Crystallex blames short sellers for share erosion

When doubts surfaced a year ago that Bre-X Minerals had only fool’s gold at Busang, the company blamed short sellers and a “well-oiled misinformation campaign.” Management of Crystallex International (KRY-T) has taken a similar approach to allegations that it made “false claims” about “rights” to Las Cristinas 4 and 6, two concessions covering a large portion of the Las Cristinas gold deposit being developed by Placer Dome (pdg-t) in Venezuela’s Bolivar state, and four other concessions in the country.

At a recent mining conference in Florida, two congressmen from Bolivar state refuted claims that a pending court challenge could give Crystallex “rights” to Las Cristinas 4 and 6 (T.N.M. March 23-29/98). They also told reporters that the junior company had been stripped of its rights to the Carabobo, Santa Elena 7 and 8, and San Miguel concessions.

“Our congressional committee investigated the illegal sale of these rights from a cooperative of small miners (ACOMIXSUR) to Crystallex,” Rafael Rodriguez Acosta told reporters. “Based on our investigation, the Ministry of Mines in June of 1995 absolutely nullified this sale. Crystallex has no rights to these parcels, but right here at this conference, it continues to claim it does.”

Venezuelan officials explained that it is illegal to buy ground held by mining cooperatives, as these areas are set aside for the benefit of local miners so they can collectively modernize and cease using practices detrimental to the environment. Acosta alleged that Crystallex had convinced some members of the cooperative to sell the concession by offering them unacceptable incentives, such as large salaries, trips to Florida and yachting holidays. He said documentation relating to this investigation was being turned over to Canadian securities regulators.

At home, Crystallex has come under scrutiny for the terms of its September 1995 merger with Eurus Resources, which was completed on the basis of high evaluations (believed to be about $11 million) assigned to the Carabobo, Santa Elena 7 and 8 and San Miguel concessions. Eurus (a junior previously controlled by Murray Pezim) brought to the table its 50% interest in the Albino concession, then operated by 50-50 partner Crystallex.

Crystallex, after acquiring control of Eurus in 1993, initially attempted to secure Eurus’ 50% stake in Albino by offering stock and a royalty interest.

The deal stalled in early 1995, when minority shareholders objected to the terms. They also alleged that certain Crystallex directors had attempted to have Eurus found in default of its payment obligations (thereby forfeiting its right to 50% of Albino). The disgruntled shareholders threatened to take their complaint to securities regulators, but were mollified when the asset transaction was dropped in favor of a merger proposal based on an independent fairness opinion.

Former Eurus shareholders have now learned that the merger was executed two months after Crystallex was stripped of its rights to the four highly touted concessions.

Crystallex does not deny this; its 1996 annual report states that ACOMIXSUR was advised in July of 1995 that it did not have the right to sell the concessions. At the same time, the Ministry of Mines declared the transfers “null and void.” Crystallex appealed the decision, however Venezuelan sources say this appeal was denied. The beleagured junior states only that it has informed shareholders “fully and often” that its option to acquire the four concessions is “contested.”

Acosta also refuted Crystallex’s claim to Las Cristinas 4 and 6, which mirrored statements made by Manuel Asensio of Asensio & Co. (a New York firm that made a sell and short-sell recommendation on Crystallex) and is consistent with Placer Dome’s version of events. These comments triggered a massive sell-off in the junior’s shares, which had climbed to over $11 on speculation that an imminent court ruling would decide ownership of Cristinas 4 and 6.

The shares have since rebounded, though Crystallex did not refute Acosta’s remarks directly, or clarify what the court case would determine. Instead, it issued a press release and took out newspaper ads blaming a “concentrated disinformation campaign” for the decline in its share price. The company also warned that it had retained a law firm “to pursue all appropriate legal action against those making false and misleading statements” against the company “in an effort to manipulate the share price.”

Meanwhile, investors are still struggling to understand what appears to be one of most complex legal challenges to a mining project in recent history.

Many are under the mistaken impression that Crystallex’s legal battle is against Placer Dome, or its Venezuelan partner, Corporacion Venezolana de Guayana (CVG), a quasi-state-owned agency.

Placer holds a 70% interest in Las Cristinas, while CVG holds the remainder.

These interests are held in a joint-venture company called MINCA. Much has been made of an old dispute between CVG and the Ministry of Mines (MEM) as to which agency had the authority to grant mining rights, but, since then, most contracts awarded by CVG have been legitimized by MEM as per the government’s assurances.

Notwithstanding the heated debate between those long or short on Crystallex, Acosta appears to have support for his view that Crystallex’s Venezuelan subsidiary, Inversora Mael, will not obtain “rights” to exploit the existing gold resource at Las Cristinas, even if it prevails in the pending application to the Supreme Court.

Acosta told reporters that the question before the court is whether or not it should overrule a decision by a Supreme Court justice that said Crystallex had no right to sue over gold rights. “There is no basis in fact or law to believe that this decision will be reversed. But if it is reversed, Crystallex would merely have the ability to file a lawsuit. It would not receive any rights.”

Acosta said that if such a lawsuit were to proceed, the court would discover a February 1991 court ruling that voided any interest Mael had in the concessions. He also said that in October 1991 Mael reached a settlement in which it gave up any right it claimed to these concessions.

In 1996, Mael (after having been acquired by Crystallex for $30 million) filed an application pleading that all resolutions and actions of MEM resulting in the forfeiture of Cristinas 4 and 6 be nullifed. In July 1997, the court refused to admit this challenge to the gold mining rights, citing expiry of time allowed by the statute of limitations. It did, however, admit a challenge to the copper rights.

Furthermore, the “rights” Mael claims to have, and is seeking to enforce, apply only to the saprolite (weathered surface layer) gold resources on the concessions. Crystallex’s 1996 annual report confirms that Mael’s “rights” are to mine the saprolite gold resource, but goes on to state that the company “intends to seek the hard-rock rights over Cristinas 4 and 6.” These gold rights are currently held by MINCA, which subsequently secured rights to mine both alluvial and vein copper after Placer Dome found that the hard-rock deposit contained appreciable amounts of the red metal.

The issue of Mael’s “alluvial rights” is complicated by the fact that much of the surface gold at Las Cristinas has already been mined by garimpeiros, local miners who swarmed the site before, and even after, Placer Dome began its initial work program to define a hard-rock gold resource.

The bulk of the existing deposit defined at Las Cristinas is in rocks that underlie the previously mined saprolite surface layer. While Venezuelan mining law gives the owner of a concession a preferential right to obtain hard-rock rights, it must apply for them to MEM, the very entity that has denied the validity of all Mael’s “rights” in the past.

Another underlying issue is how Mael acquired the alluvial rights to Cristinas 4 and 6, and the validity of that transaction. Crystallex shareholders take comfort in the fact that a Venezuelan court has recognized the validity of a transfer to Mael from Ramon Torres (who purp
ortedly acquired the concessions through transactions carried out by lawyers of the original owner, Dot Lemon) that was later published in an official gazette.

Placer Dome argues that this ruling picks up the story later in the game and is based on an ex parte application, which means that Placer Dome and CVG were not participants. And it points out that the power of attorney by which title was awarded from Lemon to subsequent parties had been withdrawn before those transfers were made.

The purported transfer was later challenged by the administrator of Lemon’s estate after her death in 1986. In early 1991, the court held that the transfers of the concessions from Lemon to Torres were void and consequently the subsequent transfers between Torres and Mael were void.

At the Miami conference, Crystallex President Marc Oppenheimer declined to answer when asked whether Placer Dome’s version of events relating to this critical stage in the sequence of events were false, saying only, “I’m not going to comment on Placer’s statements.”