A Case Study in Political Risk and How to Profit from It
By Doug Casey
Sep 16, 2006
At Casey Research, we pride ourselves on being focused on
facts. Which is far easier said than done.
That's because, even when
dealing with scrupulously honest mining company executives, they
naturally want to present themselves in a positive light and
so skew almost entirely toward the sunny side of the street.
And given that a significant
percentage of the people working in the junior resource sector
are the polar opposite of "scrupulously honest," assuming
that anything you hear qualifies as a fact is a poor starting
Yet, getting to the facts
on the many resource companies that come our way each week is
crucial. Without the facts, any conclusions on whether or not
a company warrants our investment dollars, or is worth bringing
to the attention of our subscribers, could well be built on nothing
more than a promoter's dream.
A case in point. Rather
than rely on the mainstream press or various mining periodicals,
Louis James, senior researcher for our monthly International
Speculator newsletter, recently decided to dig in deep on
the question of whether or not Gabriel Resources would be able
to cut its way through the political tangle that has kept its
Rosia Montana deposit in Romania on ice for years.
This is no idle line of
inquiry; Rosia Montana is one of the world's few remaining undeveloped
giant gold deposits. If Gabriel succeeds in wading through the
political opposition, it will unlock tremendous profits for early
As you'll read in this report
below, in order to get to the facts, we had to go to great lengths,
including hiring an undercover investigator to literally go door
to door in Rosia Montana, site of the mine.
Will Gabriel win the day?
Does it deserve your investment? Read on...
Gabriel Resources - Time to Buy?
For some time now we have been
following Gabriel Resources (T.GBU), a company there is
much to like about.
For starters, there is the
sheer size of the company's Rosia Montana mega-deposit in Romania
(more on that in a moment). Then there is the fact that Gabriel
has a new and very determined management team that is taking
a hands-on approach to shepherding the deposit toward production.
Every ounce of that determination
will be needed; if you believe everything you read, the community
of environmental activists would rank Rosia Montana as one of
the most hated mineral development projects in the world. There
are web sites dedicated to blocking the project (www.nodirtygold.com)
and even celebrities speaking out against the development.
Being speculators, and recognizing
the potential size of the prize if the broader investment community
was to change its view on the prospects of Rosia Montana coming
into production, we decided to see for ourselves what was actually
happening on the ground in Romania.
Unlike the majority of our
field work, in the case of Rosia Montana our due diligence didn't
involve kicking rocks on the deposit to verify that the company
is indeed on to a major deposit. Of that, there is no question.
That's because Rosia Montana, which has been mined back to the
Roman era, has been drilled extensively in recent decades, leaving
no question about the world-class nature of the mineral asset.
The project has:
- 10.1 million ounces of gold
in Proven & Probable reserves, plus another 14.6 million
ounces in Measured & Indicated resources, and another 1.2
million Inferred ounces.
- 47.6 million ounces of silver
in Proven & Probable reserves, plus 64.9 million ounces in
Measured & Indicated resources, and another 3 million Inferred
- Projected production of 635,000
ounces per year during the first 5 years, at a total cash cost
of US$181 per ounce, for an IRR of 18%.
So it's not the geology but
the politics of trying to build a mine in the face of environmental
opposition that has GBU selling for about $30/oz of gold in the
ground, versus a more typical $100/oz for the kind of resources
it is known to possess.
Make no mistake; large, well-defined
gold deposits like Rosia Montana are extremely rare and exactly
the sort of thing resource-hungry major mining companies are
likely to buy at a substantial premium.
All of which, under normal
circumstances, would make Rosia Montana equally attractive to
institutional investors looking for the next big play. But they're
not going to risk their capital as long as Rosia Montana looks
too politically hot to touch. Should their perception change,
and they come to believe that the political risk has been resolved-say,
when Gabriel gets its mining permit-expect the herd of institutional
investors to pile in, sending the GBU shares to the moon. It's
our intention as speculators to beat them to the door.
