Rusoro in Venezuela: A Cautionary Tale

As Venezuela’s only gold producer, Russian-Canadian junior Rusoro Mining Ltd. became the final casualty of the late President Hugo Chavez’s war against foreign-owned miners after a “force of organic decree” expropriated all of the country’s gold mines in mid-September 2011.

Though the socialist caudillo had been diagnosed with cancer that summer, Rusoro’s fate was sealed, too—just months before Chavez was re-elected a fourth time to a six-year presidential term prior to his death in March.

In July 2012, CEO Andre Agapov sought compensation through the World Bank’s International Center for Settlement of Investment Disputes—only weeks before Caracas withdrew from the tribunal altogether. “We spent a lot of money in the last 10 years,” said the well-connected Russian businessman. “The value of the company could be very high.”   

Some could argue that Agapov and his fellow executives at the 11-year-old company should have known better: After all, Chavez had long since nationalized Venezuela’s oil wealth to buttress multibillion dollar fuel subsidies and social programs, along with the rest of its mining sector which, coupled with the country as a whole, spiraled into ruin.

But in ways, Rusoro was different. In 2008, the company was riding high—and alone—as a “partner of choice” to operate with a subsidiary of Venezuela’s Ministry of Mines and Basic Industries. “The country boasts first-class geology and gold potential within an identical setting to some of the world’s largest mining districts including Ashanti in West Africa and Kirkland Lake in Canada,” stated a Rusoro news release.  

Agapov’s nationality, of course, didn’t hurt: Venezuela had long been close to a Russia notorious for its own shadowy double-dealing in mining, hydrocarbons and other natural resources—with tight economic and military ties and a high profile, mutually strident anti-U.S. agenda to show for it. In one of his typically high profile state visits to Caracas, Vladmir Putin brought Chavez a puppy.    

Previously, Chavez gave Rusoro permission to use up to 30% of liquid export proceeds to cover foreign costs and capital expenditures—up from 10%. This followed economic reforms, according to a Rusoro release, that included a two-tier currency system to blunt runaway inflation (the Bolivar was devalued five times since 2002 and, having lost 90% of its value in 14 years, left Venezuela with one of the world’s highest inflation rates.)

But for Rusoro, the picture was bright. With an output of 80,000 gold oz in 2011 and an output of 150,000 gold oz in 2010, the company owned 85% and 50% stakes in the Choco 10 and Isadora mines, respectively, with 10 more projects in exploration and development pipeline—subject to 2011 feasibility studies that could have helped tripled output.

No matter; vague denouncements of alliances between illegal miners and foreign companies suddenly swirled later that year. “This has to end, without killing anybody, without torturing anybody—just applying the law,” Chavez thundered on his weekly television show. “We cannot allow capitalist mafias, both national and international, to keep destroying our homeland.”  

Chavez railed against the “serious impact of the capitalist mining mode,” while Rafael Ramirez, his Minister of Energy and Petroleum, told El Universal that “multinational companies operate in different ways to perform covert and illegal activities.”   

Rusoro’s royalty rates were fixed at 13% soon thereafter, coupled with new rules mandating state ownership of 55% of all joint ventures—up from 30%; exports were then banned shortly thereafter. A further $130 million was diverted to the state-owned mining holding company Corporacion Venezolana de Guyana to compensate workers for previous strikes and overtime. “It’s clear the mining industry is not producing dividends for the state at the moment,” Chavez concluded.

For a time, Rusoro remained “optimistic.” Following initial talks with Mining Minister Ramirez, according to Agapov, officials pledged compensation by fair market value in the name of Venezuela’s good standing among capital markets.

But not for long; “Then all the people who started to work with us on the settlement were proposing different things and much lower valuations,” an exasperated Agapov later reported. “There was no way we could have accepted their numbers or conditions.”

In the end, “we lost it all,” said Agapov.