“The Biggest Gold Mine in Europe Will Reopen in 2012”

By Travis Johnson, Stock Gumshoe, November 17, 2009

That’s how we’re introduced to this new teaser ad letter from Dr. Stephen Leeb …

“The Biggest Gold Mine in Europe Will Reopen in 2012, But You Can Get Your Stake In The Profits Today…

“Since last July, shares in one of the world’s most promising junior gold miners have shot more than 200% higher. But even at these prices, the stock is dirt cheap compared to it’s potential growth over the next two years.

“The reason: A few years back, this Canadian company bought the richest gold mine in Europe—one that the Roman Empire used to operate, but had since been shut down. Not surprisingly, mining methods have improved a lot since Roman times, and the remaining 10.1 million ounces of gold left in the deposit can now be mined profitably.”

Ah, the Roman Empire’s gold mines! That’s good stuff — not quite as sexy as the Pharaoh’s gold that we were teased with a couple years back (that was Centamin Egypt, by the way, still an interesting story and one that just started mining this year at their massive gold resource near the Red Sea), but a similar kind of pitch — ancient gold mines given new life by modern geologists.

So who is Dr. Leeb talking about, inquires Master Gumshoe? Well, if you want the answer from him you’ll need to pony up the $997 for a subscription to Leeb’s Real World Investing. If you just want the name of the company and a bit of background, well, join along with me and we’ll see what we can find …

We get some more clues, of course …

Production costs of $270 an ounce.

47.6 million ounces of silver in that same mine — and silver’s going up even more dramatically than gold right now.

“Yet, despite the gains the stock has made in the past year or so, it’s still selling as if all its gold was only worth $100 an ounce. The reason for this undervaluation is that the company had some problems dealing with the local government in the past—which wanted strong assurances that the project would be environmentally sound.

“However, upcoming elections are likely to install a new government on the promise of job creation. With unemployment booming in the area and the large number of workers the mine will employ, the project is almost certain to get approved.

“The company has attracted the attention of one of the world’s largest gold miners, as well as some of the savviest institutional investors around— which is a strong vote of confidence. I expect this could be one of the most profitable enterprises of the next three years.

“However, if you want to participate in this incredible opportunity, you will have to get in soon. Once the government gives its stamp of approval, the prices could make another huge leap forward—and you want to be in on that ride.”

So who is this wee miner sitting on a pile of old Roman gold?

Gabriel Resources (GBU in Toronto, GBRRF on the pink sheets — click here for a free instant analysis of GBU)

The clues are all exact matches, save one: we can remind ourselves that Dr. Leeb’s PhD was in psychology, not in math, because when a stock doubles from $1.60 to $3.20 that’s a 100% gain, not 200% (it is up 200% since the trough late in 2008 … but most other junior gold stocks are, too). But otherwise, this is an exact match for all the numbers about Gabriel’s main asset, the old Rosia Montana mine in Romania.

The reserves numbers and estimated cash costs are straight from Gabriel’s website:

“The Rosia Montana Project, owned through a joint venture with the Romanian Government, contains reserves of 10.1 million ounces of gold and 47.6 million ounces of silver. Currently, measured and indicated resources stand at 14.6 million ounces of gold and 64.9 million ounces of silver in addition to inferred resources of 1.2 million ounces of gold and 3 million ounces of silver. The deposit remains open in several directions. The estimated cost to complete the development of the Project – including interest, financing and corporate costs – is US$1 billion, consisting of capital costs of US$876 million and interest, financing and corporate costs of US$124 million. The Project is estimated to produce 626,000 ounces of gold annually during its first five years of operation at an estimated total cash cost of US$272 per ounce, and an average of 500,000 ounces per year over its 16 year mine life averaging US$335 per ounce.”

And Gabriel’s share price has been on the move up lately, in part because of the interest of a big new investor, Beny Steinmetz, whose BSG Capital Markets subscribed to 30 million new shares in a private placement just a few days ago. Steinmetz is a billionaire from an Israeli diamond family who has expanded into several different mining ventures in recent years.

The Rosia Montana project has been a gold mine for thousands of years, from Roman occupation until just a few years ago, when it was shut down as part of Romania’s entry into the EU. It apparently still has huge reserves available for modern mining techniques — as well as kilometers of ancient underground tunnels, and rivers of red toxic runoff to keep everything exciting.

Restarting mining at Rosia Montana has been a hugely controversial project, which is why Gabriel hasn’t often carried the share price that you’d expect for a gold mine with 10 million ounces of booked reserves. There has been significant environmental opposition, since gold mining is, as we all know, a hideous and nasty enterprise, but the company has seemingly overcome much of that opposition — in part because the site is already a toxic dump from generations of cyanide leaching, and it would be nice to at least get someone actively involved there who was responsible for cleaning it up.

I have no particular insight into whether or not Gabriel’s mine will go ahead as they hope — it is a massive project, including the creation of a new town and resettlement of the inhabitants, and it is in an area where employment was historically dependent on the mine, so there is both support and opposition locally, and a lot of outside groups (both for and against) in the Romanian government and in the EU who have taken it on as an environmental, economic, and cultural issue. One of the opposition groups has a pretty clear website if you’d like to try to get a picture of both sides.

