Gold Reserve Inc. Q2 2009 Earnings Call Transcript

Aug.18.09 | About: Gold Reserve, (GDRZF)

Gold Reserve Inc. (GRZ) Q2 2009 Earnings Call August 18, 2009 4:30 PM ET

Executives

A. Douglas Belanger – President, Director

Analysts

Scott Newhall – Trees Investment Counsel LLC

John Bridges – JPMorgan

Robert C. Hodgson – BlackRock, Inc.

Operator

Good day, ladies and gentlemen, and welcome to the second quarter 2009 Gold Reserve earnings conference call. My name is Amisia, and I will be your operator for today. At this time, all participants are in listen-only mode. We will conduct a question-and-answer session towards the end of this conference. (Operator Instructions) As a reminder, this call is being recorded for replay purposes.

I would now like to hand the call over to Mr. Doug Belanger, President of Gold Reserve. Please proceed, sir.

A. Douglas Belanger

Thank you very much, and welcome to the second quarter conference call. In my usual format, I will go through a number of issues and areas and then take Q&A.

First, financial statements. I think the most important thing that people focus on is our cash position in the first week of August is about just under $95 million. It actually went up a little bit as a result of small equipment sale and I’ll talk about that a little bit later. We also had a profit realized from some investments of $1.8 million. And of course, we’ve also as I have said in the past quarters, we’ve been looking to cut expenses, quarter-over-quarter from last year. Our expenses are down about 50% in total. In some cases, some areas like technically down way more than 50%. So that resulted with the gain from the sale, gain from investments and the reduction in expenses. Our net loss was reduced considerably from $0.07 a share to $0.01 a share and that cost cutting will continue, substantial cost cutting be at from this point will probably depend on more on what happens in Venezuela than anything else.

In Venezuela, we were notified by the government of the denial of the extension of both the Brisas and El Pauji concessions, however, if you read our news releases 9/16/2009 and 9/17/2009. You will see that we had already extended both those concessions and while they are not material in terms of the reserves, it does show continued situation in Venezuela that they are looking for a different direction in mining I think in terms of how mineral rights are held.

We made a strong point I believe in both news releases about the fact that this did not follow their mining law. This is a fairly clear legal opinion, because we did apply for these extensions on time and under Article 25 of the current Venezuelan Mining Law, which is all we can look to the extensions were timely filed. And therefore since there was no comment, which the government admits in the six-month timeframe required for government contact, then they are automatically renewed. So but it’s obviously sending a message. We get the message. We’re proceeding apace with the arbitration situation. I did want to note too though that we still are in compliance in Venezuela. In fact just recently we received a certificate of compliance from the Labor Ministry, which informed the Ministry of Mines and other Ministries that we are in full compliance with all of our labor issues in Venezuela.

So we follow the law and that will certainly help us as we go forward in arbitration. In arbitration, we are moving apace with that to prepare our Memorandum of Claim and unless something changes, it’s a somewhat of a fluid situation as many of you are aware in Venezuela, but something changes relative to for example, a settlement. We do expect to be in a position to file the claim in late October. And that is our intention to do so as I said unless something changes. We of course would like to settle this amicably, but the ball is definitely in Venezuela’s court.

And I will talk a little bit more about the other things in Venezuela. I think that are important litigation against in Endeavour and Rusoro is proceeding to discovery as a result of the rulings, which were not only the ruling and the injunction but the denial of the leave to appeal and some limited discovery we got as a result of the injunction hearings and whatnot. We may or we’re contemplating looking at modifying some of that suit but to talk more than that obviously wouldn’t be prudent. But that is proceeding towards the discovery phase.

The equipment, I mentioned we sold some of our mobile equipment, which is probably the, I mean there is a lot of mobile, as you can imagine there is a lot of mobile especially CAT equipment around the world. So we were able to sell it for $7.3 million, we took a loss on it. However any losses that we may or may not incur on this equipment as we go forward we would also be added to a potential arbitration claim.

