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You Can't Squeeze Gold out of a Turnip

The continuing saga of Las Cristinas

Robert Moriarty
August 13, 2001

A stable owner named Thomas Hobson lived in Cambridge, England around 1600. People in need of transportation went to his stable to rent horses. Thomas Hobson was lazy. He was so lazy that he always gave each customer the horse nearest the entrance of his stable, regardless of the quality of the horse or the needs and desires of the renter.

Hobson's Choice was to either accept the first nag offered or to get no horse at all. It didn't make the slightest bit of difference to Mr Hobson if you wanted a gentle riding horse for the little kiddies or a pack horse, you got the horse nearest the door. Since that time, the expression, "Hobson's Choice" has come to mean having to choose between two not particularly desirable alternatives.

Not all choices are good choices. In the real world, many times we have only bad choices and the trick is to find those choices which do us the least harm.

Wouldn't it be wonderful if life only required us to choose between good and bad? Alas, at times, we must select between bad and worse.

At the Las Cristinas gold mine in southeastern Venezuela, Placer Dome (NYSE: PDG), Corporacion Venezolana de Guayana (CVG, the Venezuelan government-backed partner) and Vannessa Ventures (OTC BB: VNVNF.OB  CDNX: VVV) face Hobson's choice. There is an old law of economics which states, you can't squeeze gold out of a turnip. I just made that up. It didn't exist before, not that I've heard. But if it didn't exist, it should. Like it or not, the gold project at Las Cristinas is a turnip.

The massive gold and copper deposits at KM88 were discovered in 1992. Placer Dome controlled the Las Cristinas deposit with over 11 million ounces of gold and a billion pounds of copper resources identified just waiting to be mined. Over the past nine years Placer spent in excess of $132 million dollars at the mine in pre-development work. CVG, the company representing the interests of the Venezuelan government, has the right to earn up to a 30 percent interest with Placer Dome controlling the remaining 70 percent. But most importantly, CVG, as the representative of the government of Venezuela, retains veto rights over the property. They lack the resources to develop the mine but they can control who does work the mine.

Placer Dome came up with a plan for development of the mine which called for a $575 million investment. But the plan assumed a price of $325 for gold and $.80 for copper. Since gold hasn't been above $325, except momentarily, for years, Placer Dome requested a one year extension from CVG in July of 1999. CVG approved the extension and yet another in July of 2000. But a few months ago, CVG put their foot down and insisted Placer Dome either go ahead with full scale development of the mine or CVG would find another partner for the mine.

There's the fatal flaw and the central issue to the conflict between CVG and Placer Dome at Las Cristinas. You can't squeeze gold out of a turnip no matter how much you want to. While Las Cristinas, and indeed the sister deposit at Brisas controlled by Gold Reserve (OTC BB: GLDR.OB), contain massive amounts of both gold and copper, the ore is very low grade, under one gram per ton. With gold above $325, either deposit would be economic or with copper well over $1 a pound, the price of copper would support the $575 million dollar investment originally planned by Placer Dome and approved by CVG. But with $275 gold and $.66 copper, the deposit simply doesn't make economic sense and no one in their right mind would invest over half a billion dollars knowing the project can't possibly make money without a higher price for both gold and copper.

There's the rub. CVG wants the project to go ahead so jobs will be created and development of the region will take place. But Placer Dome knows they cannot make a reasonable return on their investment at the current prices of metals. In this case, Hobson's choice for Placer Dome is to chose between losing the $132 million they have already invested or to invest another $575 million additional funds on the mere hope of higher gold prices. Placer chose to walk away from the project.

But at the last minute, just a few days before the deadline imposed by CVG, another alternative came up. Vannessa Ventures agreed to buy Placer Dome's stake in Las Cristinas for a nominal sum. Vannessa operates a very lean and mean mining company without the high-priced overhead of Placer Dome and other majors. Vannessa find projects which may not make sense for the majors and can make economic sense if you scale down expectations to reflect a lower price of gold.

Placer Dome's original plan called for production of 530,000 ounces of gold a year with an investment of $575 million. Vannessa wants to invest $50 million in an operation which will produce 100,000 ounces a year at a cash cost of $150 an ounce. Much has been made in the press about Vannessa slashing their investment in the mine but the fact remains that it doesn't make economic sense for Placer Dome or Vannessa or CVG or even the Miami Hurricanes to invest $575 million in Las Cristinas. The current price of gold and copper doesn't justify the over half billion dollar investment no matter who CVG partners with. But while Placer Dome sold the mine to Vannessa a month ago, Placer retained the right to repurchase the mine from Vannessa should the price of gold go back up.

