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Why Bother Even Going Near Venezuela?

By David J. DesLauriers | Resource Investor

28 Sep 2005 at 02:17 PM EDT | DENVER (ResourceInvestor.com) -- The Chavez debacle occurred in the week leading up to the Denver Gold Forum, and thus was much discussed at the event itself. Four major listed mining companies at the development and production stages are affected by the nut that heads the country, but none of them will admit to this fact.

Indeed, denials have been the order of the day and Jon Nones has done a fulsome job in reporting on events. From Hecla [NYSE:HL], we heard “When you boil it down, the Venezuela government is looking for companies to come in and mine the properties properly. That’s what we’ve been doing,” and “With all the noise that’s been happening in Venezuela, we’re still comfortable and happy to be there,” said President and CEO Phillips S. Baker, Jr.

Crystallex [AMEX:KRY; TSX:KRY] didn’t disappoint saying “In some respect, we’re the poster-child or the blueprint [company].” “Las Cristinas will roll through the process.” And “As we see it, this doesn’t affect Crystallex in the short-run or the long-run,” said CEO Todd Bruce.

Finally, Bolivar Gold [TSX:BGC] Chairman and CEO Serafino Iacono said “The government never once said they would confiscate or take out concessions.” Not yet, they didn’t.

Gold Reserve [TSX:GRZ] no doubt made similar noises, although didn’t attend the Denver Gold Forum.

Bolivar is a company that is currently doing a feasibility study on the economics of expanding their output to something like 350,000 ounces of gold per year at cash costs below $180. It seems to me that that would put them squarely on Chavez’s radar as it would generate almost $100 million in cash flow per year.

Crystallex calls itself the blue print. Whose blueprint? The Chavez blue print is to strip these concessions, and the sheer size of Las Cristinas puts it in a perilous situation. Further, with Gold Reserve’s Brisas property next door, why would they not be next to go?

What the market doesn’t seem to understand, is that Chavez SIMPLY DOESN’T CARE. And if he plans to take just one concession, why not take them all? In for a penny, in for a pound.

Going Forward

Regardless of whether any of these properties are confiscated, the fact that no new concessions will be granted means that BGC, GRZ, KRY and to some degree the more diversified HL, will always trade at a discount.

The second part of the discount will come from a fear of Chavez, and cash flow multiples will be a fraction of peers, with no real institutional money willing to get on board.

The only thing that these companies can hope for to save their bacon would be a coup led by forces sympathetic to the U.S./democracy. Anything can happen, but Chavez seems to have a stranglehold on opposition at this point in time, and the U.S. has their hands full – it would be very difficult for them to do a Chile repeat in this day and age, especially given the other fronts they are focused on right now.

Other Opportunities

Essentially the broader issue that this story is meant to illuminate is: Why touch these Venezuelan equities at all, when there are so many other good development and production stories out there that don’t have this uncertainty, and still have great upside?

Investing in Venezuela is not an educated bet, and it now has been completely disconnected from the companies or their assets – it is simply a bet on an unstable, mercurial nutcase named Chavez. No one can predict his next move, including the analysts, so even if the new Castro behaves, there will always be huge discounts.

Conclusion

Why not look at some of the other opportunities that have been profiled by your correspondent just in the last two days: Mundoro [TSX:MUN], Anatolia [TSX:ANO], Metallica [TSX:MR; AMEX:MRB] and RNC Gold [TSX:RNC].

They offer great upside and don’t present the same aggravation and sleepless nights worrying about whether a dictator in South America plans to scupper your retirement to further his communist agenda.



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