Over the summer, the things were picked up a little bit in the late spring. We have a lot of interest in the equipment and we still have people looking at it. Things have slowdown I think it’s probably somewhat a little bit to do with the economy but probably more to do with the summer breaks. And but we did complete in July the equipment sale of the mobile equipment.

Of course we’re also looking at opportunities where we might deploy that equipment primarily the crushers, the SAG and ball mills, but of course that’s a kind of a narrower market than just simply selling it to another mine developer, because obviously a lot most of the big buyers or the multitude of buyers are major companies who aren’t looking to sell properties or look for financing. So that continues and as they said I think in previous quarters unfortunately we are looking at potential deals to invest in or potential merger acquisition candidates until we actually do something because of the confidentiality agreements, there is not too much we can say.

We do continue to look and we have identified a number of potential opportunities. So the overall priority right now for the company is obviously Venezuela and arbitration, dispose or have a disposition of the equipment one way or another then look at the capital structure and looking at opportunities in both the debt and common stock area, looking at opportunities and then of course the litigation against Rusoro and Endeavour.

I would add a few more comments on what’s going on in Venezuela. It’s pretty obvious that the policies or the direction that government wants to go is different than certainly where it’s been for a number of years. I don’t think that’s a big revelation. But the fact is the Ministry of Environment hasn’t issued any permits to anyone in the mining industry that we’re aware of for almost the last two years. MIBAM keeps talking about a new mining law. There is a new draft mining law in front of the Congress, but it doesn’t appear to be moving anywhere, but again the policies with which they are hoping to [adapters] or through their public comment are basically removed away from contracts and concessions, which is the current Mining Law. And having joint ventures with government corporations, where the government has the majority position at least 51%.

Unfortunately, the way the government has looked at these joint ventures to that we’ve seen so far or the comments we’ve obtained is that, they believe they own the resource and to an extent all governments do, although we own the mineral right. But when they look at these joint ventures, they’ve instead of you giving them 51% if you want to go to a JV they look at more or like they are giving you 49%. So and then they somewhat expect some compensation for that 49%. So we don’t see a situation that’s financially viable. To be blunt, I think the situation in Venezuela, while looking for an amicable conclusion to this. Certainly, we have moved past, trying to find a resolution to the problem I guess it’s stating it in a clear analogy, this is no longer a rescue and recovery operation. This is rescue and rescue operation, it’s more of a recovery the body is dead.

So we will be looking to recover our investment and our profits. The other aspect to I mentioned in the last quarter, which continues I did make some modifications to the gold sales law. Today I did the quick calculation based on a currency exchange rate of 6.8 Bolivars to the dollar in the free market rate. That amounts to the government paying you, if you offer your 60% of your production to the government they would end up paying you the equivalent under about $295 an ounce in Bolivars at the official rate.

I don’t know if any operation that could make money in this day and age at those levels. So it also is a problem going forward even if you could get this thing back to square one. So as I said we’ve moved it from a rescue operation to a recovery operation. We did have some good news though in the quarter, in one sense somewhat indirect good news, Russia signed a Bilateral Investment Treaty with Venezuela was that important well. One of the things that you have certainly been seeing in the news is Venezuela’s desire, refusal to recognize or be involved in arbitration they want to get away from our international arbitration. Obviously we are protected under the Canadian Venezuela BIT even if they did try to get away there is a tail period that protects such things, but one importantly, in most BITs you get a situation where they essentially leave the concept of compensation somewhat vague usually in these the language is something like fair and just compensation, if there is a violation of the treaty and that’s consistent with the Canadian Venezuelan one. And of course each side argues in the case of the corporations would argue that the market value is the true value of the asset being expropriated and the governments argue that book value or something reflective of book value, is the reasonable one.

Well, what is interesting is in the Russian Venezuela BIT is they include international arbitration in the BIT rather than reject the notion and more so and more importantly to other people with potential arbitration disputes. They in that agreement, they have defined what fair and just compensation is and Venezuela has agreed that fair and just compensation is market value. And I don’t think I have to spend much time talking about what the market value of the 10 plus million-ounce deposit is in these markets with these prices reflecting going back to the financial conditions that existed in May of ’08.