Which brings us back to a realistic
assessment of Gabriel's political prospects. Is the political
risk in Gabriel beginning to subside? That's what we determined
to investigate. But none of us, not even Doug, speaks Romanian,
and it would defeat our purpose to simply go on a guided tour
offered by the company, with a company translator posing all
our questions for us. Fortunately, thanks to our international
network of contacts, we were able to find a native Romanian-speaking
researcher willing to help us with the investigation.
Report from Romania
First, our researcher attended
public hearings in Bucharest, at which Gabriel's representatives
gave presentations on environmental, safety and other issues-a
particularly thorny one being that the company wants to move
the town of Rosia Montana itself. The environmentalists in opposition
had salted the audience with a dozen young people in dressed
in green T-shirts who disrupted the meeting whenever the company
people said anything they disagreed with-or didn't want people
But it was much ado about nothing:
our researcher observed that of the nearly 200 people present,
almost all had some professional interest in the matter. They
weren't really there to learn, but to witness, or to try to influence.
Net result: no one left more in favor or more in opposition to
the project than when they arrived.
Next, our researcher went to
the town of Rosia Montana to assess the situation first-hand.
For the third year now, anti-mining groups with global networks
(and financial support) hosted a festival near the picturesque
town, in theory to save the earth and the poor subsistence farmers
of Rosia Montana from being kicked out of their cottages by the
evil mining company. The festival features live music, which
does indeed draw a lot of people-but our researcher found that
these young people (he estimated most were still teenagers) were
more interested in smoking and listening to the music than eco-politics.
What about the poor subsistence
farmers? Rosia Montana is a mining town. The last two mines in
the area were shut down earlier this year by the government,
because they were state-supported work projects that were trashing
the environment. Romania has to clean up that sort of thing in
order to join the EU, which it is working very hard to do. There
is no significant employment in the area (a neighboring town
had a factory once, but it was shut down 16 years ago), and the
severance pay the ex-miners in the area are getting runs out
at the end of December.
The environmentalists have
suggested that the local community survive by weaving baskets
and carving wood to sell to tourists, which seems to us to be
somewhat disconnected from reality. These people are desperate
and they want to see the Rosia Montana deposit creating jobs
again-but this time with modern mining technology that won't
be so damaging to the environment. And that is exactly what Gabriel
proposes to do (the deposit area is currently a toxic disaster,
due to the employment of primitive mining techniques over the
last 2,000 years, particularly during the Soviet years).
So, it's no surprise that our
researcher found that about 80% of the locals are only too happy
to sell their houses, either to move on to greener pastures elsewhere,
or to move into the new town the company is building and take
jobs with the company. His findings are supported by the fact
that the mayor of Rosia Montana was elected on a pro-mine platform.
And the hold-outs? Gabriel says they can stay and the company
will work around them (no little old ladies need be dragged from
their cottages on TV).
Our researcher's sense of the
politics of the project on the national scale was that the national
government is in favor of the project-Romania's president has
gone on record in the press saying that the project will be developed-but
that much of the intellectual community is reflexively opposed,
though few have apparently been to Rosia Montana or taken the
time to understand the local economy.
In short, politics has held
the share price of this company down for years, but the political
tide appears to be shifting. There is opposition, but that opposition
is out of touch with the needs of the local community-and even
of the environment, because the Romanian government doesn't have
the money to clean up Rosia Montana, something Gabriel has committed
to helping with.
Of course, trouble-makers could
still derail progress at Rosia Montana, so there is still risk
in the play, but for once, the needs of the locals, the environment,
and a responsible mining company are lining up. We believe Gabriel
will get its Environmental Impact Assessment (the largest and
arguably most important component of its mining permit) approved
by the Romanian government later this year. If they do, mine
construction, new jobs, environmental clean-up, etc. could all
start rolling early next year. From there, it's off to the races
for GBU shares, which will then represent ownership of what is
truly a mountain of gold. It's a speculation, to be sure-but
that's what we do at Casey Research, and we'll be following this
story for our subscribers in the pages of the International Speculator.
The International Speculator