Crystallex sells slice of Las Cristinas dream

Unable to get any traction on developing the fiercely disputed Las Cristinas gold deposit in Venezuela, Crystallex International (KRY-T, KRE-X) has sold two-thirds of its contested operatorship, apparently 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 what had been its flagship asset 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 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, says. “That’s what they were stuck with: a stalemate.”

The other advantage Crystallex gleans from the deal is that, with the Chinese support, it may be able to instill enough short-term 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, which would raise $35 million 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, has reflected only bearish sentiment around the news. The morning of June 7, the day the deal with China Railway was announced, the company’s stock opened at 75¢.

Since then, it has been on a steady decline, trading for just 45¢ at presstime.

Ing argues 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.

Crystallex’s feasibility study envisioned a 20,000-tonne-per-day mine, using a gold price of only US$550 an oz., but any future developer could easily triple those mining rates.

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

“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 striking large deals with the Chinese.

The Chinese have 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 Chinese officials and investors agreed to lend US$20 billion to Venezuelan officials 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 funds to see it through to the end of the year — would theoretically be allowed to pay to maintain its interest in the project out of cash flows that the project generates.

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.