So we continue to monitor the situation in Venezuela. As I have said, the balls in their court, we would be happy to sell this amicably with Venezuela or even if third-party if Venezuela looks to develop it with someone else, but our objective now is to extract the full value out of our investment and shareholders’ investment in that project.

I think on that note, I will start taking questions.

Question-And-Answer-Session

Operator

(Operator Instructions). And the first question comes from the line of Mr. [Ron Pintati] Please proceed.

Unidentified Analyst

[Ron Pintati].

A. Douglas Belanger

Hello, go ahead.

Unidentified Analyst

Hi, how are you?

A. Douglas Belanger

Well, a little bit long.

Unidentified Analyst

I’ve just bought the stock of your company here a couple of weeks ago. So I don’t know much about what’s going on. Have you got prospects in the United States if you’re looking at possibly or in any other friendly country?

A. Douglas Belanger

Yes, I mean, primarily, while we would look at anything almost anywhere. We do have some priorities and in terms of regions North and South America, obviously less politically intense countries, Canada, the United States, Mexico, Peru, Brazil, Chile are obvious candidates.

Unidentified Analyst

Nothing that’s coming close to saying hey now that sounds something really good?

A. Douglas Belanger

No, I really I can’t comment, because sometimes on these things, you don't think something will happen and then it happens very quickly, other things take a long time to develop. So it’s a kind of one of those things when it happens, it happens. Most of the time, though the situation is we don’t go into these situations where we are dealing purely with public information, pretty much every thing we look at, we agree to a confidentiality agreement, which usually includes a standstill of some kind. So we are not going to go and make a hostile bid on any of these people. If we like what we see, we try to work something out. So we are that way, if we do make an investment, we are making an investment from knowledge as opposed to just relying on public information.

Unidentified Analyst

The estimate was that you were going to lose $0.04 a share and did I hear you right saying that you only actually loss of $0.01 a share?

A. Douglas Belanger

Yeah. That’s correct, primarily because we had an investment. We made $1.8 million on. And so that brought us some revenue and then of course we’ve been on substantial cost cutting and we did cut from the second quarter of last year to the second quarter of this year, we’ve cut expenses by about 50%.

Unidentified Analyst

All right. Thank you very much.

A. Douglas Belanger

Okay.

Operator

And the next question comes from the line of Mr. Scott Newhall. Please proceed.

Scott Newhall – Trees Investment Counsel LLC

Hello, Doug.

A. Douglas Belanger

Hi, Scott.

Scott Newhall – Trees Investment Counsel LLC

How are you? I had a question about the equipment sale. The $3 million loss I guess you took on the equipment will be added to the claim, is that…

A. Douglas Belanger

That’s correct.

Scott Newhall – Trees Investment Counsel LLC

Okay. And then…

A. Douglas Belanger

And then, that’s I think in terms of percentage that that stuff is pretty abundant out there. So that’s probably where we get the largest percentage haircut although it was not a large amount of the equipment.

Scott Newhall – Trees Investment Counsel LLC

Okay. And then I guess in terms of purchases in the quarter, it looks like you bought $10 million of bonds and some equities. Were the bonds from these companies that you have been looking at or were they some of the convertors just have…

A. Douglas Belanger

No. They were just longer-term securities that, I guess by definition are classed as longer-term.

Scott Newhall – Trees Investment Counsel LLC

Okay. So that wasn’t purchasing of the convertible?

A. Douglas Belanger

Yes.

Scott Newhall – Trees Investment Counsel LLC

Okay. And then the equities are you able to talk about any of the investments that you made?

A. Douglas Belanger

Not really, no, because anything that we buy generally it’s been something we go to CA with.

Scott Newhall – Trees Investment Counsel LLC

Okay. And how many confidentiality agreements do you have at this point?

A. Douglas Belanger

Oh! God. Ballpark, I’d say more than 20.

Scott Newhall – Trees Investment Counsel LLC

Okay. How many serious contenders in those 20 are there?

