Gold Reserve (GDRZF): The Numbers From The Venezuela Settlement Do not Add Up, It is A Promote

Initially, I supposed to write down this text after Gold Reserve Inc. filed its 2023 Annual Report, which primarily based upon the discharge dates of its earlier annual experiences, will occur earlier than the top of April. Nevertheless, court docket paperwork that had been filed in the present day (April 17, 2024) have accelerated this timeline. Accordingly, all monetary knowledge about Gold Reserve Inc. are primarily based upon its 2023 Q3 Financial Statements. I be aware too that except in any other case specified, all figures quoted are in US {Dollars} (USD).

Gold Reserve’s Widespread Shares commerce OTC within the US underneath the image OTCQX:GDRZF, right here is extra information. The shares additionally commerce in Canada on the Enterprise Alternate of the TSX underneath the image GRZ.

Gold Reserve’s shares have elevated by 120% over the previous 12 months on optimism that it will likely be in a position to acquire all, or a considerable portion of, the $913 Million that it’s owed by the Bolivarian Republic of Venezuela. Nevertheless, after the claims of different collectors which have precedence over Gold Reserve’s declare are paid, it’s unlikely that there will probably be a lot worth left.

Buyers or speculators who at present personal GDRZF ought to exit or cut back their place.

I. Overview of Gold Reserve Inc.

The next passage is copied from Gold Reserve’s website;

“Gold Reserve Inc. (“Gold Reserve” or the “Company”) is engaged within the enterprise of buying, exploring and growing mining tasks. The Firm, an exploration stage firm included in 1998 underneath the legal guidelines of the Yukon Territory, Canada and continued to Alberta, Canada in September 2014, is the successor issuer to Gold Reserve Company which was included in 1956. In 1992, the Firm acquired and started growing what is named the Brisas gold and copper mission, positioned within the historic Km 88 mining district of the State of Bolivar in southeastern Venezuela (the “Brisas Project”).

From 1992 to 2009, the Firm invested near US $300 million in acquisition, land exploration, growth, gear, and engineering prices, growing the Brisas Mission into what administration believed was a world class mining mission. In April 2008 the Bolivarian Republic of Venezuela revoked the Authorization to Have an effect on, eliminating the Firm’s means to use the Brisas Mission.

In October 2009, the Firm filed a Request for Arbitration underneath the Further Facility Guidelines of the Worldwide Centre for Settlement of Funding Disputes (“ICSID”) of the World Financial institution, in Washington D.C., in opposition to the Bolivarian Republic of Venezuela in search of compensation for the losses attributable to the actions of Venezuela that terminated our Brisas Mission in violation of the phrases of the Treaty between the Authorities of Canada and the Authorities of Venezuela for the Promotion and Safety of Investments.

In September 2014, the ICSID Tribunal unanimously granted us an Award of $740.3 million. In July 2016, we signed a Settlement Settlement (as amended) whereby Venezuela agreed to pay us $792 million to fulfill the Award and $240 million for the acquisition of the Mining Information for a complete of roughly $1.032 billion payable in month-to-month installments. The primary $240 million to be acquired by Gold Reserve from Venezuela is expounded to the sale of the Mining Information.”

Venezuela has paid the Firm a complete of roughly $254 million pursuant to the Settlement Settlement. Roughly $913 million (together with curiosity of roughly $135 million) stays unpaid.

The Firm is at present engaged on amassing the remaining funds contemplated underneath the Settlement Settlement (See Arbitral Award part) and executing the Blended Firm Settlement (See Blended Firm part).

The Firm maintains its government/administrative workplace at 999 West Riverside Ave., Suite 401, Spokane, Washington 99201 USA, and is listed on the Toronto Enterprise Alternate (image: GRZ.V) and quoted on the OTCQX Markets Alternate (image: GDRZF). The Firm employed 8 people as of June 30, 2021.”

II. Gold Reserve’s Market Cap And Break Up Value

As of the close of business on April 16, with a closing price for GDRZF of $2.98, Gold Reserve had a market cap of $293.4 million.

Gold Reserve has no commercial production or source of operating income. With the exception of pursuing its legal claim against Venezuela, Gold Reserve appears to have been largely inactive for a number of years. Gold Reserve has a minimal number of employees (eight in June 2021) and the lion’s share of past payments received from Venezuela, in the amount of approximately $254 million, appear to have been distributed to shareholders, employees, and to the investors who funded the company’s legal expenses.

Aside from any monies that it may collect from Venezuela, there are three other potential sources of value for shareholders.

