Crystallex does desperate deal to hold on to stake of Las Cristinas

Unable to get any traction on developing the Las Cristinas gold deposit, Crystallex International (KRY-T, KRY-X) has sold off two-thirds of the project for a song.

The Toronto-based company, which has been trying to develop the project since 2002, has agreed to hand over two-thirds of the project to a subsidiary of one of China’s largest companies — China Railway Engineering Corp. — in exchange for some help with paying off the company’s debt.

Specifics on just how much of the debt would be paid off by China Railway were not released, but it’s clear that Crystallex had little room to negotiate a better deal, and in the end had to settle for a chance to retain an interest in the project.

“A third of a loaf is better than no loaf at all,” John Ing an analyst with Maison Placements Canada said. “That’s what they were stuck with…a stalemate.”

By bringing in China Railway – with its ties to the Venezuelan government and its deep pockets – Las Cristinas, for the first time in a decade, stands a legitimate chance of being developed, and Crystallex, by virtue of its one third share, gets to stay around for the ride.

The other advantage Crystallex gleans from doing the deal is that with the Chinese support it was able to instill enough confidence in the banks to raise some much needed cash through an equity financing.

On June 9 the company announced it would do a bought-deal led by Macquarie Capital Markets Canada that would raise $35 million for company coffers by issuing 70 million units at a price of 50¢ per unit. Each unit is made up of a share and one-half of a warrant with a strike price of 70¢.

Crystallex’s stock performance, however, hasn’t reflected any bullish sentiment around the news. The morning of June 7, the day that the deal with China Railway was announced, the company’s stock opened at 75¢. Since then it has been on a steady decline and closed at just 45¢ in Toronto on June 9.

Maison Placement’s Ing said the fall in price has less to do with the market’s disappointment in the deal and more to do with arbitrage opportunities created by the financing.

What’s more, Ing remains bullish on the long term prospects for the project.

He says China Railway’s deep pockets and high gold prices will likely lead to a mine that is much larger in scale than anticipated in Crystallex’s feasibility study.

That study envisioned a 20,000 tonne per day mine and was done using a gold price of US$550 an oz. Ing expects that China Railway will triple those production levels.

One question that may be left in investors minds is that given Venezuelan President Hugo Chavez’s track record of expropriation, why would the Chinese even bother with Crystallex, when they could, conceivably, deal directly with Caracas?

“The threat of expropriation was always misguided,” Ing says. “The Venezuelan government already owned the deposit and they had a contract out on the mining that Crystallex held.”

Holding that contract meant a legal mess for the government or any third party that came in to mine without dealing with Crystallex first.

While the Venezuelan government had said in the past that it would favour Russian companies to mine the area, it is no stranger to doing large deals with the Chinese.

China has done significant deals within the country’s oil sector with an eye towards more than doubling Venezuela’s export of oil to China.

Relations between the two countries were made even closer after China agreed to lend US$20 billion to Venezuela in April.

And China Railway itself is no stranger to the country as it is in the midst of building a $7.5 billion railway there.

Crystallex said in a statement that the Venezuelan government provided an “expression of support” for the deal, and Ing says he doesn’t believe China Railway would have made the deal unless it had already been given assurances that the needed environmental permit would be forthcoming.

Cash strapped Crystallex – which earlier this year warned that it did not have enough cash to see it through to the end of the year – will be allowed to pay for its carried interest in the project out of cash flows that the project will generate.

China Railway also advanced $2.5 million to Crystallex in exchange for the right to buy common shares at 40¢ apiece, although a maximum stake of 19.95%  in Crystallex was set.