Gold Reserve Inc. (GDRZF)

[Enterprising Investor]

Venezuela’s $5 Billion Gold Deal: Progress On Default? (2/25/16)

By Dimitra DeFotis

Venezuela’s government announced late Wednesday that it settled with Canadian mining company Gold Reserve (GDRZF), and will have a controlling stake in a new $5 billion joint venture.

Gold Reserves wanted $750 million including interest for the expropriation of its assets under the Hugo Chavez administration in 2008. The government is fighting a handful of related cases, via the International Center for Settlement of Investment Disputes (ICSID), that seek $3.2 billion in restitution with interest. The government’s bond covenants require that it pay arbitrated awards of $100 million or more within 30 days to avoid triggering defaults.

Eurasia Group analysts Risa Grais-Targow and Agata Ciesielska write that “while the deal demonstrates Venezuela’s willingness to pay its debt, liquidity constraints will still lead to a default in the fourth quarter of the year.” They add:

The Nicolas Maduro administration announced last night that it had reached an agreement with Canadian mining company Gold Reserve that resolves their ongoing international arbitration dispute. The government announced a $5 billion deal that creates a new joint venture (55% state, 45% Gold Reserve) to develop the Las Brisas (Gold Reserve’s former concession) and Las Cristinas properties (a separate ICSID case brought by Crystallex over this concession is still pending at ICSID). According to the government, the deal includes a $2 billion investment and a $2 billion loan. Statements by Gold Reserve suggest that the government intends to use the properties as collateral to obtain additional financing instead of a loan commitment from Gold Reserve itself. While the precise details of the deal are unclear, it seems unlikely that the government can use this asset to generate new liquidity in the near-term.”

They note that Venezuela has other pending cases in arbitration:

Aside from Gold Reserve, the other most advanced cases are Exxon Mobil (XOM) for its Cerro Negro project, and Highbury International, both of which could see their annulment cases conclude later this year. Even after this option has been exhausted, we would expect the government to appeal any enforcement orders. Several other annulment proceedings are underway, but will likely be decided in 2017 or 2018.”

Gold Reserve, which trades over the counter, was up more than 5% Wednesday. Today, the iShares Latin America 40 exchange-traded fund (ILF) was down slightly and the Market Vectors Emerging Markets High Yield Bond ETF (HYEM) was up 0.2%.

http://blogs.barrons.com/emergingmarketsdaily/2016/02/25/venezuelas-5-billion-gold-deal-progress-on-default/