Russian-owned TSXV listed Rusoro Mining claims exciting gold prospects in Venezuela

John Helmer

A promising Venezuelan gold developer, recently listed on the TSX Venture exchange, is being funded by a mysterious Russian group of investors.

MOSCOW (Mineweb.com) --Half a millenium before Christ, the Greek philosopher Heraclitus had an unusual theory of mankind's follies, as well as this to say about the precious metal sector. "Gold miners," a fragment of Heraclitus records, "dig much, and find little". Heraclitus is reputed to have died miserably. Had he understood Russian gold mining as it is practised today, he might have reversed the epigram, and died much better off -- "gold miners", Heraclitus should have said, "find much, and dig little."

At least, that's what gold miners in Russia have been doing as they accumulate reserves on their balance-sheets by acquisition; but stop short of financing themselves the high cost of developing the mines to dig the gold, and send it on its way to market.

The present share-price boom for gold stocks has rewarded finding, but limited the incentive for digging. For example, in very rough figures Polyus - the acquisition of the Norilsk Nickel oligarchs, Mikhail Prokhorov and Vladimir Potanin - has spent a billion dollars in buying gold reserves from local licence-holders, even though the price Polyus paid in one case was so over-valued at the time, the company ordered its accountants to write it down by more than $100 million. Notwithstanding that, and flat output at its principal mine, the market currently values Polyus at $9.5 billion -- almost ten times the cost of its acquisitions; and that value has gained 15% in the past three months alone.

The Midas touch, it might be concluded, doesn't require much fresh digging at all. But can that touch be passed from hand to hand? Concretely, can two old friends of Prokhorov's, Andrei Agapov and Dmitry Ushakov, move into the Venezuelan gold sector, and turn their newly listed Canadian company, Rusoro Mining (TSXV: RML), into a major mining success?

Mario Szotlender is the Venezuelan is the leading figure in the Rusoro management as chief executive. According to an introduction to the mining company distributed last month by Rusoro's PR representative, and originally compiled by newsletter publisher, Lawrence Roulston, Rusoro "enters the public arena with 10 years of operating experience, significant gold production, multi-million ounce gold resources and extensive exploration potential. Most importantly, the company has a strong management, financial, geological and mining team with considerable experience and contacts. With those attributes to build on, Rusoro is well positioned to grow quickly as a gold producer." In the report, Szotlender is described "as a Venezuelan geologist who has enjoyed considerable exploration success working with Canadian explorers. He is currently a director of a couple of other highly regarded exploration companies." Keith Schaefer, Szotlender's spokesman, told Mineweb this is partly in error. Szotlender has a degree in international relations, Schaefer said.

Schaefer also told Mineweb that the claim that "with $35 million of cash from the initial public offering [Toronto], Rusoro is well-financed to continue an aggressive exploration program" is not quite accurate. According to Schaefer, "while the company did raise $35 million in their last round, they do not have $35 million in cash." Another publication distributed by Schaefer's firm, Vanguard Shareholder Solutions of Vancouver, reported $17 million in cash as of last month; the Rusoro website reports the figure as $17.5 million, with exercisable warrants at $21.8 million, and zero debt. Financial statements are not currently available.

Rusoro listed on the TSX Venture board on November 9. From a pre-listing share price of less than one Canadian dollar, it jumped to a high of C$4.50, and has since fallen back to a current price of C$4.05. In the weeks that followed the listing, three assessments of the company were published by market analysts, and distributed by Vanguard -- one by James Winston on November 16; one by Richard Reinhard on November 17, and the one already referred to by Roulston on November 22. All of them emphasize the importance of Russian finance, political power, and mining experience. Reinhard entitled his presentation "From Russia with Love".

Winston led off with the claim that Rusoro's board chairman, Vladimir Agapov, is a "very well connected Russian -- to both President Putin in Moscow and President Chavez in Venezuela." Vladimir and his son Andrei are reported by Winston to own "well over half the company." Noting the political risk for American investors of pursuing Venezuelan gold "so long as firebrand leftist and anti-American Hugo Chavez is the President", Winston noted "what if this mining company is owned by Russians?"

No evidence of Agapov senior's influence with the Kremlin, or political reputation, has been found in Moscow, and Schaefer declined to vouch for Winston's accuracy on the point. The spokesman for the Venezuelan Embassy in Moscow said economic officials there know nothing of Rusoro or the Agapov group.

Szotlender told Mineweb that Vladimir and Andrei "went to Venezuela four years ago; started buying a local outfit; and started investing in Venezuela." The focus of their investments, he added, was gold and kaolin. He estimated that the Agapov group had invested "between $60 and $70 million" in Venezuelan projects in the four-year period. Reinhard claims "the Agapovs have privately funded over US$40 million to get Rusoro's assets to where they are today."

