Crystallex faces lawsuit as results lag expectations

Junior miner faulted for statements about Las Cristinas project

Peter Koven, Financial Post Published: Wednesday, December 10, 2008

When a high-profile junior mining company hits the skids, it is becoming common practice for shareholder lawsuits to follow.

This week, a class-action suit was filed in New York State against Crystallex International Corp. and two of its former chief executives. It focuses on allegedly improper comments the company made about potential approval for its Las Cristinas gold project.

The suit follows similar class actions launched against NovaGold Resources Inc. and Southwestern Resources Corp. All three companies were highly touted by the investment community prior to negative announcements that wiped out much of their market value.

The Crystallex suit focuses on the period from July, 2005, to April, 2008. It cites a number of quotes from the company's CEOs, some of which appeared in the Financial Post, that suggested a final environmental permit for Las Cristinas could be imminent. Once that approval was received, the company could start building the mine.

But those hopes were largely dashed on April 30, when a Venezuelan government official rejected the permit and prompted a huge sell-off on the stock, which is off 95% from its highs earlier this year.

The suit alleges that the company did not have a reasonable expectation that the permit was imminent.

"The phone has been ringing off the hook with angry shareholders," said Joseph Gentile, an attorney representing the plaintiff.

Crystallex said only it is reviewing the complaint, but other experts suggested it is unfair to blame the company for the vagaries of the Venezuelan government. The company has threatened to go to international arbitration if it cannot settle the dispute within six months.

The Crystallex suit is only one among a flurry of legal actions and setbacks that are engulfing junior mining companies as they try to work in difficult jurisdictions amid low commodity prices.

Yesterday, Gabriel Resources Ltd. said Romania's Supreme Court officially cancelled the company's permit for the Rosia Montana gold mine following a four-year legal battle. The decision casts even more doubt that Gabriel will ever develop the project.

Also yesterday, Vancouver-based Pacific Rim Mining Corp. said it will launch arbitration against the El Salvador government. The company has been thwarted in its efforts to develop its El Dorado gold project and claims the government has breached international and local law.

"These countries are starting to realize that you can't just drag these things out and stomp your feet and get your way, because market conditions change," said Catherine Gignac, an analyst at Wellington West Capital Markets.

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