GRZ is a buy here

GRZ is currently sitting at U$2.13, down 20+%. The news last night that the Environment Ministry were planning to take away the company's Environmental permit has really shaken the share price.

Well it should....I've been trying to thinking of a case where a Environmental Impact Permit is granted and then taken away for no apparent reason less than a year later, and I cannot think of one. The main problem with this is the total lack of trust that can be placed in Venezuelan authorities now. I mean, even if the final decision goes with GRZ, how much trust can you place in the future of this project when there's a construction cost of $731m that needs to be funded by someone unafraid of the property being snatched away at any given moment (for the latest example see SIDOR, though to be fair all nationalizations in Venezuela have been compensated by the state).

So why is GRZ a buy? Well, if you look at the latest SEC filings, you'll see they have $100m in cash and other assets of around $30m. The company's burn rate has always been low, so there's little worry about that cash figure dropping significantly while the project is on hold.

With 55.06m shares outstanding, this immediately gives GRZ a residual value of U$2.36.

Add to this the $300m that GRZ has spent in developing the Brisas project. In the event of the property being taken away, GRZ would have a very strong case for either an agreed or arbitrated compensation package for at least part of that cash. So let's throw in $100m as a final settlement figure (as a totally wild guess, I must say...could be more, could be less), which would add another $1.82 to the share price.

So whatever happens here, GRZ at $2.13 is a buy. Those selling haven't done their sums yet. This is the place worth buying that I mentioned yesterday, but if you pick some up be nimble, be prepared to take profits and above all don't bet the farm.

UPDATE: I've been asked in a mail if the same trading plan applies to KRY. The answer is "no". KRY has cash at bank after its last placement, and some assets, esp in the form mothballed mining equipment. But it has a heap of debt , too, and you'd have to line up behind a whole queue of creditors before you got yours. Maybe worth $0.35 of so. So the answer is: GRZ is the play, here. At this price GRZ downside risk is negligable...can't say the same for KRY, even at $0.70.

UPDATE2: GRZ now $2.02...this is going well :-) If it touches this morning's low of $1.90 I'll average down there to put me at a penny over $2.

Trying to logically gauge a situation where people are panicking is always a toughie. But I repeat that the asset value held by GRZ gives it a clear floor price that is ABOVE the present share price.