Gold Reserve Wins $740 Million Award Against Venezuela over Mine Expropriation
"The unanimous award is one of the largest rendered by an ICSID tribunal to date," says Erik Hendrickson of international law firm White & Case, which represented Gold Reserve.
NEW YORK -- The World Bank's arbitration tribunal, the International Centre for Settlement of Investment Disputes (ICSID), has found that Venezuela must pay Gold Reserve Inc., which had operated a mine in Venezuela, $740.3 million.
The Award represents $713 million for the fair market value of the Brisas Project, $22.3 million for interest on the Award since April 2008 based on the US Treasury Bill rate compounded annually and $5 million for reimbursement of legal and technical costs, according to the Company. Payment of the Award is due and payable immediately with any unpaid amounts accruing interest at Libor plus 2% per annum.
"Gold Reserve and its legal counsel are evaluating the substantial text of the Award and expect to have further comments on the Tribunal’s decision in the near future," said the company. "Gold Reserve has commenced steps to ensure the recognition and collection of the Award which is immediately enforceable in any of the 150-plus member states party to the New York Convention. The Company is well financed and has the strong support of its stakeholders to pursue the collection of the Award in full."
"Gold Reserve expects that Venezuela will honor its international obligations and will effect prompt payment of the tribunal’s unanimous Award. While the Company is pleased with the Award, it is less than the value of the Brisas project at today’s gold and copper prices and Venezuela will substantially benefit from the development of the mine."
According to Gold Reserve, the company expended approximately US$300 million developing the Brisas project to the construction stage prior to its termination by Venezuela.
"The acquisition of the Company’s valuable engineering work product by the Venezuelan government would both expedite and reduce the cost of the project’s development," the company said. "If requested, Gold Reserve would also be prepared to assist in the fast-track development of the Brisas Project."
Gold Reserve says it plans to distribute a substantial majority of any proceeds received to its shareholders, "in the most efficient manner possible," subject to the need to retain funds for operating and arbitration related expenses, corporate income taxes and other obligations, such as repayment of convertible notes (if not otherwise converted).
As of September 22, Gold Reserve has 76.1 million Class A common shares issued and outstanding and holds approximately $8.8 million in cash. On a fully diluted basis, assuming all warrants, options and convertible notes are converted to common shares, the Company would have approximately 93.5 million Class A common shares issued and outstanding and would hold approximately $18.8 million in cash. This amount excludes any potential sale of the Brisas project technical and engineering work product and approximately $19 million of related equipment held for sale.
“The board of directors, management and employees of the Company are pleased that the Tribunal was unanimous in deciding all phases of the Award in favor of the Company. We feel vindicated by the Tribuns clear conclusion that the Venezuelan government acted unlawfully in terminating the Brisas Project in direct
violation of the BIT," according to Gold Reserve President Doug Belanger. "We are gratified to know that all of our hard work prior to the unlawful termination of the project and subsequently in the execution of our claim against the Venezuelan government has been rewarded."
Gold Reserve says that they are still studying the award, but that they plan to reach out to the government of Venezuela to explore ways to facilitate Venezuela’s ability to honor its obligations promptly. "We are hopeful that Venezuela will satisfy its obligations to the Company without delay and without any further legal proceeding. Should they fail to do so, we are prepared to pursue all available means to ensure that the amount awarded to the Company is recovered in full," says the Company. "There are well documented procedures in place for identifying and attaching sovereign commercial assets located in States that are party to the New York Convention. The Company is already well advanced in this effort.”
Some analysts have noted that Venezuela has been rushing to sell assets in the United States, like its multi-billion dollar Citgo and Chalmette refineries, to avoid potential preliminary actions or leins on them that could result from the Gold Reserve case or the other 27 cases pending against Venezuela at ICSID.
"While there is no appeal from ICSID cases, Venezuela is now likely to file an annulment procedure, which will delay payment of the judgement," according to Russ Dallen, an international lawyer and banker at Caracas Capital Markets who follows the Venezuela litigation. "The annulment tactic was used successfully by Argentina -- which actually won some of the annulment procedures -- but it is unlikely to assist Venezuela in avoiding preliminary injunctions or leins against their assets. But short of dollars, Caracas has been using delaying tactics in all its cases, and launching the annulment procedure could allow Venezuela to delay final payment of the award for another 1 to 2 years -- or maybe even avoid it all together if they win."
