Gabriel Resources Stock: An Each Way Bet On The ISDS Process

Gabriel Resources

Seeking Alpha is adding stocks from the Canadian Exchange to the listings of those covered. This brings into consideration a large number of small miners – my sort of field – which is both fun and exciting. The usual constraints still hold – true microcaps aren’t to be discussed except as examples of larger points. But clearly, being a junior level exchange there will be a large number of smaller companies.

Gabriel Resources (OTCPK:GBRRF) owns, or might own, or used to own – this is what the dispute is all about – the rights to mine a large gold deposit in Romania. The deposit is there, no doubt about that, the area has been mined since the Romans. Rosia Montana it’s called and the problem is that the full set of licences and permissions never was fully issued. This has then become subject to the ISDS process, whereby a company can sue the government for taking away its economic or contractual rights.

On the one side the company is claiming, including interest, some $5 billion and change. On the other side the government is saying they deserve bupkis. Not even sunk costs, let alone any compensation for profits that would have been made if the project had been allowed to proceed.

The outcome could be $0, could be $5 billion – by the claims being made that is – and there’s a certain probability to be assigned to each end. The current market capitalisation is around the $180 million mark. That could be very hopeful indeed, that could be a gross underestimate.

Actual operations

We should note that other than the ISDS claim there really isn’t anything there at all. In fact, Gabriel periodically issues stock in order to keep paying the legal fees on this case. There are a few minor assets – in preparation for mining they bought up certain properties that would be destroyed by the mining for example – which have since been gradually sold off. Again, financing fees and so on.

The stock really is just a binary option on this legal case. There’s the minor – several millions a year sort of level – cost of continuing the case. Other than that, it’s the judgement one way or the other.

It’s not even true that if the case goes Gabriel’s way, then there’s the mine to build and so on. That option is clearly off the table. It’s does the Romanian government have to pay large amounts in compensation or not?

So, the court case

I should emphasise perhaps that I’m fully in favour of the ISDS set up itself. That’s because, unlike near all of those who rail against it, I actually understand what it’s about. Quite simply, it’s to hold a government to whatever promises or contracts it signs. That’s it.

Now, in order to be able to do that you want – in much of the world at least – to have any disputes held outside the courts systems controlled by that government being argued with. So, the arbitration courts are one arbitrator appointed by the government, another by the other interested party, a third is neutral. They then decide – did the government live up to whatever it said in the law, the specific contract, the investment treaties and so on? And that’s it.

Note that some of the cases that are shouted about – Australia and a cigarette company for example – it was the country that won. And won at a canter too. Others – say Yukos and Russia – then it was the country that lost. Those two are, admittedly, extremes of the system.

But that a country changes the law for some good reason and that then makes an investment not work – no, that’s not normally a case for compensation. Changing the law so that this specific and only this specific investment doesn’t work – that might mean the company, not the country, wins.

Vattenfall against Germany is about whether Germany has to compensate the owners of the nuclear power plants they’ve insisted must close down early. Seems a reasonable enough question at least – govt changes policy, this screws your business, well? That one’s not even about capitalists – Vattenfall is Swedish government owned.

So the base idea of ISDS I’m fine with and it’s worth noting – again because I pay attention to this sort of stuff – that the majority of such cases fail. They’re not a slam dunk for investors, foreigners, or capitalists at all.

This specific case

There’re reams and reams of documentation on this. Start here. More here. Here’s the government’s latest statement of their case. Here’s the company’s. The government’s basic case is that the company never did get it together to have all of the necessary permissions to be able to mine. Therefore, there’s nothing that should be compensated for. The company’s seems to be that it was government action that prevented them getting it all together.

My opinion – and it’s very much the opinion of a non-lawyer but someone who knows a bit about mine licences – is that the company doesn’t clearly win this. That’s about as far as I’ll go in such an opinion. It’s not, to my mind, a slam dunk in favour of the company. Unconvinced perhaps that they did manage to nail everything down so that it’s only government action which has made the project fail or stall.

Of course, my opinion is just that, an opinion and no more. I’d hesitate to suggest that people should make investment decisions upon just that.

But given the binary nature of the option here that’s what any investor has to do. The upside is some fraction to all of $5 billion and the downside is none of it.

The decision is expected sometime in August this year, 2022. Or, at least, that’s the current date for the first ruling on the actual merits of the case either way.

My view

I think that Gabriel is currently reasonably valued, perhaps a little too high in fact, call it a couple of hundred million, with the top possible arbitration award being $5 billion. That indicates there’s about a 1 in 25 chance – the estimation of the market and the prices in it – that Gabriel will win this in full. Which sounds a little high to me but then as above, my opinion is only an opinion.

There’s an obvious bet here which is simply to stick beer money one side or the other of this question and see what happens. Any investment position would have to depend upon deeper knowledge of the chances of the lawsuit than most of us are likely to have.

The investor view

Outside some trivial position just playing the odds for the fun of its investment does depend upon being able to call the arbitration decision. Do not be fooled by much of the agitation against ISDS – companies lose more often than they win. It also isn’t true that a project not being allowed to proceed requires compensation – it matters why it couldn’t for the government to be liable.

No, I don’t know which way it will go – but to put any significant money into the stock that’s the decision that has to be made.