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BAKER & MCKENZIE
April 27, 2005
VIA EDGAR TRANSMISSION
Securities and Exchange Commission
Division of Corporation Finance
450 Fifth Street, N.W.
Mail Stop 0404
Washington, D.C. 20549-0404
Attention: Ms. Jill S. Davis
RE: Gold Reserve Inc.
Form 20-F, Filed April 1, 2005
File No. 001-31819
Ladies and Gentlemen:
On behalf of our client, Gold Reserve Inc. (the "Company"),
set forth below is the response of the Company to the
remaining comments contained in the Staff's letter to Mr.
Robert A. McGuinness, Vice President - Finance & Chief
Financial Officer, dated April 11, 2005, regarding the
Company's Form 20-F filed April 1, 2005. The Company's
initial response was set forth in a letter filed with the
Securities and Exchange Commission (the "Commission") on
April 20, 2005. As noted previously, the undersigned and
Mr. McGuinness have held various phone conferences with Ms.
Jill Davis regarding the comments and the Company's
preliminary views regarding the issues raised therein. The
response below is further to those conversations, and the
Company believes its response is consistent with its views
on the various issues discussed on those calls. For ease of
reference, the comments have been repeated below and divided
into sub-sections, with the response set forth below each
sub-section.
Background
Prior to responding to the comments in detail, we believe it
important to provide the Staff some background information
about the Company and its main mining asset - the Brisas
project.
The Company was incorporated in 1998 under the laws of the
Yukon Territory, Canada, in order to re-domicile to Canada
the business of Gold Reserve Corporation, a Montana
corporation formed in 1956. In February 1999, following a
shareholder vote, the change in domicile was completed when
Gold Reserve Corporation became a subsidiary of the Company
through an internal reorganization (the "Reorganization").
The Company is now the successor issuer to Gold Reserve
Corporation. As part of the steps required to effect the
Reorganization, a Registration Statement was filed with the
SEC on Form S-4 in October 1998. Following extensive
comment from the Staff, the Registration Statement was
permitted to go effective in November 1998. After the
Reorganization, a shareholder of the Company continued to
own an interest in the business that in aggregate was
essentially the same as before the Reorganization.
The Company's primary mining asset, the Brisas project, is a
gold/copper deposit located in the Km 88 mining district of
the State of Bolivar in southeastern Venezuela. The
Company, through its subsidiaries, acquired the Brisas
project in 1992. To date, the Company has expended over
US$80 million on the Brisas project. These costs include
property and mineral rights, acquisition costs, equipment
expenditures, litigation settlement costs and exploration
and development costs. Considerable work has been performed
to establish the Brisas project's mineral resource and
proven and probable reserves. In early 2005, Aker Kvaerner
Metals, Inc. ("Aker Kvaerner"), with the assistance of a
number of other consultants, completed a final feasibility
study with respect to the Brisas project. Based on the
positive conclusions contained in the final feasibility
study, management is proceeding with the financing and
construction of a mine at the Brisas project. The final
feasibility study followed the Company's preliminary
feasibility study, which was completed in 1998 (prior to the
Reorganization) and updated with additional drilling in
2000. The original preliminary feasibility study was
discussed with the Staff in 1998 in response to the Staff's
comments to the Company's Registration Statement on Form S-
4.
While prepared by Aker Kvaerner, the final feasibility study
includes work performed by other independent consultants
under the coordination of Aker Kvaerner. For instance,
Pincock Allen & Holt performed the geology, mineral
resources, proven and probable reserves, mining sections and
the financial analysis for the study. SGS Lakefield
Research conducted metallurgical pilot plant test work with
guidance from Aker Kvaerner. Aker Kvaerner designed the
metallurgical process flowsheet while the tailings facility
design, hydrology study, geotechnical analysis and
geochemical analysis were completed by Vector Colorado LLC.
In sum, previous activities at the Brisas project include:
Over 800 drill holes or approximately 181,000 meters of
drilling
Independent audits of drilling, sampling, assaying
procedures and ore reserves methodology
Extensive geotechnical, geophysical, hydrological and
geochemical studies
Environmental baseline work/socioeconomic studies
Advanced stage grinding and metallurgical testwork,
including extraction of a 700 tonne bulk sample from
an underground shaft for large scale metallurgical
testing
Tailings dam designs
Mine planning and milling process flow sheet designs
Form 20-F for the year ended December 31, 2004
11. Differences Between Canadian and U.S. GAAP, page 57
1. We note your accounting under Canadian GAAP
allows for the capitalization of certain exploration
costs. However, under U.S. GAAP, the costs of
acquiring unproven mining properties and any
exploration costs should be expensed as incurred in
that you have no proven and probable reserves
relating to them that support cash flow projections
or fair value measures required by SFAS No. 144 to
assess the recoverability of such costs.
Based in part on the facts described above, as well
as the results of its preliminary and final
feasibility studies, the Company believes it has
proven and probable reserves for purposes of the
Commission's Industry Guide 7. Further, prior to
completion of the final feasibility study, the
Company requested from Behre Dolbear & Company, Inc.
