosted Gold Reserve’s share price 10 to$1.58 on Aug. 27. Rusoro’s share price remained unchanged.

“First of all, we’re not for sale, but that being said we’re always willing to talk to anyone who offers the potential for increased shareholder value,” says Doug Belanger, president of Gold Reserve. “But this expression of interest. . . We currently hold $105 million in cash and it doesn’t even cover that, let alone value our assets.”

Belanger says his company owns over $12 million worth of mobile mining equipment and has put down $50 million on orders for milling equipment to develop its Brisas gold-copper project. That means assets and cash alone add up to almost $170 million in value, close to twice the value of the Rusoro offer.

Then there are Gold Reserve’s properties. The company’s main project is Brisas, which is at the development stage. Gold Reserve is also exploring the Choco 5 gold project, which sits right next door to Rusoro’s Choco 10 gold mine.

Brisas hosts proven and probable reserves totalling 482.7 million tonnes grading 0.66 gram gold per tonne and 0.13% copper. Initial capital costs to develop the project come in at US$731 million; operating costs come out at US$268 per oz. gold. The current plan assumes an open-pit mining operation pro- cessing 75,000 tonnes per day to produce 457,000 oz. gold and 63 million lbs. copper over an estimated mine life of 18 years.

Gold Reserve has already spent almost $300 million on Brisas and was set to start construction when the Venezuelan government rescinded the company’s permit in late April. The government cited concerns over environmental degradation, the presence of small-scale miners, and the project’s location within the Imataca Forest Reserve. Gold Reserve was one of several companies blindsided by such reversals.

Since then, Rusoro has been Venezuela’s odd man in. While other companies trying to explore for minerals or develop mines in Venezuela have been stopped dead in their tracks, the Vancouver-based company with significant Russian roots has been speeding ahead. A feasibility study for its Choco 10 mine is examining the potential to increase production there to 500,000 oz. gold annually. In June, an $80-million convertible loan backed by one of Russia’s largest mining houses allowed Rusoro to pick up all of Hecla Mining’s (HL-N) assets in Venezuela, including a producing mine and mill close to some of Rusoro’s other deposits.

And Rusoro’s management team has made it clear that the company plans more acquisitions. In fact, when the Russian Agapov family — which founded the company — took it public in 2006, they did so on the basis that Rusoro would be the consolidator of gold opportunities in Venezuela.

Since Rusoro enjoys what company president George Salamis describes as “strong in-country support,” consolidation is quite possibly agood idea. But the offer would have to come at the right price, according to Belanger. Considering expenditures, reserves, and assets, Belanger says his company is worth $600 to $700 million.

As to what he thinks will happen next, Belanger says he’s open to possibilities, adding: “The ball’s in their court now.”