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Gold Reserve Inc. (GRZ) is a junior gold mining company based in Spokane, Washington. Its primary asset, Las Brisas ("Brisas") mine, one of the world's richest gold mines, is located in the KM 88 mining district in Venezuela. It contains $25 billion worth of gold and $4 billion worth of copper.

The company has spent nearly $300 million to develop the gold mine since its acquisition in 1992. In 2008, right before the company could start the construction of the mine, the Venezuela government arbitrarily revoked company's mining permit. Subsequently, in 2009, the Venezuela National Guards seized the Barisa mines. After failed negotiations with the government, Gold Reserve initiated an arbitration against the Venezuelan Government at World Bank's International Centre for Settlement of Investment Disputes, seeking $1.9 billion compensation for damages. The stock price plummeted from $5 all the way to $.30 before settling at around $2.

Gold Reserve commons are highly speculative. At this moment, the commons are essentially an option on the future payout from the arbitration rulings or any settlements from the Venezuelan government.

On the other hand, the Gold Reserve convertible notes are very attractive, trading at 56 cents on the dollar (July 12, 2011 closing price). The $101 million convertible notes are the only debt on the Gold Reserve balance sheet, therefore the highest priority of claims on the company's assets. Better yet, note holders have the right to ask the company to redeem the notes on June 15, 2012, either in cash or common shares.

There is $68 million cash and $28 million worth of brand new mining equipment. (Note: $28 million is the net realizable value, a.k.a. liquidation value.) The mining data company has collected over the years are also valuable to any potential mining operator in the Barisa mines.

Debt:

  • $101 million face value of the convertible notes ($57 million market value)

Assets:

  • $68 million cash
  • $28 million worth of mining equipment
  • mining data on Las Brisas
  • potential payout from the $1.9 billion arbitration

It seems very likely that the company will have to satisfy the convertible notes in a mix of cash and common shares. Regardless of the outcome of the arbitration at World Bank, convertible notes holders should have very limited downside and the potential to realize the full face value of the notes.

Source: Gold Reserve Convertible Notes: An Attractive Investment With Limited Downside