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Update: I Was Definitely Wrong About Gold Reserve As The Award Is Larger Than I Thought
Sep. 25, 2014 2:32 PM ET | About: Gold Reserve, Inc. (GDRZF)
Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. (More...)
Summary
Gold Reserve announces it was awarded $740M by the ICSID.
Is was unexpected as I was counting on approximately half of this amount.
Is invalidates my previous thesis, and if the money can be collected, there’s an upside potential of roughly 50%.
Excellent news for the shareholders of Gold Reserve (OTCQB:GDRZF), as the ICSID has announced it is ordering Venezuela to pay the company a total amount of $740M after it confiscated the company's most important asset. As the total compensation for the project itself is $713M, I definitely have to admit my estimates in my earlier article were dead-wrong as the compensation came in at twice as much as what I was expecting. I was wrong, and the Gold Reserve shareholders were right.
I am surprised to see the share price didn't move that much, which seems to be a sign that the market doesn't believe Gold Reserve will be able to effectively collect the $740M from Venezuela. I would think that collecting the money would actually be easier than winning the arbitration procedure, as Venezuela really has no choice here. If it wouldn't pay the settlement it would be defaulting on its sovereign bonds and that would definitely destroy what's left of the country's credibility.
I would like to congratulate all shareholders of Gold Reserve, and might actually re-initiate a position myself, as the current market capitalization is just half of the awarded amount of damages. As Gold Reserve has an accumulated deficit on the company's balance sheet is in excess of $300M, its tax bill on this award should be greatly reduced, and approximately $550-575M should be added to its cash position. The most tax-friendly way to treat its shareholders would be a (tax-free) return of capital of approximately $280M with the balance being paid as a normal dividend distribution should Gold Reserve decide to treat its shareholders very well. As an investment in Gold Reserve has changed from "betting on an arbitration procedure" to "betting on the money being collected", the odds are much better now, and if Gold Reserve will be able to collect the full $740M, you're now effectively paying $310M for a company which will have $550M+ on its balance sheet. Even after taking the taxes on the dividend into consideration, Gold Reserve should be trading at around $6/share if the money can be collected.
Editor's Note: This article discusses one or more securities that do not trade on a major exchange. Please be aware of the risks associated with these stocks.
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