It’s taken six years and over US$20 million in legal costs, but Gold Reserve (TSX: GRZ; US-OTC: GDRZF) has won US$740.3 million in compensation for the expropriation of its Brisas gold project by the Venezuelan government. It’s one of the largest international arbitration awards ever granted to a mining company in a treaty case.
While the award was only 44% of what the company had sought — US$1.7 billion — Gold Reserve president Doug Belanger says the judgment is a “stunning victory” for the company.
“We believe that the value of the deposit is a lot greater today to Venezuela than what we got [awarded], but having said that, $740 million is a lot of money, and I think it’s in the top-five awards that have been granted in ICSID history,” Belanger says.
“I’m sure you always want more and you think it’s worth more, but I think we have to feel pretty good about the value that we’ve received.”
The judgment by a three-member tribunal of the International Centre for Settlement of Investment Disputes (ICSID), a body of the World Bank, was released on Sept. 22. Gold Reserve claimed that the expropriation violated the Canada-Venezuela Investment Treaty.
Gold Reserve invested US$300 million into Brisas from the early 1990s to the time the project was expropriated, and had just started initial site clearing for building the mine when the government of Venezuela revoked its construction permit in May 2008.
As a junior, the ruling is all the more meaningful for Gold Reserve, which Belanger says had the same team of people in place working on Brisas since 1991.
“We were the people that spent the money, and $300 million by any stretch is a lot of money to invest,” he said. “So I think that was most likely impressive to the tribunal that this was serious money that was spent by albeit a small company — it was a huge project.”
Gold Reserve had delineated proven and probable reserves of 10.2 million oz. gold and 1.4 billion lb. copper at Brisas, in 485 million tonnes grading 0.67 gram gold and 0.13% copper.
The mining world has seen a wave of international arbitration cases lately: Cases involving Crystallex International, Gold Reserve’s neighbour in Venezuela; Rusoro Mining (TSXV: RML; US-OTC: RMLFF), a Russian-backed company with projects in Venezuela that was at one time thought to have an in with the government; Khan Resources (TSX: KRI; US-OTC: KHRIF), a uranium company working in Mongolia; TriMetals Mining (TSX: TMI; US-OTC: TMIAF) (formerly South American Silver), which had its flagship Malku Khota project in Bolivia; and Brilliant Resources (TSXV: BLT; US-OTC: BRLGF) in Equatorial Guinea, are all at various stages in a range of international arbitration venues.
Like Gold Reserve’s case, all of these are investment treaty cases — a newer type of case for Canadian miners, which have been slow to catch on the remedies afforded by international arbitration, says Robert Wisner, a Toronto-based partner at law firm McMillan and co-chair of the firm’s international arbitration group.
“Gold Reserve is probably the first investment treaty case where a Canadian mining company has succeeded in obtaining a substantial amount of compensation,” Wisner said. “There are many older contract disputes that have been successfully resolved in favour of Canadian mining companies, but this is one of the first cases under a Canadian treaty.”
Still, it’s a growing trend, and Wisner says there have been more and more such cases in the past 15 years, as miners pushed into new jurisdictions.
“I think the mining companies have been a little late in becoming aware of these remedies, but as the industry has realized that many of the best prospects are in jurisdictions with high political risk, they’ve started both to put international arbitration clauses in their contracts, and also to plan and take into consideration the possible remedies offered by certain investment treaties as protection,” Wisner says.
While miners are more likely to ensure they have some protection against offside government actions, many of the mining companies that have ventured into jurisdictions that succumbed to resource nationalism are juniors lacking the resources to finance legal action when things go awry.
Gold Reserve has financed its fight largely with cash it had in the treasury that had been raised for construction at Brisas, as well as sales of equipment it had ordered. It’s also had the support of its shareholders and bondholders through the process, which included a 2012 restructuring of convertible debt issued to build Brisas.
But other companies have had to turn to alternative sources, including loans from specialist funds that will provide non-recourse financing in return for a percentage of any award or settlement.
TriMetals Mining — formerly South American Silver — announced in September that it would proceed with a US$385.7-million claim against Bolivia for the July 2012 expropriation of its Malku Khota silver-indium project with the help of a specialist fund.
“Arbitration is expensive,” the company’s chief financial officer (CFO) Matias Herrero says. “One way of funding the arbitration when you’re a junior company that doesn’t have any revenue … is with third-party funders that specialize in funding these types of cases.”
TriMetals struck a deal in May 2013 with one such group that was willing to pay its arbitration costs going forward in return for a percentage of the eventual prize.
“In our case, we had money [for arbitration], but we decided that we wanted to use the money in what we do best, which is looking for mines and exploring — not just paying legal fees,” Herrero says.
The company spun out exposure to the Malku Khota arbitration in B class shares (TSX: TMI.B) last year, before merging with High Desert Gold for its Gold Springs project on the Nevada-Utah border.
A 2011 PEA on Malku Khota revealed strong economics (a US$704-million pre-tax net present value of and a 37.7% internal rate of return at a 5% discount rate) based on measured and indicated resources of 255 million tonnes grading 28 grams per tonne silver and 5.8 grams indium.
TriMetals has not released much information about its third-party funder — including the name of the fund — partly because confidentiality was a condition of the funding agreement, and partly out of caution.
Herrero, who was Rusoro Mining’s CFO before joining TriMetals in 2012, explains that third-party funding is a relatively new development in international arbitration actions.
“Tribunals so far have concluded that it is OK to have these agreements because companies’ [assets] are sometimes expropriated and the government doesn’t pay anything … and the cost to litigate is expensive,” he says.