• Siembra Minera is an entity that was formed in 2016, which is 55% owned by Venezuela and 45% owned by Gold Reserve. Siembra owns mineral rights for 18,950 hectares of land. Gold Reserve had certain obligations such as funding social programs and in total, it spent $21.6 million to fulfill its obligations. To date, Venezuela has not fulfilled its own obligations, and Gold Reserve does not show a value for Siembra Minera on its Balance Sheet.
• The LMS Gold Project is an exploration property in Alaska which the company purchased in 2016 for $350,000. If the company ever does develop the property, the seller will be entitled to collect “Internet Smelter Returns” of 1 to 3 percent.
• In the notes to its Financial Statements, Gold Reserve lists Tax Losses of $156 million that it can carry into future years. These losses will only be able to be used as tax deductions if the company returns to profitability. Gold Reserve has assigned a value to these losses of $44 million, which is an aggressive valuation for a variety of reasons. In any case, even if this amount is added to the company’s Book Value, it is not material to the overall thesis that investors should sell GDRZF.

Table 1: Condensed Balance Sheet & Details of Stock Options

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Table 1 is a synopsis of Gold Reserve’s Balance Sheet on September 30, 2023. As can be seen, its Book Value on that date was $30.65 million. If all of the outstanding Stock Options were to be exercised, which would happen if Gold reserve were to collect a substantial portion of the money owed to it by Venezuela, then the company’s assets would increase by $16.2 million, and its Book Value would be approximately $46.85 million.

The vast majority of the company’s assets are cash or cash equivalents, and its liabilities are all current liabilities, so it’s a fair assumption that their market values are equal to their carrying value on Gold Reserve’s Balance Sheet. Therefore, Gold Reserve’s Market Cap on a fully diluted basis is equal to the following formula;

Market Cap = Book Value + Expected Payment from Venezuela

$293.4 million = $46.85 Million + Expected Payment from Venezuela

It is apparent that the market is expecting Gold Reserve to receive an award of approximately $246.55 million.

III. How much can Gold Reserve expect to receive, and when will this happen?

1. Background: The Venezuelan Confederation of Industries estimates that the government of Hugo Chavez nationalized 1,147 companies between 2002 and June 2012. Many of these were foreign companies that filed claims against Venezuela at the International Centre for the Settlement of Investment Disputes (“ICSID”) in Paris to obtain compensation for their loss. It was a long, torturous, and expensive process, with various appeals, disputes about the size of losses, and other delays. Ultimately, a number of awards were made, only for Venezuela to report that it did not have the funds to pay the approximately $150 billion of debt that it owed to external creditors.

In fairness to Venezuela, it negotiated a number of settlements, and started to make the agreed upon payments. However, by the time all of this had occurred, the United States had levied sanctions against the country, and there were several instances where money was paid by Venezuela, only for the bank in question to freeze the funds and not remit it to the intended recipient. At this point, Venezuela ceased making payments and Gold Reserve was one of the claimants in this position.

2. Gold Reserve’s Position: In July 2016, Venezuela agreed to pay the Company $792 million to satisfy the ICSID Award, and a further $240 million for the purchase of the technical mining data associated with Gold Reserve’s previous mining project in Venezuela (the “Brisas Project”). The total amount of approximately $1.032 billion was to be paid in a series of monthly payments ending on or before June 15, 2019. The first $240 million was received by Gold Reserve from Venezuela as proceeds from the sale of the Mining Data, before payments stopped.

Gold Reserve has financed its legal case through the issuance of Contingent Value Rights (“CVRs”) that entitle the holders to an aggregate of 5.466% of the after tax proceeds of any payment received from Venezuela. There is also a bonus plan that is meant to compensate the company’s employees, directors, executives, and outside consultants. Under its terms, 1.28% of the first $200 million of any consideration (less income taxes) received will be paid into the plan, and thereafter 6.4% will be paid. Taking these deductions into account, the company will receive $93.254 million for each of the first and second $100 million paid, and $88.134 million for each additional $100 million paid, assuming that no tax is levied in Canada or the US on these payments.

