SECTOR OVERVIEW

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Venezuela is a major producer of bauxite, aluminium and direct-reduced iron, and
also produces gold, nickel, diamonds and ferroalloys. President Chavez's
government believes that mining is a strategic sector over which the state
should have strict control. It is advancing a 'Bolivarian Revolution', seeking
greater state participation in the wealth generated from natural resources. This
is coupled with a move to promote domestic industrialisation and add value to
Venezuela's natural resources in-country via incentives and prohibitions. Since
mid 2008, mining concessions are only being granted to joint venture companies
in which a Venezuelan state company has at least 50% participation.

KEY ACTORS

Mibam

Venezuela's basic industries and mining ministry (Mibam) was created by
presidential decree in January 2005 to promote, develop and implement public
policies in the mining, forestry and basic industry sectors in Venezuela. Mibam
is working to rearrange the mining sector and retaking inactive or expired
concessions. It is responsible for drafting and implementing mining policy.
Policy direction is dictated by the executive. Mibam also directs state
companies that manage various aspects of the mining and metals sector:
Corporación Venezolana de Guayana (CVG), national geological survey (Ingeomin)
and nationalised steel producer Siderúrgica del Orinoco (Sidor).

Corporación Venezolana de Guayana (CVG)

CVG is a state holding company with subsidiaries that manage specific minerals
and metals. Its main subsidiaries are CVG Bauxilum, Venezuela's sole bauxite and
alumina producer that operates the Los Pijiguaos bauxite mine, and Puerto Ordaz
alumina refinery. Primary aluminium is also produced at the Alcasa and Venalum
smelters. CVG Ferrominera Orinoco (FMO) produces iron ore and pellets, mainly
from the Ciudad Piar and San Isidro mines. CVG Minerven is the state gold
company, and the beneficiary of much of the reorganisation of the gold sector by
Mibam. Minerven has obtained control of resources such as the Tomi mine, the
Sosa Méndez mine and the Remevin plant. In mid 2009, CVG announced it was
considering issuing $4 billion in bonds backed by future gold production.

Rusoro Mining

Russian-financed Rusoro Mining, owner of the Choco 10 gold mine that produces up
to 130,000 ounces a year of gold (and could increase to 500,000 oz/y), is one of
the beneficiaries of the Chávez administration. Rusoro formed a 50/50
partnership with the government in 2008 called Venrus to produce gold from
assets Venezuela acquired from US firm Hecla Mining. Despite the onerous JV
requirement placed by the administration on Western-sponsored projects, it is
notable that Rusoro has not been made to JV Choco 10. In January 2009, Chavez
announced that Venrus and a Venezuelan state holding company would develop the
Las Cristinas project. However, the government has yet to officially decide who
will be its partner and it is possible that it will be a 100% state-owned
Russian company. If Venrus obtains the combined projects, it will become the
main gold producer in Venezuela and the dominant privately owned player in
Venezuelan mining.

FOREIGN INVESTMENT

Despite the inherent political risks, several Canadian junior gold exploration
companies felt comfortable exploring in Venezuela until recently, placing faith
in their concession contracts with the government under the 1999 law. However,
that view appears to have been overly optimistic in light of recent state
expropriations. The very real threat of nationalisation has now scared most
international investors away, with the exception of preferred-country state
companies. The reluctance of many Western banks to lend to mining projects in
Venezuela means any project development financing would probably require
underwriting by the World Bank's Multilateral Investment Guarantee Agency
(MIGA).

KEY RISKS

(i) Nationalisation and Contract Cancellation

Venezuela's steel industry was nationalised in 1975. The Chávez government has
already targeted the most prominent mining assets in nickel, bauxite and gold.
In January 2008, Anglo American saw its six 20-year nickel concessions cancelled
at its Loma de Niquel project on the grounds that the company refused to
maintain adjacent roads, comply with social spending requirements and transfer
technical expertise to Venezuelan officials. Loma de Niquel was the biggest
privately owned mining operation in the country. Examples of nationalisation
abound. For example, in May 2009 iron briquette producing companies Matesi,
Comsigua, Orinoco Iron and Venprecar were nationalised. Tube manufacturer Tavsa,
a subsidiary of Luxembourg-based Tenaris, suffered the same fate.

All projects with foreign participation are potentially at risk of arbitrary
licence cancellation, nationalisation or enforced contract renegotiation.
Projects where workers complain to the government of alleged violations of their
rights are at particular risk. So too are investments from countries that are
currently, or later become, involved in diplomatic disputes with the Chávez
government. The smaller-scale foreign operations that remain include the silicon
carbide production facilities of Mexican firm Saint-Gobain.

(ii) 'Environmentalism' and Expropriation

A number of measures are being used to achieve the overall goal of reverting the
concessions granted to Western exploration and development companies to the
state. Environmental laws in particular are used to hinder the development of
Western-sponsored projects. Both Canadian company Crystallex International and
US firm Gold Reserve saw their respective Las Cristinas and Las Brisas gold
projects expropriated after the Venezuelan government denied environmental
permit applications for their development. Crystalex had waited four years for
its licence to be approved. The two projects together contain more than 31
million ounces of proven and probable gold reserves. Conversely, the
environmental permitting process can be radically foreshortened where the
applicant is a favoured Chávez ally. Other government measures include: not
renewing concessions licences, blocking development on technicalities, employing
bureaucracy to impede the granting of permits, and reclaiming concessions where
work has not advanced.

(iii) Bias Against Western Companies

With a lack of domestic technical expertise to run mining projects, the
Venezuelan government is seeking to joint venture key projects. It has a clear
preference for partners domiciled in what it considers ally countries, such as
Russia and China, rather than Western firms though. In November 2008, the
Venezuelan government signed a memorandum of understanding with Russian
President Medvedev for the mining and energy sectors. Russian companies have
been invited to invest in the aluminium smelting and mining sectors. Where
Crystallex and Gold Reserve failed in their permitting efforts, Russian firm
Rusoro obtained its environmental permit in a matter of weeks. It is probable
that Las Cristinas and Las Brisas will be developed as a single project as they
are one ore body, with a Russian company expected to be the state's joint
venture partner.

(iv) Gold Mining

Gold mining is currently being targeted as a means to boost state coffers and
reduce dependence on oil revenues. As of July 2009, some 500,000 hectares of
gold-rich land had been expropriated. In May 2009, a law was introduced that
obliges gold producers to sell 60% of gold produced to the Venezuelan Central
Bank, and process a further 10% of gold production in Venezuela.

(v) A New Mining Law?

Since mid 2008, discussions have been held on introducing a new Mining Law to
replace the existing one from 1999. Such a law would be likely to deepen even
further the state's control over the sector. Little progress has been made with
these discussions but, as seen with June 2009's moves to nationalise oil service
companies, such a law could feasibly be rubber stamped by the legislature in a
matter of days.


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-0- Aug/21/2009 08:58 GMT