http://www.midasletter.com/news/0902...

By James West
MidasLetter.com
Friday, February 27, 2009

In early 2009, Rusoro Mining Ltd. (RML-TSX) attempted a high profile take-over of Gold Reserve Inc. (GRZ-TSX; AMEX). Both companies operate in Venezuela. Rusoro was looking at Gold Reserve’s 9 million ounce Brisas deposit in Venezuela, and their $100 million cash. Gold Reserve has had little to no luck getting the deposit into production however – which Rusoro, with its political connections saw as its opportunity.

The bid was high profile – making all the Canadian business papers and on every mining portal around the globe - but it was unsuccessful. An Ontario court judge ruled that Rusoro’s advisor Endeavour Financial was in a conflict of interest, given they had also worked for Gold Reserve.

But only a couple weeks later, Rusoro announced its own $100 million equity financing. No moss grows under Rusoro’s stone! We caught up with Rusoro President George Salamis to see what’s next for Rusoro.

James West: Mr. Salamis, thank you for joining me today. I want the audience to hear what’s in the future, but first, give me a quick summary of what the court case that ended your bid was about.

George Salamis: I guess-- in our view the court case always was about at least, you know, partially resolving the debacle of Kilometer 88, right? You have two world class deposits, Brisas and Las Cristinas, that are really one deposit, and shareholders can’t realize any value from them. I mean this is an area that’s had a dark cloud hanging over it for a very long time. And we thought by resolving the situation, fairly and squarely in the capital markets in North America as opposed to the situation getting resolved in some other manner, that we could provide a basis for resolving the problem down there. So in the end-- it was-- it always was - about letting shareholders decide their own fate instead of allowing what we viewed was, entrenched management to make the decisions for them.

But, you know, at the end of the day, the judge made the decision for the Gold Reserve shareholders. And do we agree with it? No, absolutely not. However, it’s now up to Gold Reserve shareholders themselves to choose to follow management, pursue whatever settlement that they can get at international litigation as a business model or vote with their feet. But it’s clearly out of our hands now. We’re-- we were just trying to do the responsible thing.

James West: How likely do you think it is that Gold Reserve can even engage Venezuela in a dialogue to sell them the asset?

George Salamis: I can’t comment on whether, you know, on the likelihood of Gold Reserve, you know, coming to some sort of amicable settlement with Hugo Chavez or even getting the permit. It’s in their hands. I guess in the end, you know, we were expecting that the Gold Reserve shareholders themselves would become a bit more activist in their cause.

And, you know, certainly they invest in Gold Reserve because they believed in Venezuelan gold mining which is what we’ve been doing for the last year and a bit. However, you know, their shareholders never really did become activists and at the end of the day, the judge made the decision for them so, you know, we have to move on and grow the company on our own.

James West: So you’ve quickly announced a $100 million financing on your own. What are you going to spend it on?

George Salamis: Our goal is to immediately ramp up production from 170,000 ounces a year to 300,000 ounces. We will increase capacity at Choco 10, to take it up to 20,000 ounces a month or 240,000 ounces a year. And the Emilia Mill will get some money to ensure it can be in production on time, 12 months from now. That is high grade ore, about 20 grams per tonne or over half an ounce, so that will really help our margins – which are pretty good already!

James West: So how things are going on the ground now?

George Salamis: I think what you will see over the next quarter, and certainly in January, is production levels on par with what we announced late last year. And certainly costs are trending down. I think if you recall our costs in early 2008 were in the sort of, you know, high 600’s, low 700’s range. We managed to bring things down to below $400 an ounce and we think we can make more improvements from there. So we think what we’ve done-- this turnaround is sustainable and we think we can do an even better job at mining more effectively.

A lot of people question us: “Well, it took, you know, two quarters or maybe three quarters to turn things around for you, Rusoro. Why did it take so long?”

Stepping out of the Rusoro box for a moment and having worked for the, you know, major mining company, I’d challenge any large, well experienced, major mining company to step freshly into a district where a mine is failing and turn things around instantly. The turnaround performance that we experienced on the ground there is certainly on par with any of the best run major mining companies out there, a stellar job.

James West:How much of these turnarounds in the assets, was your political relationships and how much of that was technical? And is that an important distinction?

George Salamis: Oh, a very important distinction. I’d have to say probably about 60/40 in terms of weighting. Sixty percent of the turnaround, obviously, has to do with our ability to deal with the local communities, to local labour unions like nobody else can or has certainly demonstrated to be able to do. So that’s a big part of it. But, probably 40 percent of what we’ve done is what I’m going to call “engineering optimizations” at the operations-- things like improving haulage fleet availabilities, improving our mill availabilities, shorter haulage distances certainly from the Isadora mine to the Choco 10 mill as opposed to hauling that ore for a hundred-plus kilometres. That makes a big difference.

A good example is when we acquired the Isadora mining operation from Hecla Mining. That operation had been shut down for about three months. It was total deadlock at the mine gate itself. People protesting. Mine workers not being allowed to go into the mine. It was a mess. And within a matter of weeks we stepped in there, we reorganized the labour issues. We struck some deals with the local community. So we got the communities on side with us. And I think probably more importantly, we brought the workers on side. There were a number of very angry dissident workers on site who are now-- who have now become great employees of the Isadora mine. And that’s thanks, largely to our Venezuelan “senior management levels” who have done this before.

James West: OK, costs are low now but are you cash flow positive?

George Salamis: Absolutely yes, but people do need to understand that we’re building two brand new mining operations. Increible 6 will be coming online probably by mid-year this year. We’re adding production, and processing ore. There is the Choco 10 mill. And we have San Raphael Placer which is an underground mine, not a cheap thing to build, coming on line early next year. So every cent of free cash flow that we have is now being plowed into the development of those two ore bodies. We’d like to be going a lot faster than we are but simply put, there’s only so much cash to come out of the existing production to plow into those operations. But we are, you know, we are plowing a lot of money into building two new mines and people need to understand that.

James West: The final question is how does the new Chavez for Life presidency affect you?

George Salamis: You know, for us it’s business as usual. Look, our record speaks for itself. Above and beyond the great, sort of, rapport that we have with the government, we’re on the ground. We’re producing gold. We’re creating jobs. So, yeah, we’ve got some great links with the Venezuelan government. We’ve got a great rapport there. But we’re actually delivering on the ground and, you know, it goes beyond that rapport.

And I think the government of Hugo Chavez is going to want to resolve the situation in Kilometer 88 sooner rather than later, to get the jobs going down in that part of Bolivar State to turn things around.

SOURCE: http://www.midasletter.com/news/0902...