3. The Crystallex Decision: Venezuela’s crown jewel is CITGO Petroleum, the seventh-largest oil refiner in the US, which also has a network of 4,000 gas stations. CITGO is owned by a holding company, PDV Holding, which is in turn owned by the country of Venezuela. Due to the doctrine of limited liability, a corporation’s debts and assets are distinct from those of its owners, and Venezuela’s creditors were unable to touch CITGO’s assets. In 2019, Venezuela had a presidential election where the incumbent, Nicolas Maduro, refused to cede power to the opposition candidate, Juan Guaido. The US government recognized Guaido as the winner and transferred ownership of CITGO to his parallel government. A series of bad decisions followed that ultimately allowed Crystallex, a Canadian mining company, to obtain an “alter ego” judgement in the Delaware courts. The court ruled that CITGO and Venezuela were effectively the same legal entity, and that limited liability no longer applied – CITGO was liable for the debts of Venezuela. A number of other creditors joined the suit, and CITGO is now responsible for paying approximately $21.3 billion of Venezuela’s debts, with this figure increasing as interest is accruing daily on the unpaid amounts.

4. The Sale Process: On January 9, 2024, the Supreme Court of the United States declined to hear Venezuela’s appeal of the Delaware court’s decision. The Delaware court immediately announced that a Special Master who had previously been appointed would start a sale process of CITGO, with a view to concluding an auction by July 2024. Proceeds of the sale will be distributed on a first come, first served basis. Crystallex, which had initiated the suit, will get paid first, and any excess funds will then be paid to the second creditor that had joined the suit, and then the third, etcetera, etcetera. Gold Reserve ranks tenth out of 23 creditors.

There are a variety of news reports that have estimated CITGO’s market value at between $10 and $14 billion. I must stress that I have seen no analysis or sources cited for these estimates, except for a March 14, 2024 story from Reuters that cites a “$13 billion to $14 billion worth specialists appointed by the court docket had estimated for the shares.“

It was reported in a court hearing on February 27, 2024, that the Special Master had contacted 90 potential bidders, of which 30 signed non-binding agreements that allowed them to receive marketing material and financial models. From these 30, twelve non-binding expressions of interest were received on January 22, 2024.

The court docket officer offering the replace described the expressions of curiosity as “disappointing”, and Nathan Eimer, a lawyer representing CITGO and its dad or mum PDV Holding, acknowledged through the listening to that,“The indications of interest are quite disappointing. And we’re working hard to see if they can be raised, but we have a great deal of concern and where we are at this point.” Reuters subsequently reported on March 14, 2024, that the highest bid received was $7.3 billion.

Finally, documents filed in court on April 17, 2024, set June 11 as the deadline for binding bids to be received by the court. The winning bid will be announced as soon as possible so that there will be sufficient time for objections to be heard before the final hearing, which is currently scheduled for July 15.

5. The Precedence Checklist: On March 1, 2024, the Delaware court docket launched the finalized priority list that units out the order which collectors are in a position to acquire cash from the sale of CITGO, to settle their declare in opposition to Venezuela. Eighteen entities have 23 claims which are estimated to whole $21.3 billion.

Table 2 shows the first thirteen claims (made by ten claimants) in order of priority, and the estimated dollar amount of each claim. If you click on the name of each claimant, you will be directed to one of; a) the applicable judgement from the International Centre for Settlement of Investment Disputes, b) the claimant’s website, or, c) a news story confirming the amount of the award. I note that interest is accruing on each claim at a different rate, and some of the claimants are private debt or hedge funds that do not provide public information. I, therefore, have noted if the dollar amount indicated for each claim is for principal only, or if it includes interest as well.

In short, there are at least $14.6 Billion of claims that must be paid before Gold Reserve will see a dime.

Desk 2

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IV. Conclusion

Gold Reserve Inc.’s shares are priced at a level that implies it will collect approximately $250 million from the court ordered sale of CITGO. However, in order for this to occur, given the claims in front of it, and Gold Reserve’s commitments to litigation funders and its employee bonus plan, CITGO would have to be sold for approximately $14.9 billion. This is above the high end of estimates that the court received for CITGO’s value, and according to various news reports, more than twice the amount of the highest expression of interest that was received in January.

In the very worst case, if Gold Reserve collects nothing from the sale of CITGO, it would be left with Working Capital of approximately $30 million (as at September 30, 2023), or circa 30 cents per share, and an exploration property in Alaska that it carries on its Balance Sheet (along with associated equipment) for $400,000, or 4 cents per share.

There is a lot of event risk around Gold Reserve Inc. in the form of the imminent release of its Financial Statements, which, because it has no source of operating income, may show a decrease in working capital, and it in the form of the CITGO sale process. Holders of GDRZF face significant downside risk, without much upside. They should sell down their positions.

Editor’s Observe: This text discusses a number of securities that don’t commerce on a significant U.S. trade. Please concentrate on the dangers related to these shares.