Time to Buy, Gabriel?
By Louis James
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 ounces.
· 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 to hear.
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.
[Joel's Note: If you would like to keep up to date with
Gabriel, and a bevy of other speculative plays around the
world, we suggest you check out Doug Casey's International
Speculator. It's brimming with stories of companies around
the globe that are on the verge of significant
breakthroughs. Beat the others to the punch right here:
Doug Casey's International Speculator |
