In 2008, Venezuela's former President Hugo Chavez nationalized mining and energy assets in a failed attempt to gain control over his struggling economy. As a result, there are now 28 unresolved cases filed at the World Bank's International Centre for Settlement of Investment Disputes (ICSID) by companies seeking retribution for these actions, including the energy giant Exxon Mobil.
Last night, the Canadian-listed Gold Reserve Inc (GZ:TSX) announced that the ICSID awarded the company $740.3-million in accordance with the provisions of the Canada-Venezuela Bilateral Investment Treaty (BIT). The judgment is made up of $713-million for the fair market value of the Brisas Project, $22.3-million for interest on the award since April, 2008 and $5-million for reimbursement of legal and technical costs expended by the company.
In April 2008, after the Company successfully developed the Brisas Project to the point of construction and spent over $300 million, the Bolivarian Republic of Venezuela revoked the previous authorization to proceed with construction, effectively eliminating the company’s ability to build and mine the project.
"We feel vindicated by the tribunal's clear conclusion that the Venezuelan government acted unlawfully in terminating the Brisas project in direct violation of the BIT," Gold Reserve President Doug Belanger stated in the release this morning.
This amount is substantially less than what the company was seeking, although it is still roughly double the company's current market cap. In July, the company said it was seeking $2.1 billion for the expropriated gold and copper development project.
The company has a current market cap of $330 million and holds $8.8 million in cash in its till.
The company believes Venezuela will honour the ruling. Just to make sure, they have commenced steps under the 150 member state comprised New York Convention.
"We are hopeful that Venezuela will satisfy its obligations to the company without delay and without any further legal proceeding. Should they fail to do so, we are prepared to pursue all available means to ensure that the amount awarded to the company is recovered in full. There are well-documented procedures in place for identifying and attaching sovereign commercial assets located in states that are party to the New York Convention. The company is already well advanced in this effort," Mr. Belanger continued in the release.
Venezuela has recently faced concern that a shortage of foreign currency could force it to default on its international debt. In order to avoid default, the company must pay an ISCID ruling.
The company says it is pleased with the ruling, although the amount is less than what they consider 'fair market value' and I would tend to agree. Based on a 2005 feasibility study, the Brias project hosts mineral reserves of 10.2 million ounces of gold and 1.2 billion pounds of copper (using $2.76 per pound copper and $350 per ounce gold prices). It was expected to produce 486,500 ounces of gold and 63 million pounds of copper annually for 16 years. It is one of the largest undeveloped copper-gold assets in the world.
Given the fact the market was valuing Gold Reserve at $320 million prior to this judgment, it looks like the market wasn't expecting this large of an award.
Investors will also like the fact that the company stated in the release that they plan to distribute "a substantial majority of any proceeds received to its shareholders in the most efficient manner possible, subject to the need to retain funds for operating and arbitration-related expenses, corporate income taxes, and other obligations, such as repayment of convertible notes (if not otherwise converted). "