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Date Posted: 02:36:27 08/21/03 Thu
Author: siempre
Subject: Gold Reserve -- GLDR

Gold Reserve shows up undervalued

By: Tim Wood


Posted: 2003/08/20 Wed 20:00 EDT | © Mineweb 1997-2003


NEW YORK -- Crystallex [KRY] has cornered the market when the words gold and Venezuela are mentioned, leaving neighbour Gold Reserve [GLDR] gasping for attention. Judging by the requests sluicing into Mineweb lately, the interest deficit is closing.
Gold Reserve owns the Las Brisas concession which abuts the key Las Cristinas concessions and which ore bodies are believed continuous. With 7.5 million ounces of reserves, why is Gold Reserve battling to garner Crystallex-type speculation and valuations?

The short answer is a low grade (0.7gpt Au) polymetallic deposit; Brisas is held inferior to Cristinas. That much is apparent in the statements of each company’s backers – Gold Reserve investors tend to favour a combination of Brisas and Chistinas, whereas Crystallex investors scorn the dilution threat.

Yet the dilution cuts both ways. What Brisas may lack in grade, Gold Reserve makes up in balance sheet and legal title.

The company has $11.4 million in cash and liquid assets, worth a whopping 47 cents per share or one quarter of the current stock price. There is no debt and no legacy deficit. Gold Reserve also has secure title for Brisas whereas Crystallex is battling to convince the market that Cristinas will not melt away from it when President Hugo Chavez’s Bolivarian blight inevitably disappears.

Going cheap

For all that, Gold Reserve can currently be bought for less than $9 per reserve ounce on a fully diluted basis, whereas Crystallex has appreciated to $30 per proven and probable ounce having shaken off a rush of bad news. With the Brisas gold you get a billion pounds of copper.

If there is a large negative, it is the potential dilution Gold Reserves would suffer were it to bring its project to account independently. It needs a sharp appreciation in its stock price before that is a serious option.

Doug Belanger, executive vice president for Gold Reserve, agrees that Brisas grades are low, but counters that this is easily offset by less onerous infrastructure demands. “I can assure you that we would not have spent $70 million on Brisas and drilled 165,000 meters in 763 diamond drill holes, if we did not think it was a viable deposit,” he says.

Engineering group Behre Dolbear recently completed the reserve verification and audit, while a feasibility study is nearing completion. Certainly, the ounces will not be extracted cheaply – a previous scoping study set total cash and production costs at $153 and $243 per ounce respectively, net of copper credits.

A gold price of $320/oz would probably kill a startup, but in the current gold price cycle Brisas can proceed and earn a fair return on investment. A year on from the first commercial gold pour, a Brisas mine could probably operate comfortably down to $300/oz.

Belanger says costs will be driven down through ongoing refinements in the mine plan and engineering work. The project is currently preparing for trial mining to establish more accurate capital and operating cost parameters, as well as confirm equipment needs.

The existing pre-feasibility study assumed a 55,000 tonne per day plant producing 362,000 ounces of gold and 46 million pounds of copper per year for a minimum of 13 years. Capital costs are estimated at a weighty $353 million including working capital of $19.5 million. Ongoing life of mine capital is estimated at $39 million.

Majors

Brisas has certainly not gone unnoticed. Belanger says Gold Reserve was asked to lead tours for Barrick [ABX], AngloGold [AU] and Gold Fields [GFI] where the companies examined both projects after it became apparent that Cristinas was being shopped around. “The right gold price unlocks both projects,” says Belanger.

With Brisas so far along and with potentially cheaper capital costs, it could be the starter project that unbolts a world class mining district, the immediate prize being the combined 20 million ounces in reserve at Cristinas and Brisas. That is a world class deposit the likes of which any major would like to round out its growth pipeline.

Gold Fields’s name repeatedly surfaces in speculation about Cristinas and it already has a presence in Venezuela through the El Callao joint venture with Bolivar Gold [BGC] in which Gold Reserve retains a limited interest. Gold Fields is ripe for a sizeable international project to diversify its current rand trapped base.

Pricing

So what might Gold Reserve sell for if it were bought lock, stock and barrel? Based on recent deals such as Placer Dome’s purchase of EAGM, Brisas would carry a final price to the purchaser of more than $2 billion. Unlikely and it’s not value that will translate for shareholders.

More likely to flow through is the gap between total production costs and the existing price per resource ounce. That back of envelope answer delivers a price per Gold Reserve share of nearly $23, a heady 11 times what the stock presently sells for.

Even if you discount Brisas against recent deals and price it at $300 an ounce all in, Gold Reserve should be showing a value of over $13 per share, equivalent to just $43 a reserve ounce which would be pretty miserly by current standards, but palatable for buyers and sellers given the political and gold price risks although the latter should fade if the metal pundits are right.

What is clear is that Gold Reserve’s best means of raising value from Brisas at this point in time is less through increasing reserves than dropping production costs.

On a comparable basis with Crystallex, Gold Reserve needs a price of over $7 to achieve its rival’s $27 per recoverable ounce rating. Clearly, there is enormous scope for a rerating. Quite what will unlock it remains to be seen, but it is a reasonable prospect if you maintain a cheery outlook on the gold price.

Combination

Combining the projects could well make sense for a major who can afford the nearly $1 billion in estimated capital costs plus the likely $1 billion in acquisitions costs. But the benefit would be in total production costs falling to around $180/oz on current projections and delivering the magical million ounces of gold a year.

The trigger for the mammoth project is surely some sort of settlement with Cristinas’s feuding parties and a more secure title than a contract.

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