Investing in Venezuelan Mining: Risk or Reward?

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 |  Includes: CRYFQ, GDRZF, HL, ILF
by: Todd MacSween

Like in any investment, risk versus reward is part of the picture. Based on overseas market crashes ... or oil price wars ... or political turmoil ... all companies have both the potential for upside reward or downside disasters.

Many years ago, political risk had a greater influence on the markets. Nobody would have considered investing in Russia, and China and Brazil were much too unstable for investing for many reasons.

Suddenly, it seems like China, Russia, India and Brazil are the markets that are keeping economy and investments going. Anyone who invested in China or India markets had certainly reaped the rewards when the risks were rather uncertain.

Today its Asian markets that determine where the North American market is heading. If the Asian market crashes, so does the world it seems, as we saw a few weeks ago and last May.

Risk is everywhere in today’s markets and that is the direction of the investor to decide.

Media and political bias have too much effect on the normal investors. Media outlets continue to be more concerned about politics,people's reactions and rating rather than reporting the facts or truth to what is going on.

Venezuela with its re-elected President is one of those media-grabbing headline news jobs.

The political differences between Chavez and Bush continue to blind views of the real situation as it stands. War of words and threats is what people see and hear. In reality, Venezuela and the USA need each other, and there is no indication that this will ever change.

In short, people see reports of "nationalization" and fear strikes them. They do not understand much of what is happening, unless they are told by the media or analysts who continue to strive for their own benefit rather than the truth. Venezuela, as well as other countries, is taking control of its resources. By control it does not mean "hostile take-over", but rather a majority control which benefits both parties.

AES (NYSE:AES) CEO Paul Hanrahan said “Of all the business we have done in 62 countries, this turns out to be the most beneficial.”

The US ambassador to Venezuela said that “negotiations seemed to respect peoples' rights.”

Today, oil companies like Exxon Mobile (NYSE:XOM) make $ billions in profits per quarter with nothing going back to help the community. Chavez' view has corporate profit going towards a social-type reward where everyone can benefit from the wealth.

Why would Venezuela not put that profit towards health care, like in Canada? For years, private oil companies have been reaping profits with little concern for the general population. Lord John Browne of BP (NYSE:BP) stated (during an interview) that “only 20 % of oil companies are private, while the other 80% are state owned.”

This is not uncommon. Browne states: “that what is happening in Venezuela is not the beginning of a new era," but these cases have been predicted for some time now, and have no effect on global supply; every Government has the right to increase taxes or fees on production.

Then what’s the big deal now that Venezuela is doing that same thing? The only difference is that in this case Chavez is in charge! Mining in other parts of the world is undergoing major changes where the state is maintaining more control. Venezuela, with its vast gold and mineral reserves, is no different.

Yet because of "the Chavez factor" suddenly there's risk. New mining laws are currently being revamped, mostly to control illegal mining and accommodate small scale miners. Chavez’ view of mining in the 21st century is that companies will give back socially, as well as profit from their endeavors.

Rumors of possible expropriation and hostile take-over are just that and have no merit in Venezuelan law. Larger companies may be causing this fear based on the political situation between the USA and Venezuela in order to gain access to junior miners at a discounted (risk factor) price. This was implied by Scion Capital accusing Gold Fields (NYSE:GFI) of exaggerating the political risk in order to buy Bolivar Gold at a discount price.

Scion, a hedge fund owning Bolivar stock, rallied shareholders to reject this offer. People and companies are using this political difference to cause risk that simply is not there.

On the other side, you have statements made by Chavez with regard to nationalizing mining and taking back idle mines. By this he meant mines that have been abandoned or have no intention to operate or follow Venezuela law. This, however, was just a statement made during election time when any promise or idea goes to the ballot box.

John Sanjay, a market analyst, called Chavez’ government mafia and Chavez "a crazy man." He (Sanjay) is the problem that causes the higher risk talk. He did say he felt bad for the people though, and that was kind since they voted for that mafia government.

Sanjay mentions Hecla (NYSE:HL), Crystallex (KRY) and Gold Reserve (GRZ) as being affected by these comments. Funny that when the companies' CEOs are spoken to, there is nothing whatsoever that affects their circumstance. In fact, they belong to the Executive branch which will not be affected by any of these so called mafia takeovers.

Some analysts, such as Sanjay, appear to be downright nasty when it comes to Chavez. This may be because of recent relations between Bush and Chavez, but one would think an analyst would have to be at least justified with his comments.

Crystallex shares, for example, have taken three major dives based on reports regarding mining nationalization.

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The new mining law is not yet even official. The continuation of false reporting, or incomplete reporting, is too endless to mention, and political views should have no place in the investment community. Where are the days when a company is based on profits and reserves and management work for the investors benefits?

What continues to frustrate investors is that people believe everything they read, or see in the media, even though those reporters continue to twist the truth with no consequence. No matter what news is reported it’s always those three mines involved, somehow, but where is the proof that they are affected?

CEOs of companies mentioned in false reports should be filing charges for stock manipulation based on misinformation. Could they be targeted on purpose for reasons of takeovers? It sure looks that way.

This analyst, as well as others, should have had some facts before reporting such nonsense. He should have realized that Las Cristinas is already nationalized by Venezuela and that Crystallex has a 40 year operating contract, signed and approved and only waiting for an environmental permit.

Could Venezuela take this mine twice?

This has also been subject to a bilateral agreement between Canada and Venezuela. Venezuela stated that the permit will be given when certain conditions are met. Nora Delgado, vice minister for the environment, told the Dow Jones Newswires that “the government is working to give a joint environmental approval to both Crystallex and the Las Brisas mine if they agree to share needed infrastructure.” Crystallex officials have stated that this is taken care of.

The risk /rewards in this case are obvious.

Crystallex has an operating contract with the Venezuelan Guayana Corporation and is based on Chavez’ view of mining in the 21st century. Crystallex has social obligations as well as contract obligations that benefits both parties. Crystallex has won an environmental award and is honoring all contractual agreements. So how, Mr. Sanjay, is Crystallex affected again?

They are however sitting on 14+ mil oz of gold reserves and are currently undervalued compared to their peers due to false reports. Recently CEOs relayed their comments on mining in Venezuela through company reports. All have stated in one way or another that Venezuela was "a good place for mining" and they had "no problems whatsoever."

Venezuela has also opened the door with open arms for any new investors. There continues to be drilling and exploration by other companies such as Valgold Resources [TSX: VAL], with no problems regarding upcoming mining law changes.

Companies would not to go to Venezuela if there was not great opportunity. With changes to the new mining law, would you not have heard by now of any hostile takeovers or problems to existing miners? Mining contracts will be the way of mining in Venezuela and that’s the way it should be. The new mining law will be a source of security for new investors.

Investors have the right to invest wherever they want. It's a shame that political views between reports and reporters must obscure the view of the real situations at hand. The Chavez government has been elected democratically; they are not thugs or mafia as portrayed by Sanjay. They are simply officials doing their best to do their job.

In that regard, Venezuela is no different as far as investor risk than any other country. When a market crashes globally because Asia panics, is that not a much greater risk? When companies embezzle and scandal hits the USA investors (i.e., ENRON) is that not a much greater risk? I think so!

Warren Buffett: “Risk comes from not knowing what you are doing.”

Warren Buffett: “People tend to find themselves retired and poor because, at the end of the day, not taking any risk at all is the greatest risk of all,”

Warren Buffett: “Great investment opportunities come around when excellent companies are surrounded by unusual circumstances that cause the stock to be missappraised.”

Todd MacSween: “Opportunity is knocking, but you must open the door for the reward.”