Crystalex is mentioned as an aside.

September 23, 2010

Rusoro Is Still Enmeshed In The Financial Shenanigans Of The Venezuelan Government, But New Chinese Arrivals May Sort Things Out

By Charles Wyatt

“He who rides a tiger finds it difficult to dismount”. And so it is with the Agapov family, which has been running Rusoro Mining in Venezuela since 2002, with a little help from good relations with the government. Indeed, at one time, Hugo Chavez, President of Venzuela, declared that when it came to exploiting the gold assets of Venezuela, Rusoro was the country’s chosen partner. But that was before gold was actually being produced in any quantity from Rusoro’s Choco 10 mine and mill. When it was, Chavez licked his lips at the thought of real money coming into his poverty stricken country, and the relationship between the Agapovs and the Venezuelan government seems to have deteriorated.

Interestingly, there are stories currently in circulation that the Chinese are about to make an entrance on the scene, through a deal with another Canadian listed company, Valgold. Valgold has three groups of licences on the Guiana Shield which forms the northern part of the Amazon Craton in Bolivar State, in the north of the country, where Rusoro’s license are also located. Two Valgold’s blocks are about 40 kilometres from Rusoro’s Kilometre 88 exploration ground, itself just north of the well-known and sizeable deposit at Las Cristilinas. The other Valgold project is 60 kilometres to the south east.

There is no doubt that there is plenty of gold in Venezuela, but the high degree of political risk means that little has been done to exploit it. Maybe the Chinese reckon that they can adopt a more ruthless attitude in their dealings with Chavez. Perhaps they will get involved in the development of infrastructure vital to his country’s development so that he cannot afford to do without them. The tables will be then turned, but in the meantime the Chinese will also have to contend with the significant devaluation of the country’s currency, the Bolivar, which took place at the beginning of this year. That was a development which clearly had a major impact on the costs of any supplies which were imported into the country. And the squeeze was really on for Rusoro, because at the same time most of the gold produced at Choco 10 had to be sold through the Central Bank of Venezuela which offered a derisory price. These are the facts of life for gold producers in the country at the moment and there are not many of these, following the problems faced by Crystallex and Gold Reserve.

A look at Rusoro’s quarterly results to the end of June makes the Chavez squeeze stand out in stark relief. For a start, anticipated production for 2010 has been reduced from 142,000 ounces of gold to 110,000 ounces. The reason given is that capital asset expenditure at the Choco 10 mine has had to be curtailed in order to conserve cash for the principal payment on the company’s convertible debt. Read a bit further, however, and it becomes clear that the cash cost of production this year will rise from US$613 to US$813 per ounce, an increase of no less than 32 per cent, and comes mostly as a result of the Bolivar devaluation. This drives a huge hole through profitability, especially when the other side of the equation is considered: gold was sold to the Central Bank of Venezuela at a price of only US$768 per ounce. It does not take a mathematical genius to see that any operation producing gold at US$813 per ounce and selling it at US$768 per ounce is making losses and is therefore permanently on the back foot, for as long as it can keep going.

Minesite has taken a deliberate decision not to discuss the current situation with chief executive Andre Agapov, as such a conversation might put him in a very difficult position. A relationship of some sort has to be maintained with Chavez, meaning that Andre need to be ultra diplomatic which, in turn, would make it almost impossible to get to the heart of the story. In the quarterly results, for instance, he says that cash costs of production were significantly impacted when the company had to mine a significantly higher proportion of fresh unoxidised hard ore of a lower grade than it had been mining previously. Fair enough, but in other circumstances a company in such a position would probably seek to blend higher and lower grade ore and upgrade the milling facilities. Rusoro simply does not have the financial back-up as a result of the Chavez squeeze, and so has to take these problems on the chin. The Chinese may bounce into the country loaded with cash, but it is hard to see how they could counter the present situation without refusing point blank to sell gold to the Central Bank. Obviously they could bring in their own plant and workers and may be hoping that sanity will have returned by the time their mines are approaching production, but Chavez is only 56 years old, and won the 1998 election for the Left by a significant majority.

Still, Rusoro is well established in Bolivar State, so all is not completely grim. In addition to the Choco mill and the 95 per cent owned Choco mine, Rusoro is involved in a 50:50 joint venture with the Venezuelan government at the Isadora mine, which is also producing gold, albeit a modest amount. There are also plans to expand production at Choco by developing the Increible deposit which is only six kilometres away, but as long as the company remains in its present financial predicament “plans” are what they are likely to remain. Even so Rusoro has been getting down to brass tacks in some respects. Earlier this year the company completed a pre-feasibility study for the San Rafael El Placer project, including a mine plan, for the probable reserves there of 1.16 million tonnes grading just over 10 grams per tonne. But the net present value that came out of that study was based on a gold price of US$950 per ounce, and this looks out of the question at the moment.

Since the end of June the proportion of gold that Rusoro can be export and sell at the world price has been increased slightly, subject to the company obtaining permits and using the income to make some direct payments in foreign currency. Not for us to judge if this will have a significant impact, but then nor did poor old Rusoro’s share price reflect a recent 78 per cent increase in measured and indicated resources to 8.3 million ounces, with a further 2.8 million ounces inferred. The irony is that neither the Chavez government nor the company benefit from this financial regime, as all expansion of production is effectively on hold. Maybe the Chinese, with the extra muscle of a communist state body behind them, will be able to break the log jam and teach President Chavez some of the facts of business life. Let us hope so, as Rusoro should benefit.