A. Douglas Belanger

Oh. I don’t know. There is a couple or three that we have a level of interest in that. We may wish to do something. We are looking at potentially various structures that we might employ, which at this point we do know of the other side will be acceptable to. I think we are making progress in the sense of clarifying our own situation, because obviously what’s happening in Venezuela. Our debt situation is something that in any company we talk do they, they want to look at understand. So as we make progress there, we will clarify that situation.

Scott Newhall – Trees Investment Counsel LLC

Okay. And then if you can remind me, how many letters did you actually send out about that arbitration claim in April?

A. Douglas Belanger

How many letters, I mean in terms of to who?

Scott Newhall – Trees Investment Counsel LLC

To whom?

A. Douglas Belanger

No, I think at least six or seven that I can think of to various senior ministers and other people in the government like the Attorney General’s office that kind of thing.

Scott Newhall – Trees Investment Counsel LLC

And I mean do you, if I recall you sent one to Chavez's office, have you got an indication that actually read these letters?

A. Douglas Belanger

We think so, because there has been reference to it in the local news. So even if he didn’t physically see it. I think they are aware of it. You never know, but you know that, we know now that senior people in the government have seen the letter.

Scott Newhall – Trees Investment Counsel LLC

Okay. And then what is actually left in the country at this point. I mean I thought you are taking out a lot of your materials, I mean do you have everything for your case outside of the country at this point or can they lock you down for something or how does that work?

A. Douglas Belanger

Yeah, no. We have everything; we believe we have everything, but certainly everything that we need to prosecute the case. We have outside the country and there’s no, there is some very minimal assets like a couple of generators, pickup trucks things like that, but nothing of any major value. We add the value that, unfortunately is remaining in the country is the property itself.

Scott Newhall – Trees Investment Counsel LLC

Can’t think that with you…

A. Douglas Belanger

Yeah. We are – as I said, our intention if nothing changes. Our intention is to file the claim in late October and be prepared to do so.

Scott Newhall – Trees Investment Counsel LLC

Okay. And October 21 would be the first date that you could do something?

A. Douglas Belanger

I think that in six months so within days or whatever that, yeah.

Scott Newhall – Trees Investment Counsel LLC

Okay. Okay, and in terms of Venezuela, I mean this whole BIT that Russia had, it seems like that should really decrease the discount rate for recovery. So that $5 billion…

A. Douglas Belanger

Well, it certainly….

Scott Newhall – Trees Investment Counsel LLC

That you had, I mean it should if you discounted it a pretty small number, still adds up to a couple billion dollars? Correct?

A. Douglas Belanger

Well, yeah. You look at various external tests that in a loss profits claim that you’re going to look at various values. Certainly, regardless of what was in the Russian BIT, we would assert that anyway, but obviously when you’ve got a panel of judges, they are asking for testimony from both sides as to what’s fair, each side makes their best pitch as to what’s fair and reasonable. Well, if the other side is already defined that to them fair and reasonable at least in the Russian BIT is market value that changes quite a bit from book value.

Scott Newhall – Trees Investment Counsel LLC

Okay.

A. Douglas Belanger

And so, you’re looking for indications of what each side is trying to defend as their position and while that’s not in the Canadian, Venezuela BIT, which was signed in the 90s. Obviously, this is a here and now real time statement by Venezuela that in the event of violation of an investment treaty, they believe that fair compensation is market value. It’s not certainly a kind of a kind of a quid pro quo. That’s exactly the way it’s going to be determined in our case, but it’s one of those things that it couldn’t hurt.

Scott Newhall – Trees Investment Counsel LLC

Okay and…

A. Douglas Belanger

And obviously you’re right. I mean market value when you look at what’s the 10 million ounce deposit exchange at when there is transactions. First of all, there is not too many 10 million ounce deposits that ever get ever sold. But when you do look at those, it is considerable. And let’s say throwing numbers around, we’ve estimated in the letter, a claim in the neighborhood of $5 billion. And that’s our undiscounted number, but that’s the gross value. So obviously, there will be a number of evaluation tests that can be applied to this process. And they all as you say, no matter what discount factor you employ, you’re coming up with big numbers.

