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XMFSinchiruna (26.58)

Venezuelan Central Bank Demands First Dibs on Gold



May 05, 2009 – Comments (3)

This development in Venezuela is linked to the country's decision to nationalize mines like those of Crystallex (KRY). Basically, Venezuela simply has the cajones to do first what many other nations will soon be doing... nationalizing gold supply in one way or another in order to preserve the purchasing power of their reserves (especially USD reserves).

We can only hope that few follow Venezuela's lead of nationalizing mines licensed to foreign corporations without due process nor due compensation, but I could see this type of Central Bank action being copied all over the world. Most importantly, look for Russia or China to make such a move sometime this year... declaring a quota of domestic production that must be offered to their central banks.

Venezuela's central bank corners local gold production on weak dollar expectations

Venezuela more than doubled the amount of gold that local producers must offer to the central bank in a bid to increase its reserves of the metal and reduce reliance on supporting them with US Dollars.

The Finance Ministry said today that 70% of gold produced in Venezuela must be sold domestically, and 60% must be offered first to the central bank, in a resolution published in the Official Gazette. The remaining 30% can be exported. Previously, 20% had to be offered to the central bank.

The resolution affects Vancouver-based Rusoro Mining, said Andre Agapov, the company’s CEO. Rusoro will still have the right to sell its gold elsewhere should the central bank refuse to purchase it, he said today in a telephone interview.

“It’s a political decision,” he said. “Why ship it from Brazil when you could buy it from local producers?”

Agapov said that his company always sells to local buyers because the central bank hasn’t ever exercised its right to purchase 20% of Rusoro’s production. Buyers of the company’s output pay in local currency, he said.

Rusoro plans to increase production to between 250,000 and 270,000 ounces by next year, as it brings two new mines into production in the first quarter. The company is reviewing investing in more deposits and mines in the South American country, which would be developed through joint ventures with the government, Agapov said.

Rusoro aims to produce between 175,000 ounces and 195,000 ounces of gold in Venezuela this year, he said.

Gold futures for June delivery jumped US$14, or 1.6%, to US$902.20 an ounce on the Comex division of the New York Mercantile Exchange. That’s the biggest gain for a most-active contract since 23 April. The price fell 2.8% last week, the most since the first week in April.

The Venezuelan resolution may be a first step in a regional trend to rebuild government gold reserves on expectations that the US Dollar will weaken, said Philip Gotthelf, President of Equidex Brokerage Group in the US.

“Venezuela has decided to take a lead in rebuilding government gold reserves,” Gotthelf said today in a telephone interview. “If we see this as a catalyst for other emerging economies we will probably see the value of gold rise.”



3 Comments – Post Your Own

#1) On May 05, 2009 at 11:54 AM, Borisincincy (< 20) wrote:

One major correction, The Las Cristinas Project is contracted to be mined by Crystallex (KRY). They do not, nor have they ever had the rights to the gold itself. The gold from this mining contract has always been owned by the Venezuelan Government/ people.

 While I understand this does not alter your point of governments keeping more and more of thier gold, it is certainly misleading to anyone attempting to value KRY as an investment.

Where the gold is sold will have little or no affect on KRY.




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#2) On May 05, 2009 at 3:48 PM, XMFSinchiruna (26.58) wrote:


Boris, I appreciate the correction on the rights / license issue, although I'll have to double check whether that's correct, but are you suggesting that KRY still retains that contract to mine Las Cristinas? I know we were awaiting confirmation in writing from the Venezuelan mining ministry, but my understanding is that the Crystallex was informed through media reports that the license / or contract would be revoked and given instead to RUSAL.

It is my understanding, going back to when I did my due diligence on KRY a couple of years ago, that they in fact did own the land and had obtained mining permits in the traditional manner, but that Venezuela just incorporated a royalty... which is not uncommon. Please do correct me (again) if I'm wrong. :)


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#3) On May 08, 2009 at 12:20 PM, themaxpain (< 20) wrote:

"Crystallex was informed through media reports..."

I would never advise someone to invest based upon media reports, or take them as anything but speculation from third parties.  Media reports are not official, and the company appears to remain waiting for clarification on their "notice of official dispute" filed back on November 28.  If not "settled amicably" within 6 months (i.e., by approximately May 28, or 3 weeks from yesterday), the company has stated that it has the option to file for international arbitration.  GRZ (Gold Reserve, TSX, Amex), with the adjacent Brisas property recently released a similar statement, citing approximately $5.0 billion as a figure they will attempt to retrieve via the ICSID.  Las Cristinas (KRY's asset) is larger by about 20-30%, so the math is fairly clear. 

 "...that they in fact did own the land and had obtained mining permits in the traditional manner, but that Venezuela just incorporated a royalty" 

This is incorrect.  Crystallex signed a mining operation contract, versus Gold Reserve (GRZ's) concession.  The contract indicates that the CVG (Ven. heavy industry corp) has contracted Crystallex to mine the land, which is owned wholly by the Venezuelan state.  GRZ, on the other hand, possesses an older style "concession" to mine, which seems to imply that GRZ "owns" (for a time) the land, gold, etc, and can sell it according to the rules of their concession.

Whatever the legalities, both companies have rights that cannot be taken away (nationalized/confiscated/etc) by VZ without compensation for investment costs, and lost profits.  If that happens, both companies have fairly clear-cut grievances they can file with the ICSID to recover lost money.

Both companies are either being ignored, or put on the back burner in VZ politics.  If the issue is not addressed by May 28, in Crystallex's case anyway, I expect KRY to proceed to international arbitration soon thereafter, beginning with a figure in the neighborhood of $5-10 billion.  VZ appears willing to settle disputes, albeit slowly, following the recent $2 billion steel company nationalization compensation (Ternium), and while $5-10 billion may seem unlikely, anywhere from $1-5 billion does not at all (to me, at least, judging from previous ICSID and nationalization actions).  $1-5 billion in settlement would raise KRY's share price to anywhere from $3.30 to $16.50.

It's a crap shoot, in the end, but the stock has been beaten down to a minimum of 1/10 of its rock bottom settlement value, imho. 

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