("Behre Dolbear") in May 2003 written confirmation
that Behre Dolbear concurred with the Company's view
that it had an adequate basis for supporting its
reserve estimates under Industry Guide 7. Behre
Dolbear provided the Company the letter attached as
Annex I. The Behre Dolbear letter relates to
findings at the Brisas project dating back to 1999,
when the Company first engaged Behre Dolbear to
perform audit work with respect to the Brisas
project. Behre Dolbear had originally audited the
Company's data collection procedures and modeling
and mineral reserve methodology with respect to the
preliminary feasibility study completed in 1998, as
well as the for the 2000 update.
As to the specific issue of capitalizing costs of
acquiring unproven mining properties, pursuant to
the guidance contained in EITF 04-3 Mining Assets:
Impairment and Business Combinations, the Company
believes that the approximately $11 million related
to acquisition costs of the Brisas project are
properly capitalized and the continued
classification as an asset on the Company's Balance
Sheet is supported by the considerable work
performed on the Brisas project.
Costs incurred on the Brisas project prior to 1998
were capitalized pursuant to FASB 144, paragraph 22,
Fair Value (supersedes FASB 121):
"The fair value of an asset (liability) is the
amount at which that asset (liability) could be
bought (incurred) or sold (settled) in a current
transaction between willing parties, that is,
other than in a forced or liquidation sale."
Prior to the preliminary feasibility study, the cash
flows to support the recoverability of capitalized
costs would be realized by the sale of "in-the-
ground" gold ounces, which is a common practice in
the industry. As such, capitalized costs were
recoverable either in a sales transaction based on
ounces in the ground or as a result of gold and
copper production in the future.
Based on FASB 144, the Company, on an annual basis,
evaluated the historical average acquisition price
paid per ounce in the ground for gold deposits. The
average price paid times the number of gold ounces
at the Brisas project consistently exceeded the
carrying value or "fair value" of the Brisas project
capitalized costs.
Costs incurred since the completion of the original
preliminary feasibility study by JE Mincorp in 1998
were development in nature, as the Company was in
preparation of a commercially mineable deposit.
Based on an analysis of representative transactions
(the price paid per gold ounce in the ground) prior
to 1998, and the results of the preliminary and
final feasibility studies, management maintains that
there is a probable future economic benefit and a
reasonable basis for capitalizing costs associated
with the Brisas project.
Further, the Company notes that the reserves issue,
as well as related issues regarding the expensing or
capitalization of the Company's exploration costs,
were discussed extensively with the Staff in 1998 at
the time of the Reorganization (including as to the
results of its 1998 preliminary feasibility study,
later updated in 2000). Copies of related
correspondence with the Staff are attached as Annex
II to this letter. As to issues raised by the Staff
at the time of the Reorganization, including with
respect to the capitalization of acquisition and
exploration costs, the Company understood these
issues had been resolved in 1998 as part of its move
to Canada at the time final comments were cleared
and the Registration Statement on Form S-4 was
permitted to go effective. In fact, it is the
Company's position that the Commission concurred
with its request in the second to last paragraph in
the attached November 17, 1998 letter that "no
changes be made to existing accounting policy and
its US GAAP financial statements." The Company takes
this view, in part, since following discussions with
the Company and review of related correspondence,
the Staff did not request that the Company take the
alternative accounting position noted in the last
paragraph of the letter.
Finally, to aid the Staff in its review of the
Company's response, as requested by Ms. Davis,
attached as Annex III is a summary of exploration
and development costs (or the expensing thereof)
since 1998. The Staff will note that the Company
has not capitalized all exploration or development
costs. The Company has capitalized only those costs
for which it considered capitalization supportable.
The Company would certainly make itself available to
discuss with the Staff the year-by-year numbers.
You should not capitalize mining costs under U.S.
GAAP until you are in the development stage as
defined in Industry Guide 7.
Please see our response above as to capitalizing
costs in general. In addition, please note, as the
Company believes it has proven and probable reserves
within the meaning of Industry Guide 7 and since it
is proceeding with the financing and construction of
the mine, it considers itself a "development stage"
company within the meaning of Industry Guide 7.
In addition, a contract is required to be in place
to establish proven and probable reserves when there
is not an active market to sell the minerals. As a
result, we have traditionally required a sales
contract or binding letter of intent to buy the
industrial mineral, before we would accept proven
and probable reserve designation.
The Company has provided its response in the letter
filed with the Commission on April 20, 2005.
Based on your disclosures on page 52 in Note 3, it
appears some, if not all, of the capitalized
exploration costs should have been expensed under
U.S. GAAP. As your reconciliation to U.S. GAAP in
Note 11 does not address these accounting
differences, revisions may be required to
appropriately reflect these accounting differences.
Please revise your disclosures as necessary or
supplementally support your accounting position
under U.S. GAAP.
Please see our response above as to capitalizing
costs in general. We do note, however, that Note 3
on page 52 contains a typographical error. Instead
of "Capitalized exploration costs" it should read
"Capitalized exploration and development costs."
The Company plans to correct such typographical
error with a simple modification to the applicable
line item in prospective filings.
I would appreciate it if you would please call me at (713)
427-5018 after your review of the above responses. Thank
you for your attention to this matter.
Very truly yours,
/s/ Jonathan B. Newton
Jonathan B. Newton
cc: Mr. Robert A. McGuinness