Scott Newhall – Trees Investment Counsel LLC

Okay. And then, I’m guessing you’ve hired a firm and they’ve looked over the materials at this point. And I mean, have they looked over like the four boxes of stuff you brought in from Venezuela that you thought was pertinent and think that while you have plenty or how does that work?

A. Douglas Belanger

Well. I’m not going to comment on their attitudes. We did hire White & Case out of Washington who are considered the Top Tier International arbitration firm. We are very pleased with their work so far. And we are confident I said this many time, more of a generic statement, but anybody goes into any legal process, thinking it’s a slam dunk is being naive. It’s a process that it will take time and effort, but we believe we have prepared for it, we are very confident of our case. And we believe that if we are diligent, we should prevail quite strongly.

So even and as we say even a just a win on the violation of the treaty and recovery of investment is a huge number relative to our current market cap, loss of profits, which I think given the quality and quantity of work we done and to a lesser extent, but it as you say couldn’t hurt that the definition of market value in the Russian BIT. And I think that people forget that the reason that they revoked our permit was ostensibly for environmental reasons. Well, based on the rhetoric out of Venezuela and what’s been going on, that doesn’t appear to be the case, which again potentially enhances our claim or the veracity of our claim.

Scott Newhall – Trees Investment Counsel LLC

Okay. And then I guess you were saying that you had $95 million in cash at this point today. And how much is invested in the equipment? I mean is that any of the restricted cash that you put aside for the equipment or what would be the gross number of the current cash plus what you’ve put in?

A. Douglas Belanger

Plus the equipment would probably be upper in the 145 at book value on the equipment.

Scott Newhall – Trees Investment Counsel LLC

Okay, great. Thank you so much, Doug.

A. Douglas Belanger

Okay.

Scott Newhall – Trees Investment Counsel LLC

And good luck with the case.

A. Douglas Belanger

Thank you.

Operator

And the next question comes from the line of Mr. John Bridges with JPMorgan. Please proceed.

John Bridges – JPMorgan

Hi Doug, John Bridges.

A. Douglas Belanger

Hi, John.

John Bridges – JPMorgan

I think my question was answered. I was going to ask about the equipment, but terrific a good work, good luck.

A. Douglas Belanger

Yeah. We are working apace as they say.

Operator

And the next question comes from the line of Bob Hodgson with BlackRock. Please proceed.

Robert C. Hodgson – BlackRock, Inc.

Yeah. Hi Doug. A couple of questions.

A. Douglas Belanger

Hi. Bob.

Robert C. Hodgson – BlackRock, Inc.

Hi, could you run through some of the timelines in terms of the, if you file late October for arbitration kind of lead us through what the timeline on that has been would be. I know you probably have done this before and also with respect to the lawsuit that you have against Endeavour and Rusoro, is that a combined case or is that two separate cases? And could you lead us through of the timeline on that as well and if they’ve actually approached you regarding a settlement or not? Thanks.

A. Douglas Belanger

Okay. On the arbitration after if we file, let’s say end of October. It is two to four months to constitute the panel. And then, I believe one to two months for the first kind of hearings. So we should have some news kind of first quarter of 2010. And then it goes on, it depends on what issues that Venezuela makes in terms of for example, they may challenge jurisdiction. We think we have a very strong situation there, but you go through it. So it’s kind of a worst, best and best guessed or most optimistic. But I think the best guess if this thing goes well, not great, but well. We are looking for an award or a decision in late 2011 or early 2012 to be a little bit slower than that. It could be a little quicker, but it really it’s a function of what Venezuela does somewhat. We can’t completely control the time process. I can say that the firm that we choose has a good reputation for trying to keep the delays to a minimum, although it is a legal process, which that’s an inherent risk. So two to three years is probably the best from here, from this point, is probably the best guess right now.

Obviously, we are going to stay very focused on this and not just kind of let it drift around, because the sooner or the better. So I think that’s about the best I can do for a timeline things basically each side when there is and the actual process you have your claim, then they respond, then there is rebuttals and a cross-rebuttal, and then there is potential hearings, merits hearings at the end. So it’s about five or six points that have to be dealt with and then people have two to three or four months in response time in each of those things. So you add them up and that’s where you come up with the two-year or so 2.5 year of timeframe.

