Romanian Rhapsody: A Gold-Plated Litigation Play

Though bedeviled by political problems, the Roșia Montană mine project in west-central Romania represents one of Europe’s greatest undeveloped gold assets. Beaten-down junior miner Gabriel Resources owns most of Roșia Montană, which makes it a cheap buy with strong leverage to the gold price. It’s also interesting as a litigation play — Gabriel is currently fighting a legal battle with Romania in which a victory could produce huge value for shareholders. There’s two ways to win.

Flickr. Romania has a rich mining history -- and the Rosia Montana project would be the jewel in the crown.

Flickr. Romania has a rich mining history -- and the Roșia Montană project could be the jewel in its crown.

The Roman Emperor Trajan, near the start of the second century AD, invaded and subdued what was then known as Dacia -- current-day Romania -- and seized its gold. Such was his jubilation at this martial and natural-resources coup that he ordered a solid four months of celebrations. Since then, Romania has become better-known for vampires Transylvanian and Soviet than for its world-class mining assets. So it may not be surprising, therefore, that Gabriel Resources (TSX: GBU) has faced difficulties in trying to develop such an asset there that would frustrate even Sisyphus. The London-based junior miner is focused on progressing with the Roșia Montană project, currently Europe’s largest undeveloped gold mine, of which Gabriel owns 80.7 percent through its local subsidiary.

The deposit is absolutely massive and of exceptional grade. If and when Roșia Montană ("red mountain", so named for the color of mining pollution) comes online, it has a predicted 16-year life with a predicted annual production rate of 500,000 oz Au at a 1.46 g/t grade. Roșia Montană is also in physical and economic terms ideally situated as a gold mine. (The political terrain is another matter entirely, but more on that below.) It is located in the Western Transylvania region, which has a mining history stretching back centuries into the country’s Roman past. This long involvement with the mining industry has created a large and deep pool of skilled local labor that has been hungering for work for almost a decade. As part of its E.U. accession process, Romania closed the vast majority of its state-run mining enterprise in 2007, leading to unemployment rates in the Roșia Montană region that are around 80 percent. With regard to infrastructure, the project looks solid: it has easy access to water and power and a functional road and rail system. Romania enjoys a corporate tax rate well towards the lower end of the scale in E.U. countries at 16 percent -- and it also has one of the lowest GDP per capita figures in the E.U., a mix which would in theory seem perfect for spurring the adoption of pro-growth policies by the government. Giving Roșia Montană the green light would seem to be just such a policy: it is estimated that it will add as much as $24 billion to the Romanian economy.

The trouble is that this green light does not, so far, seem to be happening. There are a number of structural-historical reasons. First, mining in Romania comes with a very tainted past: the Russians saw Romania as a resource bonanza, and when the country fell under Soviet dominion they began a campaign of aggressive and highly pollutive mining. The mine shutdown that preceded Romania’s E.U. accession was meant to wipe the slate clean there, but a cloud still lingers -- and national feelings against such pollution were stirred up once more by the 2000 cyanide spill by another gold-mining firm into the Someș river near Baia Mare. This disaster proved to have international ramifications: the Someș flows into the Tisza, Hungary’s second-largest river, which in turn flows into the Danube, its biggest. The cyanide pollution spread with the currents, giving a significant piece of ammunition to Hungarian opposition to Roșia Montană (which in turn revives a long-held Hungarian complaint about the division of land after World War II, where it lost precisely the resource-rich region of Transylvania where Roșia Montană is located).

There is also the question of Gabriel’s founder, Frank Timiș, a colorful character with a couple of convictions for heroin possession, at least one serious fine from a London stock market levied against a company he was associated with, and a healthy slate of unproven allegations made against him about his business dealings -- including about how he got the Roșia Montană project started. He’s no longer associated with Gabriel, but his presence seems to hover.

It’s no shock, then, that Roșia Montană has long been a focus of highly visible protests from NGOs -- one funded by billionaire philanthropist George Soros -- and ordinary citizens citing concerns about the environmental and cultural damage the mine might do. These have attracted a cadre of celebrity supporters as well, including Woody Harrelson and Romanian TV star Gianina Corondan. It should be noted here that rumors have long circulated that Russia helps the protest movement from behind the scenes. No firm evidence of this has yet emerged, but it would accord with the strategy practiced by Putin (as outlined in our September issue by Zvi Magen) in attempting to bring former Soviet bloc countries back into Russian auspices. Russian involvement or no, as a result of the protests the project has seen sporadic if significant progress in approvals stretched over almost two decades. It is currently advanced in the permitting process, needing only to receive the OK of Romania’s environmental agency -- but that missing permit has been a key stumbling block for them, as the anti-mine activists have seized on its being granted as a be-all-and-end-all issue. Their protests were deemed a powerful enough issue that the current Romanian administration under Prime Minister Victor Ponta (now under investigation for corruption) and President Klaus Iohannis used them as a campaign issue in 2012 -- and successfully.

The mine does have some political support: former Romanian president Traian Basescu has proved to be a consistent backer. But Ponta and Iohannis’s campaigning against the project and their eventual victory sent the company's stock price plummeting from its early 2011 highs of C$8.40 to $2.28 by the end of 2012. This despite the fact that the Romanian government through its Minvest subsidiary owns a 19.3 percent stake in the Roșia Montană mine. After Ponta was safely installed as Prime Minister (his rival Iohannis ended up taking the presidency Ponta had aimed at), he switched gears on the Roșia Montană question and drafted a law that would have removed the obstacles to getting the mine into operation. Whatever Ponta’s motive for moving the issue to the legislature was, the law died there, in the face of those very loud, very sustained protests, leaving the project in limbo. This has driven the price down to between $.24 and $.47 where it has been trading since April of this year, putting the company's market cap just a hair above $94 million.