“But the way these arrangements are put together is sort of new, they’re testing waters,” he says. “It’s not a straight loan … you have to give more than just interest, and we don’t want Bolivia or any respondent to argue that we don’t have rights to the claim anymore because we already gave a piece of that to our funder.”
Herrero adds that the more detail TriMetals provides about its arrangement, the more ammunition it could give to the government
of Bolivia to draw out proceedings.
“Our concern as well is that if we disclose a lot of information, the more we disclose, the more Bolivia’s attorneys will perhaps create hurdles or try to muddy the waters as a means of delaying the process.”
TriMetals reported in late September that it had filed its claim with the Permanent Court at The Hague in the Netherlands under the Rules of the United Nations Commission on International Trade Law. The arbitration hearing isn’t expected until May 2016.
With regard to its funding agreement, TriMetals disclosed that up to one-third of any award or settlement could be used to pay fees and arbitration costs.
While it sounds fairly reasonable for fees and other costs to eat up one-third of an award, the cost could be higher.
Take, for example, the case of Crystallex, which did not have the money to fight the February 2011 expropriation of its mining rights to Las Cristinas — a 27 million oz. gold deposit located next door to Gold Reserve’s Brisas.
But on the strength of its claim, Wisner’s firm McMillan helped Crystallex obtain a large debtor-in-possession (DIP) financing to fund its arbitration proceedings, even though it was insolvent under the Companies’ Creditors Arrangement Act (CCAA) and its existing bondholders were seeking to take control of the company.
“The court that approved the loan over the objection of the bondholders felt that it was a fair and reasonable arrangement, even though it was a substantial loan,” Wisner said, noting that the company’s claim, at US$3.8 billion, is quite large.
“It remains to be seen what Crystallex will be awarded, but they had similar circumstances [to Gold Reserve],” Wisner says. “[If they win,] even if you don’t get the full one hundred cents on the dollar, you still have enough money left over to be able to pay off the financing and have a nice recovery for the shareholders.”
Crytallex had US$100 million in debt at the end of 2011.
While its DIP financing has allowed its claim to be heard through ICSID, the financing has come at a steep price for Crystallex.
Tenor Capital Management, which has provided $62.5 million in funds so far, has earned 70% of any net award or settlement the company receives for Las Cristinas, according to a June 2014 report by court-appointed CCAA monitor Ernst & Young.
Reducing political risk
To reduce the risk of working in emerging jurisdictions, more mining companies are incorporating their subsidiaries in places that offer them treaty protection. TriMetals subsidiary South American Silver, for example, was incorporated in Bermuda, an overseas territory of the U.K., which has an investment treaty with Bolivia.
Herrero says the company chose Bermuda because of that investment protection, as well as for tax purposes.
“When you’re going to invest money in an emerging country, I think that’s a smart way to go,” he said. “Otherwise [if something goes wrong], you’re left to the legal system in the country where you’re investing. We would have to litigate in Bolivian court against Bolivia — with a Bolivian judge appointed by the government probably.”
Companies such as TriMetals and Gold Reserve that have been burned before are more sensitive to risk when it comes time to seek out new projects.
TriMetals’ flagship project Gold Springs, acquired in late 2013, is located on the Nevada-Utah border, while Gold Reserve had been working on a project in Mexico until recently.
Gold Reserve’s Belanger says there is a disturbing trend among many resource-rich nations of “fine-tuning and changing their laws constantly” — which drives away investment.
“Everybody talks about having sovereignty over their resources — which is fine, countries should have sovereignty over their resources — but mining is a global industry, and if a country’s not competitive with their tax and environmental and social policies, there simply won’t be any investment,” he says. “So they’ve got a larger percentage of nothing as opposed to a good percentage of something.”
Even Mexico, a favourite jurisdiction of miners for more than a decade, isn’t quite as mining friendly as it used to be. Gold Reserve dropped its option to earn 51% of Soltoro’s (TSXV: SOL; US-OTC: SLTOF) La Tortuga copper-gold project in Mexico in August, citing a “perceived change in the Mexican government’s posture towards mining.”
After Mexico’s mining law was amended in late 2013, the company says environmental reviews and approvals have been receiving more scrutiny, including drill permit applications (the company was recently asked to resubmit its drill permit application and expand its environmental baseline study).
Now without a project, Belanger says Gold Reserve is looking at several opportunities for its next acquisition in other jurisdictions — all of them mining friendly.
Even for companies that make it to the finish line and see a substantial award granted by a tribunal, payment isn’t guaranteed. Some countries, such as Russia and Argentina, have reputations for stalling payment, even though the awards get bigger when interest is added over time.
But Wisner says that most countries pay their awards.
Even Venezuela — because it is a big oil exporter and holds assets abroad that could be seized if it doesn’t abide by international arbitration judgments — tends to pay up, Wisner says, who adds that Gold Reserve has a good chance of collecting on its award.
“Venezuela has settled even before arbitration with a number of international oil companies,” he says. “Even when Hugo Chavez was in power in Venezuela, it settled all of its cases.”
The country also wants to keep its bondholders happy, Wisner says, noting that it has a number of bonds that have been downgraded to junk status.
In one recent case involving the expropriation of an oil project, Venezuela paid out the award about three months after it was issued, Wisner said.
While every country is different, most want to preserve their credit ratings and attract investment. And they also understand that challenges to such awards will likely be unsuccessful.
“The grounds for challenging an award are narrow. Challenges rarely succeed — they’re usually a delay tactic,” Wisner says. “Once an award is rendered, I think most countries realize it’s just a matter of time before they have to pay.”