After almost two decades of false starts and a running battle with some of the savviest environmental groups on the planet, it's make-or-break time for Europe's biggest and most politically sensitive gold project. In early November, the Romanian government will, like a Roman emperor at a gladiator fight, give the thumbs up or thumbs down to Gabriel Resources Ltd.'s $1.4-billion (U.S.) Rosia Montana mine in Dracula's legendary homeland, Transylvania.
The vote could go either way, though the share price says the odds are against the Toronto-listed company. Gabriel's stock collapsed early last month, falling from $1.47 (Canadian) to as low as 41 cents, when Romanian Prime Minister Victor Ponta said parliament would likely reject a draft mining law that would allow the project to go ahead. (It's now at 93 cents.) Gabriel's response was to threaten the government with a $4-billion (U.S.) lawsuit if the law were to die. That threat still stands. Rosia Montana's future lies in the hands of lawmakers and lawyers, not engineers and financiers.
Gabriel says a lot about what's right and what's wrong with Canadian gold miners, which dominate the industry. About half of the top names are Canadian, among them Barrick, Goldcorp, Yamana, Kinross and Eldorado. They are big risk takers, superb at engineering and financing and occasionally capable of impressive value creation. They have created tens of thousands of jobs in both the developed and developing world and turned the Toronto Stock Exchange into the world's premier mining bourse. In some ways, they are Canada's corporate ambassadors, a role thrust upon them when Inco, Falconbridge and other base-metal miners with global scale were eradicated in the takeover battles of the past decade.
But they are also prone to spectacular gaffes, such as paying absurd, top-of-the-market prices for gold deposits in areas you wouldn't chose for your honeymoon, then clobbering investors with massive writedowns. They are guilty of environmental messes now and again, though nothing like the bad old days, and, far too often, of pleasing shareholders at the expense of other stakeholders, such as local communities. (The Vatican recently held a mining conference, which was attended some of the industry's top CEOs, on this very topic.)
Gabriel's sin was a bigfoot approach that cast it in Romania as the uncaring, imperial miner. Launched in the mid-1990s, the company's plan was to make a lot of money quickly by building a four-pit monster, one that would blow up two mountainsides, displace about 2,000 villagers and fill an entire valley with waste-rock and cyanide-laced sludge. Covering nearly 300 hectares, the so-called tailings pond would rise from an initial height of 70 metres to 180 metres – one third the height of Toronto's CN Tower – and eventually hold 215-million tonnes of waste.
The idea was driven by maximizing the project's net present value, all the better to enrich shareholders, most of them foreigners (though the Romanian state owns 19.3 per cent of the Gabriel subsidiary behind the project).
The sheer size of the mine and its use of cyanide naturally acted as a lightning rod for the environmental groups and their sympathizers who, over the years, have included Hungarian-American billionaire George Soros and celebrities such as Vanessa Redgrave. Gabriel's mistake was not backing down and redesigning the project on a smaller scale, one that would emphasize slow, steady, job-creating growth over the big-bang approach. The environmental groups didn't back down either.
Toronto mining promoter Stephen Roman, the son of the late Slovak-Canadian uranium mining magnate Stephen B. Roman, played a key role in Gabriel's early years. In a 2010 interview, he told me that Gabriel was obsessed with size. "All [it] saw was the dollars," he said. "They should have started with a small operation and added on to it as they gained the trust and confidence of the residents."
Gabriel milled through five CEOs and $550-million (U.S.) trying to get the Rosia Montana project approved. Ireland's Jonathan Henry became the 6th CEO in 2010. He too thought he could make the big breakthrough, and he just might. To his credit, he emphasized the social and economic benefits that would help to lift the region out of poverty, a strategy designed to dilute the project's imperial flavour. He could have scaled down the project, but that would have required another gruelling round of engineering and environmental studies that investors, among them U.S. hedge fund Paulson & Co. and Israeli diamond billionaire Benny Steinmetz, might not have supported.
But he made mistakes, too. His biggest was threatening the government with the $4-billion lawsuit when Mr. Ponta said the draft mining law was going nowhere. The law would boost the Romanian government's equity stake in the project, lift the royalty rate from 4 per cent to 6 per cent and give Gabriel expropriation rights, allowing it to force out residents who refuse to sell their land to make way for the mine. "Our case is very strong and we will make it very public that Romania's effort to attract foreign investment will suffer greatly," Mr. Henry said in an interview on Sept. 9. The threat was not welcomed by the government, making the CEO, in his own words to me, "the most hated man in Romania."
After The Globe and Mail wrote about the lawsuit threat, Gabriel chairman Keith Hulley, with the approval of Mr. Henry, made a botched effort to defuse the political backlash. Mr. Hulley put out a statement to the Romanian media about the story, claiming that Mr. Henry had been "misquoted" and that the quotes were later "corrected." In fact, the CEO's comments were not contested; he was quoted accurately. The company asked only for a change to the headline in the online version of the story, to which the Globe agreed.
Since then, the streets of Bucharest have been filled with anti-Gabriel protests, partly balanced off by smaller pro-Gabriel rallies in Rosia Montana. The Romanian parliament may yet approve the mine next month because it is desperate for income in an economy that has been hit hard by recession. But there is also a good chance the region will stay as it is, a postcard-pretty landscape of valleys and mountains, dotted by faded old towns and the spires of Orthodox churches, where jobs are as scarce as modern-day Draculas. If that happens, Gabriel can blame itself as much as vagaries of Romanian politics. Canada's gold miners may be the most successful in the world, but a few of them still have a lot to learn.
Eric Reguly