THOM CALANDRA'S STOCKWATCH: Troubled miner to see light of day-- Crystallex shares 'in play' as Las Cristinas heats up
By Thom Calandra, <a href=cbs.marketwatch.com>CBS.MarketWatch.com Last Update: 1:19 PM ET June 13, 2003
SAN FRANCISCO (CBS.MW) - Beleaguered Canadian miner Crystallex International Corp., grasping rights to a world-class gold asset, is likely to be sold before it ever develops the vast Las Cristinas deposit.
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That's the view of some of the hedge funds and other investors who recently were lining up behind the company's shares. Trading in Crystallex shares (KRY: news, chart, profile) on the American Stock Exchange is running four to six times average daily volume.
The same brisk activity this week also applies to the company's Toronto-traded shares.
Crystallex shares rose more than 20 percent earlier in the week after The Calandra Report, a subscription service owned by CBS MarketWatch, quoted a mining analyst as saying he expects a bid for the entire company in the next month.
Other fund managers quoted in the report said the company's Las Cristinas deposit, awarded to Crystallex by the Venezuelan government after years of bungled negotiating and political strife, will almost certainly see development. The question is: by whom?
"I think the executives realize this thing has become so mispriced that it will become irresistible to a company looking to replace reserves," Robert Bishop of Gold Mining Stock Report told me Friday morning.
Crystallex CEO Marc Oppenheimer, in an interview this week, said Crystallex will release a feasibility study conducted by engineering group SNC-Lavalin in the late summer or early autumn. The study will examine costs for a 20,000-tonne-per-day facility at Las Cristinas. Some observers say the first phase of such a project could require $200 million or more, far more than the company would be able to raise, even with the help of newly hired banker Deutsche Bank.
Fund managers tell me several companies are busy auditing Crystallex's activities and financial statements this week in preparation for a possible bid or a 50-50 licensing or development agreement for Las Cristinas, which is estimated to hold about 10 million proven and provable ounces of gold. The company, of course, declines comment.
At this week's San Francisco gold conference, more than a dozen small to mid-sized hedge funds were inquiring about Crystallex and its Venezuela efforts. Las Cristinas is one of the world's largest known untapped gold deposits, and major gold producers are desperate to replace diminishing bullion reserves on their balance sheets.
Several fund managers tell me they expect to see an outright purchase or at least a large corporate backing of the company or its Las Cristinas venture within the next month. The Venezuelan government awarded full rights for Las Cristinas to Crystallex in September of last year.
This week, an auditing committee of Venezuela's legislative body approved a report that probed the September contract between Crystallex (CA:KRY: news, chart, profile) and the country's state-owned holding company, CVG (Venezuelan Corporation of Guayana).
"We are pleased to see the news in Venezuela regarding the National Assembly's review and support of the Crystallex CVG agreement and the cancellation of the Minca agreement," Crystallex spokesman Richard Marshall told me. "We are waiting to see a final copy of the resolution."
Minca is a previous joint venture between CVG and Vannessa Ventures Ltd (CA:VVV: news, chart, profile), a Canadian company.
To be sure, some say the recent Crystallex trading activity might be tied to unwarranted speculation by small investors, alongside the conversion of debentures into equity by large holders.
The convertible bonds, issued by the company to raise much-needed cash, are priced for conversion into stock at 15 percent below the Crystallex market price. According to The Calandra Report, some owners of those so-called toxic converts are more than likely shorting the stock and delivering their converted shares against the short for an instant payday. These convert holders are "monetizing their investment," as they say in the business.
Others, speaking to me at the San Francisco gold show this week, said the stock rise may be because of "significant short covering or a big acquisitive buyer" looking to close the gap between the company's $1.50 U.S. share price and a possible offer of $3 or more.
Oppenheimer, the chief executive, said he would decline at this time to comment on any M&A speculation. See: Crystallex CEO says shares are mispriced. Oppenheimer also told me he expects continued support from Venezuela authorities in Crystallex's efforts to develop Las Cristinas.
"Deustche Bank has met with the Venezuela government. I think that speaks for itself," Oppenheimer said this week about the company's new banker.
Industry leaders say Las Cristinas cannot remain undeveloped for long. The government of Venezuela hopes to raise billions of dollars to further efforts to exploit offshore natural gas deposits, and some of that money would come from gold sales. The project would deliver an approximately 3 percent royalty to the government and another, smaller royalty to state-controlled CVG.
In addition, the world's major producers of gold, such as Barrick Gold (ABX: news, chart, profile), are nearly all losing part of their gold reserves as mines get tapped out or as environmental restrictions reduce output. Gold reserves are a fundamental Wall Street measure for evaluating the worth of a miner's shares.
"This deposit is clearly at the top of everyone's list," says John Clarke, chief executive of Nevsun Resources (CA:NSU: news, chart, profile), a Canadian company that is exploring for gold in Africa. Nevsun was the world's best performing gold stock in 2002.
"Many companies are very challenged on the issue of reserve replacement," says Richard Sacks, an asset manager at Phoenix Advisory Management in Chicago and large Crystallex shareholder. "It is the most critical issue. Can an ore body of this size be overlooked forever?"
If Gold Mining Stock Report's Bishop, considered one of the deans of mining strategists, is correct, Crystallex will see a transforming corporate event sometime very soon.
It just may be the Crystallex board that paves the way for an outright purchase or 50-50 Las Cristinas partnership. The Crystallex board of directors is led by Robert Fung of mining investment house Yorkton Financial, which is a Toronto powerhouse in the gold business.
Board members, in the opinion of some observers, may be watching a class-action shareholder lawsuit filed against Barrick Gold this week. "Barrick assured the markets that it was improving its operations by keeping its production costs in check and that the company expected to earn $0.42-$0.47 per share in 2002, even taking into account the phasing out of several mines and decreasing ore quality (which increases costs) in several of its mines," according to the complaint.
The lawsuit concerns a period of the company when Barrick's Randall Oliphant was chief executive of the gold giant, roughly from February through September 2002. Oliphant, who has since resigned, first promised a $2 billion, five-year growth plan, then did a stunning about-face. See: Barrick CEO describes timing snafu.
In my opinion, Crystallex shareholders - if there is no major Las Cristinas financing for the company, or an outright sale of the company or joint venture -- will start to wonder just what they can do to extract more value from their depressed shares.
(I'm not predicting legal action, and I am not saying that any legal complaints against the company would be warranted. But after years of political and corporate strife, including two government coups and a pending review by the Toronto Stock Exchange on the company's eligibility for continued listing, shareholders are ready for a sizeable return on investment.)
Oppenheimer, the CEO, says he is confident of his company's strategy. "Our objective is to build the project," he told me. Few CEOs at this point would say anything different, even if they were on the verge of an outright sale.
On Friday, Crystallex shares in U.S. trading were unchanged at $1.46.
The Calandra Report
Read subscription service The Calandra Report for more on the Crystallex story and for more about a natural-gas company poised for further explosive gains. See: The Calandra Report. Thom Calandra's StockWatch is CBS MarketWatch's flagship column. The regular report is in its eighth year at CBS.MarketWatch.com. Thom Calandra is also author of subscription service The Calandra Report.