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Gold Reserve deal with Venezuela a potential turning point for Canadian miners with arbitration wins (3/01/16)

Canadian mining companies are putting together a pretty good winning streak in international arbitration cases against foreign governments.

But their record of collecting on those awards is a lot more mixed.

Late last week, a tiny firm called Gold Reserve Inc. shocked many onlookers by reaching a potentially favourable settlement with the Venezuelan government, which it has been battling in court for more than six years. On the other hand, Khan Resources Inc. and Stans Energy Corp. have won high-profile decisions against Mongolia and Kyrgyzstan and have yet to see any benefit from their efforts.

Gold Reserve spent much of the 1990s and early 2000s developing the Brisas project in Venezuela, while a separate Canadian firm called Crystallex International Corp. worked on an adjoining gold deposit called Las Cristinas. Each company invested hundreds of millions of dollars in Venezuela before Hugo Chavez’s government expropriated them both in 2008.

Both firms filed international arbitration suits. And in September 2014, Gold Reserve won an award worth more than US$740 million. (The Crystallex case is still ongoing.)

That is a major bill for Venezuela, where the economy is reeling due to weak oil prices and runaway inflation. But if the government refused to pay, Gold Reserve could potentially seize sovereign assets located outside the country. A refusal could also have a negative impact on Venezuela’s credit reputation.

Venezuela decided to settle. The government said it formed a joint venture with Gold Reserve to develop both the Brisas and Las Cristinas projects. Gold Reserve said Venezuela also agreed to pay an arbitration award, though it did not specify the amount.

“We’re not commenting on the dollars,” chief executive Doug Belanger said, though he added that Venezuela “recognizes the award.”

At this point, the two sides have only signed a memorandum of understanding. If the settlement agreement falls through, Belanger said Gold Reserve would continue to try to claim its full arbitration award.

Meanwhile, Toronto-based Khan has failed in its efforts to get Mongolia to pay up or settle. The company won a US$100 million award early last year after the state seized its Dornod uranium project.

“It’s been a year now,” Khan chief executive Grant Edey said. “We’ve asked them to pay and they’re reticent. They don’t respect Canadian companies or the rule of law.”

Mongolian officials will be in Toronto next week, trying to solicit investment in the country’s mining sector at the Prospectors and Developers Association of Canada (PDAC) conference. It will be a tough sell as long as the state refuses to pay out Khan.

Edey will be meeting with the Mongolians ahead of the conference and hopes the two sides can finally reach a settlement. But for now, Mongolia is trying to annul the arbitration award with a legal challenge in France.

In the case of Stans Energy, the company won a US$118 million award against Kyrgyzstan in 2014 that got annulled by Moscow courts the following year. Regardless, the company is trying to get the award recognized by the Ontario Court of Justice.

Legal experts said that when countries have no choice but to pay out arbitration awards, they usually do agree to pay or settle. Argentina, for example, recently settled arbitration cases and ended a long-running dispute with creditors.

On the other hand, Russia has shown no willingness to pay a US$50 billion award to the former shareholders of Moscow-based Yukos Oil Company, a company that during the past decade was allegedly bankrupted by the state and later had its assets nationalized.

“Most cases wind up seeing some form of settlement at the end of the day, because these awards are enforceable and have some kind of bite,” said Robert Wisner, co-head of the international arbitration practice at McMillan LLP.

http://business.financialpost.com/news/mining/gold-reserve-deal-with-venezuela-a-potential-turning-point-for-canadian-miners-with-arbitration-wins