Experienced Russian mining sources told Mineweb that the Agapovs are unknown in Russian gold mining, and the source of investment as substantial as that reported is also unknown. A source who knows Andrei Agapov told Mineweb that, like Ushakov, he had been friends with Prokhorov, and had moved between Moscow, the US and London.

Andrei Agapov told Mineweb that "our family is the first Russian investor in Venezuela." He noted that he does not have "much mining experience myself", while father Vladimir "was into oil exploration." He acknowledged that "Prokhorov knows us well on a social basis." But Rusoro "is not big enough" for Prokhorov to be interested to fund, he conceded. He estimates that his group had invested in Venezuela "$70 million -- maybe a little bit more." Rusoro (formerly Newton Ventures Inc.) was purchased as a private company, he added, in 2002, when there had been "no exploration, an old mill, and gold was at $300."

If the Russians backing Rusoro's public flotation in North America are the insurers of its impressive reputation and political risk cover in Caracas, where did the Russian money come from, Agapov junior was asked. "Borrowing mostly," he replied, "with equity raised from Russian investors; some from the mining community, and others." He explained that he had been the founding owner of MFC Securities, a modest Moscow brokerage identified in the Russian press archive as having a small annual revenue -- too small to generate the size of the Venezuelan investment reported. Agapov told Mineweb MFC "is not involved in trading, with very few institutional [clients]. It services high net-worth individuals". MFC and Andrei Agapov appear to be represented on the Rusoro board of directors through Peter Hediger, managing director of MFC Merchant Bank S.A. of Switzerland.

The other Russian who appears to be at least as important in Rusoro's financial history is Dmitry Ushakov, who is listed as a board director.

According to Rusoro's spokesman at Vanguard, Keith Schaefer, "Mr. Ushakov was the chief executive officer of Norilsk Nickel from 1999 to 2002. He is currently on the board of directors of Interros, a company which in turn owns Norilsk Nickel and Polyus Gold." Rusoro's website says the same thing.

This isn't quite correct. According to Norilsk Nickel, Ushakov was never an executive in that company. According to a Russian mining source, who knows him, Ushakov was a friend of Prokhorov's from their time together at university. Like a good many others in that friendship circle, when Prokhorov and Potanin took over Norilsk Nickel and vested shareholding control in the Interros group, Ushakov was engaged. He was assigned the agribusiness interests to manage, but this proved to be troublesome, according to a Moscow source. Ushakov grew personally wealthy, and is currently listed as a director of Interros. Polyus says Ushakov has nothing to do with their company.

Ushakov told Mineweb through his Moscow assistant that "had never been an executive of Norilsk Nickel, but he was member of the board. In the Rusoro project," Ushakov says he "plays a role of Vladimir Agapov's consultant."

According to Rusoro's releases last month, current gold reserves are 900,000 ounces; inferred resources are an extra 2.5 million oz, making a total of 3.4 million oz. The resource estimates have been prepared by Scott Wilson RPA of Toronto and set out in Canadian NI-43-101 reports. Drilling is under way at several deposits listed by the company and its promoters, located in Bolivar state, southeastern Venezuela. Rusoro says it plans to operate 11 rigs to drill 140,000 metres on five properties, with the target of doubling the total resource estimate to about 7 million oz by the end of 2008. Mine production is targeted to reach 200,000 oz per annum by the end of 2009; 400,000 oz pa by the end of 2010. The cost of this capital development is reported by company publications at $50 million.

With Russian future financial input unclear, and cash left to the company from the Vancouver listing estimated at $17.5 million, Rusoro is likely to need substantial fresh finance. A bankable feasibility study is due in a year's time, the company website says.

Rusoro's value multiple promoted by Vanguard is indicated by applying to the current reserve estimate the US$130 per ounce valuation placed by South Africa's Gold Fields, when it bought Bolivar Gold Corporation's assets in the same region of Venezuela. This suggests a total value of Rusoro's current assets of US$442 million, and a target value, if the 7-million oz target is reached, of $910 million. Rusoro's current market cap this week is C$450 million (US$391 million).

Whatever the size of the Russian financial stake was, or may be, and wherever it came from, gold miners with experience of the Venezuelan properties now under development by Rusoro include veterans of Placer Dome's exploration in the country, when the gold price was much lower. They say the Rusoro properties are prospectively worth more detailed exploration, and the evidence on the ground confirms that Rusoro is busy drilling.

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A promising Venezuelan gold developer, recently listed on the TSX Venture exchange, is being funded by a mysterious Russian group of investors.