Crystallex Says Stress Due to Press as Announcements Loom
By Gene Arensberg
11 Nov 2005 at 02:17 PM EST
HOUSTON (ResourceInvestor.com) -- I could be wrong, but I think Crystallex shareholders will find the quarterly financials and press release comforting in some respects. Added to the expected upcoming Venezuela mining policy announcement in about 12 days, this might give speculative short sellers a bit of an incentive to take profit (cover) if they haven't already. As of October, Crystallex had a short interest on the American Stock Exchange of just under seven million shares.
According to BN Americas, “Venezuela’s President Hugo Chavez will announce policies and guidelines for the mining sector on November 23.”
The company maintains that the stress being endured today is due largely to the press and that it remains confident that Venezuela will honor its commitments. Still, Crystallex [AMEX:KRY; TSX:KRY] announced Thursday a Q3 net loss of U.S. $10.3 million (5 cents per share) and a net loss of $26.6 million (14 cents per share) for the first nine months of 2005.
From the short seller’s point of view, there has been no definitive announcement from Venezuela which gives Crystallex an "all-clear" as of yet and some of the short interests may actually believe that the Chavez government is capable of a dishonorable taking of Crystallex' contract rights even though Crystallex was invited in under Chavez and the contract with Crystallex negotiated for Venezuela by long-time Chavez ally and now governor of Bolivar State General Francisco Rangel Gomez, and even while it is they, Venezuela, who have withheld permission for the company to begin construction. Nonetheless, even the short sellers who may still believe Venezuela will “stiff” Crystallex may not want to chance being short into such an event as the upcoming policy announcements. Why risk it?
Of course, there is a chance that the policy announcements might not deal with Crystallex, but there is also a chance that an announcement about Crystallex might precede that policy event on November 23rd. I’m sure the short sellers probably noted that deputy mining minister Juangustavo Ovalles did say, “The president will make a series of announcements…”
Crystallex CEO Todd Bruce’s comments in the press release regarding “some sectors” of the media being “all too successful” in their attempts at misrepresentation of Venezuela being intent on driving out foreign investors hit home with me personally. They are in line with the gist of my commentary on October 3.
Deserved or not, Chavez and his administration are seen as anti-capitalist and antagonistic to international companies trying to bring that country jobs and infrastructure. And while we can argue whether or not that is actually the case, it is self-evident that the western press takes every opportunity to frame events and quotes in a way that supports that view. For KRY, the politically caused damage is unfortunate and could not have come at much worse of a time.
KRY acted on the signals coming from the Chavez government in ordering the long lead-time plant equipment, fabrication of mill components, mining fleet, etc., much of which sits in storage on the docks at the port of Houston awaiting the final permit news for shipment to Puerto Ordaz and then Las Cristinas. Because it takes so much time to have those items built, in order not to lose valuable time in the construction schedule KRY ordered and arranged for financing of those long lead time items in advance of receipt of the permit to impact natural resources. At the time, over a year ago, the final permit was seen as a “bureaucratic formality” not just by the company but by the Venezuelans.
Even as late as June of this year, MBIM minister Victor Alvarez said as much. We should also remember that he said at the time that Venezuela would be “going ahead with the Crystallex project.” It is really only since June that the political uncertainty has become what it is today.
However, that political uncertainty came while Crystallex needed a permit to keep the considerable momentum they had going in June, going.
Permit me a small tangent, so to speak. The world is separated into two distinct kinds of regimes. The ones that reward investment and the ones that discourage it. If one believes the reporting from Dow Jones, Reuters, et al, Venezuela under Chavez is rapidly moving strongly in the direction of the latter. But is it mostly real, or imagined?
There is evidence that Chavez' reported rhetoric is worse than the eventual actions by his government. As Mr. Bruce said Thursday,
“Additionally, in direct repudiation of the recently published media reports that Venezuela intends to drive out foreign investors, cancel contracts and nationalize the resource sector, the Venezuelan Government announced during the quarter that an Australian company had committed to investing in a major new aluminium production facility in Bolivar State, that new offshore gas leases had been awarded to a number of companies including the US company, Chevron, and that Bolivar Gold would receive its outstanding Exploitation Certificate for its Choco mining operation. In addition, Chevron announced that it was proposing a new 400,000 barrel per day heavy oil operation in conjunction with Spain’s Repsol YPF and the Venezuelan national oil company, PDVSA, which would see Venezuelan total heavy oil production increase from the current 600,000 barrels per day to almost 1,000,000 barrels per day.”
While it’s still no sure thing, I think it's more likely than not that Venezuela will end up honoring the agreement with Crystallex. But there can be no doubt that unless what is mentioned below occurs, KRY will not be able to achieve a valuation it once could have before President Chavez and his moving-target government undermined confidence in the companies attempting to play by the rules in Venezuela, ... even the ones which came in under his own umbrella so to speak, like Crystallex.
That is not to say that Crystallex cannot achieve a multiple of where it is now ($1.50) should the political situation stabilize and the most recent fears be put aside. For Crystallex that means 1) obtaining the permit and 2) a clear indication from the government that it will honor its commitments. (As of now, thanks to the long delays, Chavez’ comments and the western press reporting of them, there is widespread doubt as to second item.)
The permit alone is not enough long term. The commitment from Venezuela is, I believe, even more important for the simple reason that Crystallex needs to finance the remainder of the mine construction.
In my opinion, once the permit is obtained, the company faces an uncertain prospect for financing of the build out of the mine unless the firmest assurances are tendered by the government that the contract will be honored. But should those assurances be given by the Chavez regime, I also think that the past several months will be largely forgotten in a matter of weeks or months. The prospect of twelve-plus million ounces of gold is the kind of motivation that can bring on political risk amnesia fairly rapidly.
The above contains opinion and commentary of the author. Each person should study the issues carefully and, as always, make their own informed decisions. Disclosure: The author is currently a long shareholder in Crystallex International.
