Rusoro Mining to Benefit from Venezuelan Currency Devaluation

By James West
MidasLetter.com
Wednesday, February 3, 2010

Rusoro Mining Ltd. (TSX.V:RML) could be one of the lowest cost gold producers in the world, now that Venezuela has devalued its currency. And this could present a curious dilemma for investors.

A recent report by Ambrian Partners, a UK based brokerage firm, suggests that costs for Rusoro – the largest gold miner in Venezuela – could drop under US$300 per ounce as production increases, and because of the devaluation.

No other gold company has production costs under $300/oz.

However, Rusoro sells part of its gold to the government at a reduced rate, which effectively gives the company a 20% overall discount to the gold spot price. Ambrian estimates that means an effective $500/oz cost of production for Rusoro – putting it 11% above the junior producer average cost of $440.55/oz. On January 8, Venezuela devalued the Bolivar from 2.15 to 4.30 against the US dollar, with a special rate for essential imports. The move will boost the country’s revenue from resource exports, and provide a more competitive environment for Rusoro Mining Ltd.

Rusoro benefits as costs are in Bolivars, yet the underlying balance sheet assets remain in gold reserves. Gold reserves have also demonstrated strong value during periods of inflation, higher money supply or geopolitical risk.

Rusoro is currently trading at $.43 (CAD) per share which represents a 50% discount to a targeted Net Asset Value of $0.86 (CAD) per share, according to Ambrian.

With third quarter operating margins around 14% Rusoro is relatively competitive to its industry peers for the previous year as reported by Thomson Reuters.

One of Rusoro’s main fiscal goals to repay a $60 million bond due in June 2010. The devaluation makes it easier for Rusoro to pay this bond as their cash flow will increase due to lower costs in country.

For investors, Rusoro suddenly creates an interesting dilemma. The Ambrian report shows Rusoro’s stock trades at a discount of 50% to its Net Asset Value, yet other producers of similar size (200,000 – 300,000 oz per year) with low cash costs trade at 1.5x NAV.

The questions for investors is – what is a fair a political discount for operating in Venezuela? Right now it’s a sizable gap, and Ambrian make the case that at some point, investors are going to realize the value Rusoro is creating on the ground.

The company has an estimated cash position of $15 million (USD), and 60,000 ounces of unsold gold.

SOURCE: http://www.midasletter.com/news/10020301_Rusoro-Mining-to-Benefit-from-Venezuela- Currency-Devaluation.php