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According to the updates they’ve given in recent quarterly reports (like this one here), Gabriel appears to believe that they’re at a pivotal point for getting “their” permits back after they were pulled by a former minister — Romania is in massive financial trouble at the moment, and they essentially had a “no confidence” vote on the government recently, so everyone’s just waiting until election results next month to see who’s actually in charge and how the government will actually work. During this time Gabriel has been continuing to invest in resettlement, infrastructure building, and community outreach to try to win the argument with their promises of billions of dollars to the Romanian government and a revitalized economy in the local area.

And yes, Gabriel has other big investors — including Newmont Mining, but the one who gets the most attention these days is the hedge fund god John Paulson, who achieved such fame by making perhaps the best trade in history (betting huge against subprime mortgages), that everyone wants to follow every idea he has. He has been moving substantially into gold over the past year or so, including a huge chunk of the GLD exchange traded fund, but his company has also continued to build a position in Gabriel Resources, of which they currently own (just as Newmont does) close to 20%.

Of course, John Paulson can treat a 20% investment in Gabriel like a roll of the dice at the craps table — one which could pay off huge if they are able to start mining (which is why Gabrial has spent hundreds of millions of dollars over the last ten years trying to advance the mine and get permits) … but he won’t be eating cat food if the permits never materialize and the mine continues to just sit there. And I haven’t heard any news about his stake lately, since he subscribed to a private placement (at $2.25) back in June, so I can’t guarantee that he continues to hold the shares — I did take a look at his 13F filing for the quarter, but that only includes the US-listed firms so it doesn’t tell us anything about Gabriel Resources, which is listed in Canada. It does tell us that GLD was still Paulson’s largest holding (with Wyeth and Bank of America second and third), and that he was still heavily invested in several other miners at the end of September, for whatever that’s worth.

I’ve taken brief looks at a few controversial gold mining projects in the last year or so, and they always make fast moves on political and permitting interpretations, and on the interest by outside investors that makes people think “hey, he wouldn’t be investing if it wasn’t a lead-pipe cinch!” I’m sure I know far less about gold than John Paulson or Beny Steinmetz, and I have far less influence over the Romanian government, but my wild guess would be that this one seems more likely to eventually get approval than does Northern Dynasty’s Pebble project in Alaska, if only because the economics seem better (Pebble could destroy a lucrative fishery, Rosia Montana is already a toxic hazard and has a dependent mining community already in place).

That’s not a judgement call on whether it’s right or wrong to mine either of these sites, just a guess to try to put things in a bit of perspective — and to remind you that when comparing mining stocks that don’t yet have mining operations in place, the reserves and costs aren’t everything, you have to make some kind of assessment about whether, if, and how they’ll actually get their required permits (or whatever other impediment they have) and start to mine. Gabriel Resources will also need a lot lot lot more financing to actually build the mine and start producing gold, which oughtn’t be a problem with the reserves they have booked and the current gold price, but that’s all on hold until they actually get permission to mine the site.

Oh, and if you like “old Europe” gold and prefer following John Doody and his Gold Stock Analyst, he’s also pushed in the past a European gold miner with some permitting controversy, though I think that was the less controversial (in my opinion) European Goldfields.

What do you think? Do the reserves and the low-cost nature of the mine make it worth standing alongside a couple billionaires to wager on Romanian approval for Rosia Montana? Have any insight as to whether or not Gabriel will get the green light from the new powers-that-be in Romania? Or would you rather wait until the permits come through and miss the resulting enthusiasm for the shares?

Or, perhaps, are you just plumb sick of gold stocks? Let us know with a comment below.

And if you’ve ever subscribed to Leeb’s Real World Investing, please click here to let us know what you thought — we’ve heard from one reviewer, but we’ll know more if you share your experience. Thank you!



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ed swiatkowski
November 17, 2009 11:15 am

Daggummit gumshoe!
“oughtn’t”? I haven’t heard that word since my bercytus was acting up.

November 17, 2009 11:16 am

This is very much a caveat emptor opportunity. It may work out however its track record in terms of the effectiveness of the organised opposition in Romania and in the EEC to it receiving its mining permits and hositility within various parts of the government has stalled the project and the company for a long time.

Another leading indicator is that Alan Hill, the CEO recruited from Barrick to take the project into production gave up and resigned in March of this year which is not exactly a screaming vote of confidence from some one so intimately familiar with all the dynamics and realities of the situation. It is also interesting that 7 months later Gabriel has still been unable to recruit a new CEO and is still operating with an interim CEO. Again not a great vote of confidence that the company has not been able to sell any of the candidates that it has been headhunting on the project.

Lastly I would point out the other side of the coin to the recent dilutive financing the company secured from Benny Steinmetz, i.e. it means that both existing major shareholders, Newmont and Paulson preferred to see their holdings diluted as they declined to participate in the financing.

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November 17, 2009 2:43 pm

Gold Gold Gold! Enough already SG. I’ve been holding it and silver for 29 years and am a long long way from getting back to even money yet. I need 2199.80 and 45.55 just to break even with the initial investment, never mind the costs of holding it all this time. So Thanks for every thing you do, but enough on gold/silver already.

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Erick Tippett
November 17, 2009 7:52 pm