Gold Reserve originally filed the case on November 9, 2009 and is claiming damages arising from violations of three provisions of the Canada-Venezuela bilateral investment treaty that resulted in the effective expropriation of Gold Reserve's sizable investments in the Brisas gold/copper project and the Choco 5 property.
Gold Reserve was originally seeking compensation corresponding to the restitution, or fair market value, of the rights to develop the Brisas Project and Choco 5, as of the date of the Tribunal's decision, saying that the fair market value of those rights in its Reply dated July 29, 2011, was approximately $2.1 billion. In its initial filing in 2009, the company estimated the value and damages from lost earnings at $5 billion. According to the filing, the company spent $300 million on the projects.
Both parties last filed post-hearing briefs on December 23, 2013. It is typical for tribunals in this type of arbitration to require six to eighteen months (the historical average is approximately 1.2 years) to finalize and issue a decision.
The President of the Tribunal is Piero Bernardini of Italy, with Pierre-Marie Dupuy of France and David A.R. Williams of New Zealand. Gold Reserve was represented by international law firm White & Case and Venezuela was represented by Foley Hoag.
According to a 2005 feasibility study, Gold Reserve estimated that the Brisas mine would cost $552 million to develop and yield 486,500 ounces of gold and 63 million pounds of copper a year over a 16 year life. Venezuela's People's Ministry for Planning said earlier this year that gold production had fallen 64.1% in the last year to 97 kilograms in February (see page 67 below).
After a rash of expropriations and nationalizations by Venezuela's firebrand former President Hugo Chavez, Venezuela has 28 cases pending against it at ICSID -- the most of any nation in the world. Faced with the cases, Chavez withdrew Venezuela from ICSID jurisdiction in 2012, but pending cases and new cases brought under bilateral investment treaties and contracts continue to give ICSID jurisdiction to settle the arbitrations.
Other companies with pending ICSID arbitrations against Venezuela include mining and smelting companies Anglo American, Rusoro Mining Ltd., Crystallex International Corporation, Highbury International and Tenaris SA; food industry companies Gruma, Polar, Longreef, Vestey, and Owens-Illinois Inc.; and oil industry companies Tidewater Inc., Williams Cos. Inc., Koch Industries Inc., ConocoPhillips, and ExxonMobil.
The Gold Reserve case was officially closed by ICSID on July 23, 2014.
"More importantly," says Dallen, "the multi-billion dollar Exxon case was officially closed by ICSID 5 days later on July 28, 2014, meaning that a decision in that case is imminent." ExxonMobil initially filed its claim seeking $20 billion for the expropriation of its multi-billion dollar investments in Venezuela in 2007.
The last arguments and briefs in the Exxon case were submitted in May of 2012. An International Chamber of Commerce (ICC) arbitration panel awarded Exxon $908 million from Venezuela state oil company PDVSA for lost contractual earnings from the Cerro Negro project in 2011.
ICSID is an autonomous international institution established in 1965 under the Convention on the Settlement of Investment Disputes between States and Nationals of Other States (the ICSID or the Washington Convention) with over one hundred and forty member States. The primary purpose of ICSID is to provide facilities for conciliation and arbitration of international investment disputes.
Gold Reserve Inc. has a history in mining dating back to 1956 and was formed for the purpose of acquiring, exploring, and developing mining properties and placing them into production. The Company is incorporated under the laws of the Yukon Territory, Canada and is listed on the TSX Venture Exchange and the OTCQB Markets Exchange.
In 1992, the Company acquired and began developing what is now known as the Brisas gold and copper project, located in the historic Km 88 mining district of the State of Bolivar in southeastern Venezuela (the "Brisas Project"). The Brisas deposit, which is one of the largest undeveloped gold/copper deposits in the world, contains ore reserves of 10.2 million ounces of gold and 1.4 billion pounds of copper. From 1992 to 2009, the Company invested close to US $300 million in acquisition, land exploration, development, equipment, and engineering costs, which the Company believed developed the Brisas Project into a world class mining project.
Gold Reserves is a small company and was decimated by Venezuela's actions which left it with no real business or money since the expropriation of its assets and investment in Venezuela. According to the company's Annual Report, Gold Reserve had $3.3 million dollars and its Brisas Project related equipment (that it valued at $19 million) on hand at the end of 2013. The company had $37 million in convertible debt.
"The company has no revenue producing operations at this time and its working capital deficiency, cash burn rate and debt maturity schedule required that the company seek additional sources of funding to ensure the Company's ability to continue its activities in the normal course," Gold Reserve wrote in its 2013 Annual Report.