Haywood Securities bids a not-so-fond adieu to Crystallex, Las Cristinas

Haywood Securities says it's dropping coverage of Toronto-based junior gold miner Crystallex, calling it a tragedy that its world-class asset, Venezuela's Las Cristinas project, "never got off the ground."

Author: Dorothy Kosich
Posted: Wednesday , 06 Jan 2010

RENO, NV -

Complaining that "the company continues to burn cash at the Las Cristinas project, with the granting of the permit nowhere in sight," Haywood Securities announced Tuesday it was dropping its coverage of Crystallex International.

In a report, Haywood mining analysts Kerry Smith and Shane Nagle said, "The value of Crystallex is based entirely on the Las Cristinas project, and without this flagship asset, we estimate minimal equity value for the company after repayment of the current debt."

"The 27 million-ounce resource is a world-class asset, and it's a tragedy that this project never got off the ground," the analysts declared.

Over the years the Las Cristinas project had attracted considerable investor interest during a time when the world actually believed Venezuelan President Hugo Chavez welcomed foreign mining investment in his country. However, as Chavez began to expropriate foreign oil assets, cement companies, communications companies and other foreign investment in Venezuela, fears began to develop that the Chavez Government would somehow expropriate Las Cristinas and neighboring gold project Las Brisas.

Las Cristinas planned to produce 290,000 to 460,000 ounces of gold annually. Although Crystallex remains in compliance with its operating contract, Smith and Nagle noted that the Ministry of Environment and Natural Resources has yet to respond to a June 16, 2008, appeal following the Ministry denying a crucial permit in April 2008.

"Legally, this appeal has now been denied, and the company's next step would be to seek arbitration, which we expect would be protracted and would essentially turn Crystallex into a litigation story-one to which we bring no particular expertise," the analysts said.

Haywood estimated that Crystallex's current all-in cash burn rate is about US$1 million to US$1.5 million per month with a $4.7 million interest payment due this month. Smith and Nagle estimated the company probably has US$10 million to $12 million in cash.

Frustrated investors, tired of Crystallex continuing to spend millions of dollars on what investors consider a doomed project, turned to the Ontario Superior Court for help.

In December 2004 Crystallex raised $100 million to be used for Las Cristinas development by selling units comprised of a senior unsecured $1,000 note and 65 common shares. Last month the trustee for the noteholders sought relief from the Ontario Superior Court as the result of the inability of Crystallex to develop the Las Cristinas project as the result of the permits not being issued.

The trustee asked the court to appoint a receiver over all Crystallex assets to restrain Crystallex from dissipating any further assets in connection with the Las Cristinas project.

However, Judge J. Newbould found there was "plenty of warning that delay or denial of a permit was a possibility. In the prospectus, prospective purchasers were warned of the history of the property including the prior expropriation of the site from Placer Dome, the fact that permits were required for virtually every aspect of the project, that is was possible there could be changes to the laws and regulations or their interpretation that could have a significant impact on the operations of Crystallex."

"Apart from the warnings of the risks provided in the prospectus, information regarding political risk in Venezuela," the judge found. "News sources had reported on President Chavez's violent past, nationalist rhetoric, attacks on economic reform, negative attitude towards business, anti-democratic behavior, threats to take over the National Bank of Venezuela if it did not surrender foreign currency reserves to him, and accusations of espionage and terrorist sabotage against foreign companies."

"In the face of this, no protection against these risks were provided in the trust indentures."

Newbould said he was satisfied "that the directors of Crystallex have acted in good faith, that their actions and decisions have been reasonable and made on an informed basis, and where appropriate, after taking professional advice."

In their analysis, Haywood Securities predicted the Crystallex note holders are likely to appeal the Ontario court decision to the Court of Appeal for Ontario.

Mineweb's request to Crystallex for comment regarding Haywood's decision to drop Crystallex coverage had not yet been responded to by publication deadline early Wednesday.