Not So Rosy Future for Newmont Mining at Rosia Montana

When angry mobs are pounding on the door, it's not surprising if the ruling class caves and gives in to their demands.

Canadian gold miner Gabriel Resources must have realized it was inevitable the Romanian parliament would decide against its proposal for the Rosia Montana project in the Carpathian Mountains, which, had it been approved, could have become Europe's largest gold mine, with an estimated 314 tons of gold and 1,500 tons of silver. Instead, the parliament voted overwhelmingly against it. Thousands of angry Romanians took to the streets of Bucharest and elsewhere to oppose the gold mine's advance.

Rosia Montana open pit in Cetate that operated from 1971 till 2006.
Source: Gabriel Resources

For well over a decade, Gabriel has been trying to get the opencast mine off the ground in an area that has seen mining activity since since the first century. Yet the miner, which has the backing of Newmont Gold (NYSE: NEM  ) and hedge fund investor John Paulson, recently had to advise investors to use caution in trading in its shares because of the risk associated with the proposal falling apart yet again.

At issue is Gabriel's plans for use of cyanide to separate the gold from the waste material. The heavy metals and cyanide would be stored in an artificial lake in the Corna Valley that covers 900 acres and would be contained by a 590-foot dam. 

Although it's a commonly used process in gold extraction, Romanians have a particularly horrific reminder of the risks associated with the cyanide process after the Baia Mare gold mine in northern Romania suffered a catastrophic dam failure in 2000 that released 100,000 cubic meters of chemically contaminated water, wiped out the local river's ecosystem, and polluted the Danube River. 

Gold and copper miner Taseko Mines (NYSEMKT: TGB  ) recently suffered a setback of its own over the creation of a tailings pond in British Columbia for its New Prosperity project. Aboriginal tribes are opposed to the project because the "pond" -- a body of water the would obliterate an existing lake through the construction of a 377-foot tall wall -- has raised fears of water contamination downstream as well.

It's possible this isn't the end of the road for Gabriel or Rosia Montana, as the Romanian government is still expected to draft a new legislative framework to revise the project. Considering the vast wealth the proposed mine possesses, it wouldn't be too surprising to see it still come to fruition, because the government is slated to see its stake in the project rise to 25%, as well as receiving a royalty of 6% of the mine's production, according to the draft agreement between the parties involved.

Newmont's stake in Gabriel, while substantial at just under 20% of the outstanding shares, is only for investment purposes. It's not trying to control the direction of the operation. Paulson owns another 16% share of the miner and guru investor Seth Klarman has a 12.6% stake through his Bluapost Group fund. Beny Steinmetz Group's Capital Markets subsidiary is another investor in the gold miner.

Gabriel owns 80.7% of Rosia Montana Gold, the company that will actually carry out the project, with the Romanian government owning the rest.

Like Taseko, which may get a second bite at the New Prosperity apple after it was learned the government based its rejection of the mine proposal because it relied on faulty data supplied by its own agencies, Gabriel may yet get another swing at Rosia Montana and finally succeed in achieving its 14-year quest. 

Although shares in the miner have been appropriately beaten down as a result, causing Newmont to have to write down the losses it's suffered on its equity investment, they may still prove lucrative in the end.

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9/23/2016 4:01 PM
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