Rusoro Mining Hopes To Establish Partnership Model With Venezuela

Last update: 9/23/2011 5:43:43 PM

--Rusoro CEO says company will be reimbursed book value plus premium for nationalized property

--CEO says new royalty rate 'exorbitant'

--Payment terms for gold sold to government still being negotiated

 
   By Kejal Vyas 
   Of DOW JONES NEWSWIRES 
 

CARACAS (Dow Jones)--Rusoro Mining Ltd. (RMLFF, RML.V), the only non-state-owned gold producer left in Venezuela, is looking to establish a model for joint-mining ventures with the government after the industry's recent nationalization and is eyeing an expanded role in the South American country, Chief Executive Andre Agapov said in a phone interview Friday.

The company is now in negotiations to create a new management structure and over what kind of compensation Rusoro will receive after new industry regulations formalized earlier this week declared the government will take a 55% stake in all gold projects.

Agapov said Oil Minister Rafael Ramirez had assured the company during a recent meeting that they will be reimbursed 55% of the book value of the project as well as some premium, using a model similar to that used by Venezuela during a string of oil-industry expropriations between 2006 and 2007.

"We need to set the tone going forward since we are the first joint-venture being formed," Agapov said, adding that operations for the new company will still be managed by Rusoro.

Venezuela is counting on forming joint ventures through state oil monopoly Petroleos de Venezuela in a bid to increase gold output. Critics, however, say that may be a big challenge as unpredictable government policy and tight regulations keep many companies with mining expertise away.

Guidelines under President Hugo Chavez's takeover of the gold industry require all of the produced metal to be sold to the government, effectively banning exports. Last month, the president unveiled controversial plans to repatriate gold reserves held in the U.S. and in Europe and said the metal would help shield the country from the economic turmoil facing developed economies. He also said Venezuela aims to take advantage of the surging price of gold.

The new industry regulations set a 13% royalty rate, a move that Agapov called "very exorbitant."

"We will need to talk to the government about lowering that. We consider it way too high," he said.

A major issue which is still being sorted out is payment for produced gold as exports have been prohibited. Agapov said the government will have to pay spot market price but terms will need to be refined given Venezuela's strict currency regulations and cumbersome tiered-exchange-rates. The bolivar has a state-set rate of VEF4.3 per dollar but the value of the currency drops significantly in the black market, where a dollar fetches more than VEF8.

"No mining company can survive" if it's losing half the value of its product, Agapov said, adding that the government may have to tweak some of its regulations.

On Thursday, Venezuela's Mining Ministry assigned the task of defining the terms of acquiring and selling gold to the Central Bank of Venezuela.

Still, the CEO said he is looking to boost the company's position in the country and said that projects may have strong potential as the government will now be contributing a share of capital expenses. Rusoro will be evaluating more projects as negotiations between both parties continue, he said.

Agapov said Rusoro is likely to issue a new guidance on production outlook by year's end once the government's capex contribution has been determined. The company has two mines in production, as well as 10 exploration projects in Venezuela.

Rusoro's second-quarter production fell 38% to 15,975 ounces from a year earlier, while posting a net loss of $9.8 million.

Despite large deposits, Venezuela has been a relatively small-time producer of gold, which critics say is a result of government red tape and strict regulations, and hostile policies towards private companies. Much of Venezuela's gold is said to be under heavy jungles in the sparsely populated southeast region, where illegal mining operations and cross-border smuggling is rampant. That's likely to continue being a hurdle for Venezuela, Agapov said.

"If I were in charge of solving that problem, we would need a five-year, or seven-year plan. It's a tall order," he said.

-By Kejal Vyas, Dow Jones Newswires; 58-414-249-6821; kejal.vyas@dowjones.com

(END) Dow Jones Newswires

September 23, 2011 17:43 ET (21:43 GMT)