Wednesday, December 5, 2007

Gabriel's Romania pitfall

Barry Critchley, Financial Post
Published: Wednesday, December 05, 2007

It was hardly a banner day for investors in Gabriel Resources Ltd. yesterday: Barely eight months ago they ponied up $4.35 a share -- almost $200-million in total -- "to advance" the company's Rosia Montana gold deposit in Romania. Those same shares could be bought for $1.41 yesterday, the day Gabriel announced plans to scale back its activities.

The reason for the stock's slide: Gabriel hasn't been able to secure all the required permits from the government of Romania to allow it to develop the mine. Indeed, a mine without the required permits is nothing more than an idea.

Gabriel's business plan and stock price have been buffeted on two fronts: Late last month, it announced that a Romanian court had annulled a so-called archeological-discharge certificate. Two months earlier, it had announced that the review process for the project's environmental impact assessment had been suspended.

Of course, investors' grief would have been lessened had Gabriel, together with the underwriters, ensured that the funds raised in the offering were placed in escrow and released when Gabriel secured the necessary permits. It's understood no thought was given to including such a provision because obtaining a permit was months away at the earliest. And the risks of investing in the offering were highlighted in the 20-page prospectus. RBC Capital Markets and Cormark Securities were joint book-runners.

But there are lots of examples of monies being placed in escrow pending certain third-party consents or approvals. That list includes deals where shareholder approval is required on certain matters; the completion of an acquisition (there is a term for such deals -- subscription receipts); or the achievement of certain agreed-upon milestones. In those situations, the money is not paid out until things happen.

And there have been examples of financings where the funds were dispersed only after a permit had been received. For instance, consider the $86.8-million financing by Guinor Gold Corp. That issue -- each warrant cost $1-- was done in May, 2005. Guinor is a gold-mining and exploration company with activities mostly in the Republic of Guinea.

The prospectus for the special warrant financing details four so-called release conditions. Two of the four conditions are fairly standard: obtaining a final receipt for the prospectus by the qualification deadline and obtaining the requisite shareholder approval for the special-warrant financing. The third condition was relevant to the Gabriel matter: "the government of Indonesia irrevocably and unconditionally waiving its right to purchase the Kelian plant."

The government of Indonesia was involved because as part of Guinor's bankable feasibility study, Guinor was to purchase the Kelian carbon-in-leach gold-recovery plant from a subsidiary of Rio Tinto PLC. That plant was in Kalimantan. "The seller.... is obligated to deliver the dismantled Kelian Plant to .... Indonesia," said the prospectus.

Guinor's deal was led by BMO Capital Markets. It's understood the condition was included because obtaining the second-hand plant was crucial to the economics of the project, a continent away. Six months after that financing, Crew Gold Corp. offered to purchase Guinor Gold for $1.50 a share. At least Guinor's shareholders made a nice pass in a short period.

bcritchley@nationalpost.com

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