Gold Fields has a cunning plan

[] — Venezuelan president Hugo Chavez is in South Africa signing an “energy co-operation” agreement which makes it as good a time as any to review the latest developments in Venezuela’s gold sector.

This is that Rusoro Mining – in which Gold Fields is the largest shareholder owning 38% of the equity – has just made a play for fellow Canadian miner Gold Reserve Inc which owns the Las Brisas gold project in Venezuela.

Rusoro offered two of its shares for one of Gold Reserve’s and got the brush-off from Gold Reserve president Doug Belanger.

That is not going to be the end of it as can be deduced from reading between the lines of Rusoro president George Salamis’ response.

He said Rusoro management was of the opinion that “a consolidation of its assets and abilities with those of Gold Reserve could potentially help transition their Brisas gold deposit to development and future production in the Km88 district.

“Rusoro will continue to actively pursue consolidation opportunities and further demonstrate its ability to successfully develop and operate gold mines in Venezuela.”

Salamis’ statement is fascinating given that Gold Reserve’s plans for developing Las Brisas are currently stalled because of opposition from Venezuela’s Ministry of the Environment (MinAmb).

Fellow Canadian junior Crystallex is the same boat with its Las Cristinas project which adjoins Las Brisas.

The two projects are amongst the largest undeveloped gold deposits in the world with Las Cristinas containing an estimated 16.9m oz of gold and Las Brisas an estimated 9,2m oz of gold and 1.2bn pounds of copper.

Those are mouthwatering takeover targets and the share prices of both Gold Reserve and Crystallex have been hammered to rock-bottom levels.

Both shares were dumped by North American investors in response to the actions taken by Chavez to nationalise sections of the Venezuelan economy starting with the oil producers.

Rusoro’s key “ability” – to use Salamis’ term – is that it is the only mining company which has a good relationship with the Venezuelan government.

In July, Rusoro announced it had been appointed “partner of choice” by the Venezuelan government for gold mining opportunities in Venezuela.

The reason for that lies in Rusoro’s Russian links which are crucial because Russia supplies Venezuela with its arms and military equipment requirements. Rusoro is headed by chairman Vladimir Agapov and CEO Andre Agapov.

Ahead of that announcement some smart western capitalist “gringos” – in the form of a syndicate led by UK fund Blackrock and gold company Peter Hambro Mining – put up $80m in loans to Rusoro for “regional consolidation opportunities”.

Peter Hambro is the second largest gold mining company operating in Russia.

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So far Rusoro has taken out Gold Fields Choco 10 mine for equity and cash – which is how Gold Fields got its 38% stake in Rusoro – as well as Hecla Mining’s operations in the country for $20m in cash and $5m worth of Rusoro stock.

The burning question has to be whether Rusoro can get its hands on Las Brisas and/or Las Cristinas.

Both these companies are involved in renewed negotiations over their environmental permits with MinAmb and both are sounding cautiously hopeful although Belanger also sounds like a realist to me.

In June he said: “We believe it is premature to predict the outcome of this initiative by the government. Although we are enthusiastic with MinAmb’s initiative, we are also trying to reconcile Environmental Minister’s Ortega’s statements related to the potential banning of open pit mining in the Imataca Forest Reserve.”

Looking at the situation as a hardened South African conspiracy theorist you have to wonder if what it will take to get approval for the projects is the involvement of Rusoro.

Gold Fields CEO Nick Holland is playing his cards close to his chest on what happens next maintaining that his group is a passive participant despite its dominant shareholding in Rusoro.

He has stated Gold Fields options include participating in Rusoro’s strategy but he won’t comment at this stage on whether Gold Fields might support future funding calls from Rusoro.

Despite its obvious advantages the Rusoro share price has been punished just as badly as those of Crystallex and Gold Reserve. It plunged as low as C$0.65 in mid-August but has since recovered to around $0.85c. The 12-month high was C$2.75.

Anyone fancy a flutter with part of their foreign investment allowance?