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James West, MidasLetter (16 clicks)
Long only, long-term horizon, medium-term horizon, gold & precious metals
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The ongoing battle for the hearts and minds of Gold Reserve Inc. (GRZ) shareholders by Rusoro Mining (TSX Venture: RML) proceeds apace with both companies issuing press releases designed to win over shareholders. Despite Gold Reserve’s desperate attempts to convince its shareholders that Rusoro’s bid is not in their interest, Gold Reserve’s shares are trading as if the market believes the shareholders of Gold Reserve will indeed tender their shares before the deadline of January 21st.

In fact, yesterday Gold Reserve announced that it “has filed an investor presentation with Canadian securities regulatory authorities and the Securities and Exchange Commission ("SEC"), in connection with Rusoro Mining Ltd.'s ("Rusoro") (TSX-V: RML.V) unsolicited offer to acquire Gold Reserve.”

Statements within the presentation are misleading and indicative that the Gold Reserve team is throwing as much mud at this wall as possible, praying that something sticks.

Let's look at the 10 “reasons to reject the Rusoro Offer” contained in the presentation.

1. “The Rusoro Offer does not represent a premium as it does not adequately compensate Gold Reserve Shareholders for the fair value of the world-class Brisas Project or Gold Reserve’s cash assets.”

This statement is extremely misleading, as it suggests that Brisas should be valued absent the reality of the political situation. To a company that can get the mine permitted and built through all the political hurdles, it has value. To a company that cannot, well...it may as well be a garbage dump. Gold Reserve shareholders need to be cognizant of this important difference.

2 “The Gold Reserve Board believes Rusoro lacks the financial resources to fund its aggressive growth plans for the proposed combined company.”

In all likelihood, Brisas would be subject to the same 50/50 partnership that its acquisition of both Hecla Mining and Goldfields became subject to. This means the Venezuelan 50% partner would be responsible for 50% of any costs. That reduces Rusoro’s obligation to 50% of costs, which makes it even more able to meet any obligation. And again, senior management’s affiliation with the Russian industrial oligarchy puts the whole issue of financing on a very different footing. Rusoro’s successful startup of Brisas is within the national interest of both Venezuela and Russia. Gold Reserve’s is contrary to the national interest.

3. "Rusoro’s claim that Gold Reserve Shareholders would own approximately 30.4% of the proposed combined company is misleading.”

This is a matter of opinion and interpretation. Such statements are sweeping and disingenuous in their inclusion.

4. “Based on Rusoro’s track record, Gold Reserve does not believe Rusoro has the operational expertise necessary to even maintain, much less enhance, the value of the proposed combined company.”

Yet again, a matter of opinion, and largely unfounded. Rusoro has demonstrated its ability to construct, operate, and maintain mining operations in Venezuela. Not only that, but expertise is merely a matter of acquisition. Especially with access to Russian industrial expertise, this statement only underscores the desperation apparent within the management of Gold Reserve.

5. “Financial and mining experts raise material concerns regarding Rusoro.”

What is this? A Seinfeld episode? You can pay an “expert” to say anything you want. Utterly immaterial.

6. “Rusoro has accessed Gold Reserve’s Choco 5 Project without Gold Reserve’s authorization and has conducted unauthorized exploration sample drilling.”

No evidence in support of this allegation has been provided. Why have no criminal trespassing charges been filed against Rusoro if this is the case?

7. “There is no reason to believe that Gold Reserve Shareholders would benefit from Rusoro’s purported “established” relationship with the Venezuelan government.”

This is where Gold Reserve shareholders need to understand the level of desperation within their management team to stay part of the program. The fact that Rusoro is in possession of and operating gold mining operations according to the 50/50 partnership structure clearly articulated by Hugo Chavez and his ministers is bald faced ignorance of the facts. The bottom line here is Russia and Venezuela.

8. “Gold Reserve’s financial advisors, J.P. Morgan Securities Inc. and RBC Capital Markets, have each provided a written opinion dated December 30, 2008 that the consideration offered under the Rusoro Offer is inadequate, from a financial point of view, to Gold Reserve Shareholders.”

J.P. Morgan and RBC Capital markets syndicated US$164,200,000 in a combination of Gold Reserve convertible notes and common shares to its clients with Gold Reserve shares valued at $5.80 per share. Obviously, anything less than $5.80 a share is going to represent a loss to the clients of J.P. Morgan and RBC Capital Markets who participated. Obviously they are going to call the offer “inadequate” If I was J.P. Morgan and RBC Capital Markets, I’d be negotiating with Rusoro management, not Gold Reserve.

9. “The Rusoro Offer is not a Permitted Bid under Gold Reserve’s Shareholder Rights Plan.”

Another disingenuous statement by Gold Reserve. Do they mean the Shareholder Rights Plan they put into effect after they had received Rusoro’s bid?

10. “The timing of the Rusoro Offer is opportunistic and disadvantageous to Gold Reserve Shareholders”

While the offer is opportunistic, it will not be “disadvantageous” to Gold Reserve shareholders if the result is a Venezuelan gold mining powerhouse that successfully consolidates and operates gold mining operations within a country where it's not what you know, but who you know that ultimately counts.

The Gold Reserve Desperation Presentation goes on to warn of Rusoro’s $80 million Hambro loan, which, given the current economic environment, it will clearly be in both parties’ interest to restructure, if necessary.

Gold Reserve could go on and on pointing out the inherent business risks of gold mining. They are not unique to Rusoro or any mining company for that matter.

By way of disclosure, by the way, I own shares in neither company, nor do I have any relationship whatsoever with either company. I have been studying the difficulties inherent in establishing mines in Ecuador, Venezuela, Bolivia and other politically challenged regions of the world, and the one most important element to unlocking shareholder value in any of these jurisdictions is relationships, relationships, relationships.

Disclosure: no positions

Source: 10 Reasons to Reject Rusoro's Bid: Gold Reserve's Desperation Presentation