So that’s about all I can say on that. On the other litigation, there are separate cases completely separate one is, the other one is in Ontario. And that one again it’s more of a commercial legal process. I think we are advised that it could be about a two-year or so, maybe less than two years process. Again, depends what the other side does and of course none of either the arbitration or this case, the Canadian case that could be obviously settlement discussions. We wouldn’t comment on any potential settlement discussions until we actually would have something.

Robert C. Hodgson – BlackRock, Inc.

And the…

A. Douglas Belanger

Like in any case though, I think from a corporate business standpoint, our attitude is you always wish you can settle legal and litigation processes, makes more sense than dragging it out, but settlement has to be fair.

Robert C. Hodgson – BlackRock, Inc.

Right. But are the suits, separate suits one against Rusoro, one against Endeavour?

A. Douglas Belanger

No they’re jointly and severally.

Robert C. Hodgson – BlackRock, Inc.

Okay. That’s okay.

A. Douglas Belanger

It’s one suit against both…

Robert C. Hodgson – BlackRock, Inc.

Okay. And with respect to on the arbitration assuming you win, what recourse do you have to monetize that award?

A. Douglas Belanger

Well, generally speaking in an World Bank, this would be the ICSID division of the Word Bank. The International Center for Settlement of Investment Disputes and essentially an ICSID award is like a judgment anyone of the 72 member World Bank countries. So the collectibility of it, especially since Venezuela is relies heavily on exports, obviously primarily oil. That means there is a lot of international assets that are potentially claimable, if they refuse or try to avoid payment. So it’s like you’ve gotten at a legal judgment in any one of the 72 countries. And so recovery, if they wanted to be difficult, it would be another process, maybe a few months, six months whatever, but it does, it’s a process that has teeth. So it is collectable or obviously people wouldn’t do this if it wasn’t.

Robert C. Hodgson – BlackRock, Inc.

Okay, great. Thanks Doug.

A. Douglas Belanger

But generally speaking, I think the reaction of most awards is government’s, if government’s lose, they pay them.

Robert C. Hodgson – BlackRock, Inc.

Okay.

A. Douglas Belanger

Because to not pay them does have implications to their national debt interest costs and everything else.

Robert C. Hodgson – BlackRock, Inc.

Okay, great. And are there organizations of private equity firms that would purchase the outcome prior to you doing an award?

A. Douglas Belanger

Well, from a – I know the rules, not wanting to practice attorney, but I do know the rules. ICSID of the World Bank process or you cannot sell a lawsuit essentially in an arbitration in ICSID nor can you transfer the domicile of the claim.

Robert C. Hodgson – BlackRock, Inc.

Okay.

A. Douglas Belanger

Now if someone took us over that’s different. I mean it will still survive, but in terms of us trying to monetize it prior to no that's not possible.

Robert C. Hodgson – BlackRock, Inc.

Okay, great. Thank you.

Operator

And the next question comes from the line of Mr. [Rene Sulan]. Please proceed.

Unidentified Analyst

Yes. I would like to know what are the profits or the deficit for this trimester, please? Thank you.

A. Douglas Belanger

Yeah. The loss for the quarter was $787,556 or $0.01 a share compared to a loss of $4.172 million or $0.07 a share in the 2008 quarter. And the six-month loss was $4.498 million compared to a loss of $7.031 in the six-month of 2008. So $0.13 versus $0.08 this year, as I said primarily due to increased revenue from gain on disposition of securities and also a reduction in our operating expenses.

Operator

(Operator Instructions). There are no further questions at this time.

A. Douglas Belanger

Okay. Well. You all certainly know how to get a hold of me. So if you have any further questions just call our 800 number, 800-625-9550 and I will be happy to answer any further questions. Otherwise, I will other than news releases between now and say I guess late October early November. And obviously if we when we filed the claim should we do that. We will certainly be putting out a news release on that. So thank you for calling in.

Operator

Thank you for your participation in today’s conference. This concludes the presentation. You may now disconnect.

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