Empresa Mixta Ecosocialista Siembra Minera, S.A.
In August 2016, we executed an agreement with the government of Venezuela to form a jointly owned company and in October 2016, together with an affiliate of the government of Venezuela, we established Empresa Mixta Ecosocialista Siembra Minera, S.A. (“Siembra Minera”), the entity whose purpose is to develop the Siembra Minera Project. Siembra Minera holds certain gold, copper, silver and other strategic mineral rights within Bolivar State (having a term of 20 years with two 10 year extensions) which is comprised of approximately 18,950 hectares in an area located in the Km 88 gold mining district of southeast Bolivar State which includes the Brisas and Cristinas areas. The entity is beneficially owned 55% by Corporacion Venezolana de Mineria, S.A., a Venezuelan government corporation and 45% by Gold Reserve and, in the event the settlement payments are not made by Venezuela, the parties will retain their respective interest in Siembra Minera.
Pursuant to the agreement, Siembra Minera similar to other mixed companies operating in the area of the “Orinoco Mining Arc” (as defined in Presidential Decree No. 2.248) is expected to be issued tax and fiscal incentives that include exemption from value added tax, stamp tax, municipal taxes and any taxes arising from the contribution of tangible or intangible assets, if any, to the mixed companies by the parties and also provides for the cost of electricity, diesel and gasoline the same as that incurred by the government or related entities. The agreement also obligates Siembra Minera to pay a special advantage to the Venezuelan government of 3% of gross sales, a net smelter return royalty (“NSR”) on the sale of gold, copper, silver and any other strategic minerals of 5% for the first ten years of commercial production and 6% for the next ten years and income tax upon the commencement of commercial production at a rate of 14% for years one to five, 19% for years 6 to 10, 24% for years 11 to 15, 29% for years 16 to 20 and 34% thereafter.
Siembra Minera is further authorized by the agreement to export and sell concentrate and doré containing gold, copper, silver and other strategic minerals outside of Venezuela and maintain foreign currency balances associated with future capital financings and sale of gold, copper and silver in offshore US dollar accounts, with dividends and profit distributions, if any, paid directly to the shareholders of Siembra Minera. In addition, funds required for Venezuela income taxes and annual operating and capital costs denominated in Bolivars for the Siembra Minera Project are expected to be converted into local currency at the most favorable exchange rate offered by Venezuela to other entities.
The parties agreed to participate in the future price of gold, in accordance with an agreed upon formula resulting in specified respective percentages based on the sales price of gold per ounce. For sales up to $1,600 per ounce, net profits will be allocated 55% to Venezuela and 45% to Gold Reserve. For sales greater than $1,600 per ounce, the incremental amount will be allocated 70% to Venezuela and 30% to us. For example, with sales at $1,600 and $3,500 per ounce, net profits will be allocated 55.0% and 45.0% and 60.5% and 39.5%, respectively. In addition, Gold Reserve, under a Technical Services Agreement, is expected to provide engineering, procurement and construction services to Siembra Minera for a fee of 5% over all costs of construction and development and, thereafter, for a fee of 5% over operating costs during operations. Siembra Minera is expected to undertake initiatives to secure financing(s) to fund the anticipated capital cost of a small cyanidation plant estimated at $300 million as well as the large flotation plant, which is expected to cost in excess of $2 billion.
PRELIMINARY ECONOMIC ASSESSMENT
On March 16, 2018, the results of a technical report for the PEA of the Siembra Minera Gold Copper Project in accordance with National Instrument 43-101 Standards of Disclosure for Mineral Projects (“NI 43-101”) was announced. The technical report in connection with the PEA (the “Siembra Minera Technical Report”) prepared by Roscoe Postle Associates, Inc. (“RPA”), Samuel Engineering Inc. (“Samuel Engineering”), Tierra Group International, Ltd (“Tierra Group”), and AATA International, Inc. (“AATA”) is available to the public at www.sedar.com and www.sec.gov, as well as, the Company’s website at www.goldreserveinc.com. The summary section of the March 16, 2018 PEA of the Siembra Minera Project Report prepared in compliance with NI 43-101 is included in the Company’s annual information form.
The PEA is preliminary in nature and includes inferred mineral resources that are considered too speculative geologically to have the economic considerations applied to them that would enable them to be categorized as mineral reserves. The PEA only demonstrates potential viability and there is no certainty that the PEA will be realized, or that any production will be realized from the Siembra Minera Project. Mineral resources are not mineral reserves and do not have demonstrated economic viability. The potential viability of the mineral resources at the Siembra Minera Project have not yet been supported by a pre-feasibility or a feasibility study. The terms “mineralised material” and “material” are used in this summary to denote mineralised material above an economic cut-off grade on which the proposed mining and processing activities are designed to operate. It does not imply that mineral reserves have been estimated.
SIEMBRA MINERA PROJECT COMPLETED ACTIVITIES
The Company, on behalf of Siembra Minera completed and published the Siembra Minera Technical Report with respect to the PEA as discussed above. In addition, preliminary design and cost estimates and related tailings dam facilities for the small plant and large plant were compiled along with an initial framework for an early works program. Preparation of a Venezuela Environment Impact Statement (“VEIS”) and International Environmental and Social Impact Assessment (“IESIA”) have also commenced. The Company is currently transporting a large sample of the surface saprolite material to the United States for metallurgical testing which will aid in the final engineering design of the Early Works Project.
In May 2018, Siembra Minera obtained the Permit to Effect for the Siembra Minera Project from the Venezuelan Ministry of the Environment and later participated in an inauguration ceremony which included the officials from the Ministry of the Environment, the Minister of Mines, the Bolivar State Governor and other high government officials to mark the formal commencement of activities on the Siembra Minera Project now that the Environmental Permit to Effect has been issued. Siembra Minera is currently awaiting the issuance of the Initiation Act authorizing it to proceed with work on the Project.
The Company, on behalf of Siembra Minera, has also launched a number of social programs to improve the health care in the Siembra Minera Project area including addressing the malaria problem with medicine and preventive measures and recently engaged an independent contractor to rehabilitate and upgrade various health care facilities, schools, sports courts and parks located in the Project vicinity and to generate engineering assessments for future upgrades to the local communities’ water supply and sewage system infrastructure.
The Company has incurred costs associated with the work so far completed on the Siembra Minera Project, which through June 30, 2018 amounted to a total of approximately $10.4 million. These expenditures primarily include costs associated with consultants working on the project as well as various social works programs, which have been recognized in the Consolidated Statements of Operations.
SIEMBRA MINERA PROJECT DEVELOPMENT
Concurrent with financing efforts, the next phase of the Project’s development is expected to include detail design work for the small cyanidation plant and related facilities along with the metallurgical testing to support the metallurgical process used in the plant. Subject to appropriate funding we expect to initiate the feasibility study on the large flotation plant and concurrent detailed engineering.
With the issuance of the permit to effect the environment we are evaluating various on-site activities such as site clearing, construction of a temporary camp and warehouse facilities, drilling of dewatering and development drill holes, access roads on the property, opening of the quarry for construction aggregates and commencement of initial construction activities. Further permits and authorizations will be required to place the project into production which will be requested during this initial period of activity.
Proposals are being evaluated for a drilling program which will support the overall project development activities, water management wells, and test areas where additional resource potential is evident. Siembra Minera has established local management offices in Caracas and Puerto Ordaz which will support its plan to complete various geotechnical studies as well as environmental and social studies to augment and update previous work on the property. This work will support the generation of a pre-feasibility study for the small and large plant and generate an International Environmental & Social Impact Assessment (IESIA) for the support of the various operating and environmental permits that will be required for the project.