The last minute deal between Placer Dome and Vannessa seems to have caught CVG off guard and at least ruffled a few feathers. I suspect CVG didn't really intend to be seen as holding a gun to Placer Dome's head with their demand Placer go into production. But from Placer's point of view, it easily could be seen that way.

Placer was spending over $10 million a year on the property and not taking out an ounce of gold. It was a headache for Placer Dome and the CVG ultimatum offered Placer a convenient way out of the problem.

Probably without recognizing it, CVG also faces Hobson's choice. They would have preferred Placer Dome go ahead with development. But Placer Dome would prefer to not lose any more money. If Placer Dome simply walked away from the property, CVG is no better off. They lack the resources to develop the mine themselves and if Placer Dome couldn't squeeze gold out of a turnip, no one else will either. The $575 million dollar plan is dead unless and until gold and/or copper makes a major and sustained price movement upward.

So CVG is no better off with or without Placer Dome as a partner. I have no doubt there are many companies willing to stand in line to make promises to CVG about how they want to invest $575 million in the full scale development plan but it ain't gonna happen without higher prices. No matter who CVG gets into bed with, their new partner will need to study the drilling results a long long time or until gold/copper prices go up.

The Vannessa/Placer Dome deal has all the earmarks of a win-win-win situation for everyone, CVG, Placer Dome and Vannessa. The plan calls for high grading the mine. Vannessa can mine gold profitably, it just means fewer jobs and less gold. But that horse is still a lot better horse than the dead horse CVG is now sitting on top of. Vannessa is a mining company, and all talk of how big or small a mining company is today is about as meaningful as a discussion of virginity in a house of ill repute.

When you could buy every gold mine in the world for about $25 billion, there are no large gold mines, only some a little bigger than others. The market value of Cisco changes more in a day then the total market value of every gold mine in the world. If a mining company has managed to keep the doors open in today's environment, they are doing real well. And if they are advancing new projects as Vannessa has been doing, they are industry leaders and deserve some respect for growing when everyone else is trying to figure out how to survive by shrinking.

Statements from Placer Dome in the last week or so seem to indicate the entire issue of Las Cristinas remains a sore subject. CVG insists Placer Dome was required to obtain written permission from CVG to sell their portion of the mine. In a surprising display of bad manners if not bad sense, Placer Dome insists the deal with Vannessa ends Placer's involvement with Las Cristinas and the company has nothing to discuss with CVG because it is no longer involved in the project.

That's a remarkable position for Placer Dome to take in a deal in which they have nothing to lose by being civil to CVG. I personally can understand why CVG is miffed at Placer Dome, after all, CVG wants the mine in production. And I can understand why Placer Dome is miffed at CVG, after all, Placer Dome invested well over $100 million in what essentially is a hole in the ground. But stuff happens. Placer Dome has no more control over the price of gold than does CVG and the only situation where they can both win is by sitting down and resolving the issue.

CVG wants a board meeting with Placer Dome on Friday August 17th and seems to be sending a message that perhaps the deal between Placer Dome and Vannessa may find approval from CVG. It should. Vannessa has property adjoining Las Cristinas and a working mill. Even if only on a smaller basis, Vannessa can be creating jobs and producing both taxes and income in short order by mining Las Cristinas. If the deal between Vannessa and Placer Dome is canceled, the Las Cristinas project will slip behind by years more.

Unusually direct comments from an unnamed CVG official last week dashed the faint hopes of Crystallex International (AMEX: KRY) of being handed the concession based on their weak legal claims to the Las Cristinas property. "I understand the Crystallex secretary came to see us about a month ago. We listened to his proposal but we just listened. That's all," the official said.

At times, even a sway-backed old nag beats heck out of no ride at all. If Placer Dome, CVG and Vannessa would each like to prosper, they would do better by trying to understand the viewpoint of each of the others. This is going to be one of those deals in which everyone wins or everyone loses.

Crystallex International website
Placer Dome website

Vannessa Ventures Ltd website

Bob Moriarty
August 13, 2001

Copyright ©2001 321gold Inc

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