Tuesday, September 10, 2013

A quick comment on Gabriel Resources

At Bronte we have been short Gabriel Resources for some time. Gabriel (a Canadian company) owns a potential gold mine in Romania. The biggest investor is John Paulson of "greatest trade in history" and later Sino Forest fame.

The deposit has been known since antiquity and was worked by the Romans (presumably using slaves) and later by the foreign-exchange starved communists using the modern equivalent of slaves (which the commies called "workers" or the owners of the revolution).

Slaves have a habit of removing most high-grade ore...

The mine was closed as uneconomic (loss-making) after the iron curtain fell. It just wasn't a very good gold mine - at least it wasn't after the slaves had picked over the ore body.

The company used to have a multi-billion dollar market cap based on an old deposit with no working mine - and which was only recently deemed not worth even running...

This was unusual and warranted further attention.

And we gave it more-than-the-usual amount of attention.

We paid a law student in Romania to pull the Communist Party archives to work out what the commies thought the grades of the mine were and to compare them to the (seemingly optimistic) statements of the company. [Yes - you know a hedge fund does original research when it is poking about in the Romanian Communist Party archives...]

The reported grades were lower than claimed by the company (enough reason to be short) but the difference was only about 20 percent - not that dramatic. Indeed this could be a genuine sampling error and there is little reason to assume that the difference is deliberate.

If there had been a dramatic difference in grades we would have taken a much larger position and danced about in joy. We are short sellers at heart - and investigative stock picking is fun.

With minor grade differences and more than a few environmental doubts about the mine we maintained a modest short position.

This worked well. The Romanian Prime Minister Mr Victor Ponta - after mass protests - has decided to advise Parliament to reject approval for the mine. This is hardly surprising as the company proposed an environmentally nasty - indeed toxic - method for extracting the gold.

And so yesterday the stock entered the final-phase of its collapse - it fell a little over 50 percent - but it still has more than a quarter of a billion in market cap! The stock is down to 68 cents.

And the company response. They plan on suing Romania for "multiple breaches of international investment treaties".

But they don't mention what treaties. Indeed I am for the most part unaware of what treaties might pertain. A google search for the term "breaches of international investment treaties" but without the world "Gabriel" produces roughly zero results.

For this reason I suspect Gabriel's legal case is modestly overstated.

Like their gold grades.*


*The overstatement of the gold grades is my guess. As stated above the difference in the gold grades was not large. However I believe the grades in the archives for good reason: the Commies did a rather big bulk sample on the mine by actually mining it. It is however not outside the realms of possibility that the Communists were so incompetent at extracting gold that they underestimated the grades in their own mine. In which case Gabriel's estimates may be accurate. I report: you decide.


Sam said...


Likely the Romania-Canada Bilateral Investment Treaty. See http://www.sice.oas.org/Investment/BITSbyCountry/BITs/CAN_Romania_e.asp. They can file a request for arbitration through ICSID, which is part of the World Bank. A long, arduous process that might or might result in a judgment.

- Sam

Anonymous said...

And the 4th largest shareholder is Baupost. Well done John

Anonymous said...

"India is held liable for investment treaty breach due to protracted judicial delays suffered by foreign investor"


"Tribunal Finds Ecuador in Breach of its Obligations Under International Law and the Bilateral Investment Treaty with the United States"


uair01 said...

You might be interested in looking at uranium ore mines in the Czech republic. There is some speculation if they will be restarted. At the moment they are mothballed.

NL said...

1.) What is unprofitable at $300/oz may be profitable at $1,300/oz.
2.) The company was probably going to use better technology than the commies had 20 years ago. Romania is *still* practically a third-world country.
3.) The mine was shut because the runoff would have created an international incident. (Although this would not have been the first Romanian cyanide poisoning of a major river system in recent memory so who knows.)

Anonymous said...


most of the ex-WP countries seem to have some "investment treaty" with quite a few western countries. I know that Czechs especially lost a lot of money to international arbitrations based on those treaties.
Sometimes it even seems that the business model is:
- create a company which is going to do something dodgy (that may include overpriced gov't contract)
- assume that the relevant govt will kill it one way or another (because it was so dodgy to start with - here's where endemic corruption helps)
- sue them and collect

Basically, if you're ruthless enough, there are semi-legal (as in you need some initial corruption, but then the gains are legal) ways to make tons of money in some countries, regardless of how your balance sheet etc. looks like or how viable would your business be looked at via "business" lenses. Shorting these is a very risky proposition (especially on a pure known-business-economics basis), as it's basically a bet that they lawyers/contacts in the country are not up to the scratch and/or made some powerful enemies there.

David said...

Having worked in the mining industry in the eastern bloc for nearly 20 years, I can say their estimates were usually not bad. They used similar statistical inferencing and had very rigorous testing protocols. Why? because these activities employed huge amounts of bureaucrats.

What the commies did not have was the concept of an economic cutoff grade. If you raise the cut-off, you raise the overall grade of the deposit. Thus, I would not be too worried that G overstated just because they had higher grades than the commies.

There are still huge numbers of examples of overstated economics in the industry, and outright fraud (remember Bre-X?) Junior projects are being shuttered every day and this one in particular is way down on the list to be funded anywhere in the world.

Summery: it might have the grades they are talking about, but still be far from either economic or bankable in todays market.

Anonymous said...

Gabriel's resource estimation was based on elaborate research (about 200 000 samples) carried out under modern international standards, independently verified by accredited evaluators. Also, subsequent audits proved that the entire estimation process was done according to international standards.

The communists, however, and the old state-run company, used an old Russian evaluation system for the deposit, which was proven to underestimate low grade deposits, under 3g/ton. Their methods were outdated and inefficient both in evaluation and in exploitation.

So it's not that Gabriel overestimated the deposit, it's that the communists underestimated it.

Oh, and slaves were never used in Rosia Montana

Anonymous said...


the company has certainly used better methods to evaluate the deposit and will certainly use better technology, both cleaner and more efficient, to extract the gold. Old communist state-run companies were known for their inefficiency and technological backwardness, and also standards are much stricter now, since Romania is a part of the EU

Anonymous said...

enlightening :) I can go home today having learnt something new!

great stuff and lateral research methods


John Hempton said...

I know that if you raise the cut-off grade you raise the average grade and lowered the deposit size.

But this deposit is 10 million tonnes or so they say...


Mitch said...

"This is hardly surprising as the company proposed an environmentally nasty - indeed toxic - method for extracting the gold."

Just as an FYI, cyanide leaching (as proposed by Gabriel) is the method used in a majority of the world's gold mines - both in the developed and developing world.

I agree Gabriel is a short, but for political reasons rather than issues with the project. It's a spectacular deposit.

Anonymous said...

In the back of the NI 43-101 Technical Report filed on SEDAR there is an mineral resource table at different cut-off grades...

Anonymous said...

@:"NL said"..Who thought you Romania is a third world country? Before you leave a comment, better Google about Romania and see that is a Second World Country .Do you even know where is located Romania on the world map? Or let's ask something else: do you know geography at all? Because Romanian people are so kind, countries around think they can do whatever they want with this country. Shame on you posting that comment.

Anonymous said...

And by the way " Gabriel Resources LTD" is just a LIMITED COMPANY, that promises whatever Romanian government wants to hear, and then after they extract the gold and silver, they will go bankrupt. Some kind of "underground" company, so I have no idea how they will sue the country.

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