Gabriel Resources investors flee after miner loses arbitration

Breadcrumb Trail Links Mining Commodities Investors shave nearly $900 million…

Investors shave nearly $900 million off market cap in one of swiftest, largest single-day losses for a Canadian junior miner

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Yukon-based Gabriel Resources Ltd. once harboured ambitions to build one of Europe’s largest gold and silver mines in the Carpathian Mountains of Romania, which has been mined by humans for at least 2,000 years.

But the proposed mining area is now on the UNESCO World Heritage list and Gabriel just lost an eight-year legal battle with Romania that has left the company’s future uncertain.

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Gabriel’s experience is a cautionary tale that shows how shifting attitudes around resource extraction and an evolving global financial system have changed the business of mining. The main investing thesis behind the company for more than a decade has been its arbitration claim against Romania at the World Bank’s Washington, D.C.-based International Centre for Settlement of Investment Disputes. In it, Gabriel was seeking US$4.4 billion from the country for blocking its proposed mine.

Investors had piled into the company in recent months anticipating an end to the legal saga, and its stock price doubled to as high as 88 cents last week from 43 cents in early January. But investors decamped even more quickly after the arbitration panel on March 8 issued a two-to-one decision that rejected Gabriel’s claim and awarded Romania US$10 million in legal fees and expenses.

In a matter of hours on Monday, the first day of trading after the decision was announced, investors shaved nearly $900 million off the company’s market cap. It was one of the swiftest, largest single-day losses for a Canadian junior mining company in recent memory, representing about 2.7 per cent of the combined value of the entire mining sector on the TSX Venture Exchange.

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Horses graze on a meadow on a slope on Carnic mountain at the Rosia Montana gold mine site in Romania.
Horses graze on a meadow on a slope on Carnic mountain at the Rosia Montana gold mine site in Romania. Photo by Sean Gallup/Getty Images

Richard Brown, chief financial officer at Gabriel, declined to comment on the decision, but the company has used public statements to lash out at the arbitrators, who have yet to publicly release the text of their decision.

“Gabriel believes the Tribunal’s decision is deeply flawed and a travesty of justice,” the company said on Monday. “This decision blatantly ignores or intentionally misconstrues the vast body of evidence …”

But appealing the decision based on the merits of the legal decision — or lack thereof — is generally not possible, according to Hugh Meighen, a partner at Borden Ladner Gervais LLP in Toronto who specializes in international arbitrations.

Arbitrations are intended to be “final and binding,” he said.

But a party can challenge an arbitration through what’s known as an annulment, he said, even though the underlying merits or the legal rationale of a decision are irrelevant. Instead, an annulment seeks to convince a new tribunal that there were significant “irregularities” in the legal process itself.

“It’s an uphill battle,” Meighen said. “The system by design is actually intended to limit very significantly the ability to reargue substantive points.”

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Gabriel Resources has said it is considering an annulment, but it is not clear if investors have an appetite for more arbitration.

The company this week said it has $2.7 million in cash reserves, which would ordinarily last until May, but it is immediately conducting a review of its financial obligations.

It’s an uphill battle. The system by design is actually intended to limit very significantly the ability to reargue substantive points

Hugh Meighen

The arbitration decision awarded Romania US$10 million for legal fees and costs, which accrues simple interest at the three-month U.S. Treasury rate — currently above five per cent. It may also have its own legal fees as well as salaries for its executive team and other expenses.

The company’s lawyers in December 2022 asked the arbitration panel to award them US$63.8 million in legal fees and costs. That year, the company also paid its top three executives nearly $1.2 million in salaries including $513,000 to chief executive Dragos Tanase, according to regulatory filings. It also paid its board $280,600.

The company said it will “require further funding during the second quarter of 2024” for long-term activities, including potentially pursuing an annulment.

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“There is a significant risk that sufficient additional financing may not be available,” it said, adding this could affect “its ability to continue as a going concern.”

Regardless of what happens next, the company’s long legal saga has already shown how investor protection treaties that Canada signed with various countries in the 2000s — which send foreign investment disputes to binding international arbitration forums — are having far-reaching consequences on the global economy.

In the past 20 years, Canadian-based investors have filed 67 arbitration claims since 1999, according to the United Nations’ Conference on Trade and Development.

The lawsuit against Romania, had it been successful, could have resulted in damage claims that amounted to 1.5 per cent of the country’s 2021 gross domestic product of approximately US$284 billion.

Gabriel’s involvement in Romania dates to the late 1990s. After communism fell in that country in 1990, the government created a state-mining enterprise to take control of a then-operating mine known as Roșia Montană.

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A Gabriel subsidiary in 1997 struck a joint venture with the state-owned mining company to develop and reprocess tailings — the waste ore from previous mining — from the mine.

By 1999, Gabriel controlled about 80 per cent of a company that owned the licence for Roșia Montană, which it planned to expand, while a Romanian-state entity held the remainder.

Gabriel’s lawyers said the company invested US$650 million into the project, and identified proven and probable mineral reserves of 10.1 million ounces of gold and 47.6 million ounces of silver.

But its lawyers said the project stalled during the environmental review process, and that the Romanian government passed “arbitrary” restrictions on the project’s ability to use cyanide, which separates gold from other ore, but is also toxic if spilled into the environment.

A protester holds a flag reading Save Rosia Montana during the demonstrations in Bucharest, in 2013.
A protester holds a flag reading Save Rosia Montana during the demonstrations in Bucharest, in 2013. Photo by Daniel Mihailescu/AFP/Getty Images

By 2010, Romania had placed the area where the project is located on a list of historical locations, which prohibited development. Meanwhile, protests against the proposed mine sprang up and drew thousands of people.

Gabriel continued its push to develop the mine, even as prominent politicians, archeologists and voices such as Hungarian-American billionaire George Soros took up blocking the mine as a cause célèbre. In 2014, Romania officially withdrew its support for the project.

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Gabriel in July 2015 filed a request for arbitration with the World Bank’s settlement arm, claiming Romania had denied it the necessary permits to build the mine for political reasons rather than any objective regulatory basis and violated treaties that protect foreign investors.

Its lawyers argued the area was already environmentally contaminated from mining that occurred during and before the communist era.

Activists and university professors, however, made calls to protect the area, citing its historical significance. The site in 2021 was placed on the UNESCO World Heritage List as the location of “the most significant, extensive and technically diverse underground Roman gold mining complex.” UNESCO said more than 500 tonnes of gold were extracted over a 166-year period beginning in 106.

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The case has been one of the most closely watched arbitrations between a Canadian mining company and a country, though it is far from the only case.

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Meighen said there’s now a broad network of treaties that give Canadian investors the right to file an arbitration against a country if they feel their rights have been abused. Critics say the system constrains a government’s ability to regulate environmental, health or other issues.

“These types of claims are unlikely to dissipate,” he said, “because it’s a standing network of claims that Canadians have access to.”

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