Crystallex to take back seat at Las Cristinas

The Las Cristinas gold mine in Bolivar State, Venezuela, is pictured in this undated company photo. Crystallex International Corp.

Cash woes and permit delays prompt miner to sell majority stake in Venezuela gold project to China Railway

David Ebner

Vancouver — The Canadian Press Published on Monday, Jun. 07, 2010 8:19AM EDT Last updated on Monday, Jun. 07, 2010 6:55PM EDT

A state-owned Chinese company will take the reins of the stalled Las Cristinas gold project in Venezuela after beleaguered Toronto miner Crystallex International Corp. (KRY-T0.52-0.03-5.45%) was unable to build the mine and faced a cash crunch.

Crystallex has been trying to develop the Las Cristinas deposit since 2002 but was never able to secure the key permits from the Venezuelan government. On Monday Crystallex said it will cede majority control over the project to a subsidiary of China Railway Engineering Corp., one of the world’s largest companies.

China has forged major multibillion-dollar connections with Venezuela recently to secure oil supply, and the backing of China Railway is viewed as a major positive. Crystallex Monday said the Venezuelan government provided an “expression of support” for the deal.

“There’s no question that having a partner such as the Chinese state-owned railway company will finally help break the Gordian knot,” said analyst John Ing of Maison Placements Canada Inc. “China has the political muscle to deal with Venezuela.”

The ties between the two countries have strengthened significantly in the past six months. Late last December after talks in Caracas, two deals between Venezuela and state-owned Chinese oil companies were struck for the development of projects in the Orinoco region, where previously international operations had been nationalized. The deals are part of a goal to increase oil exports to China to one million barrels a day from 400,000.

Then in April, Venezuelan President Hugo Chavez said China had promised to lend $20-billion (U.S.) to his struggling country, which is beset by soaring inflation, decrepit infrastructure and shortages of fuel.

China Railway is already active in the country, building a $7.5-billion railway to connection a state in the southwest to one in the east.

China Railway will have a two-thirds stake in Las Cristinas and will fund and oversee its construction. Crystallex will contribute its assets related to the mine for a one-third carried interest, to be paid for by cash generated when the project is in operation.

Stock of Crystallex has doubled from the lows of last year but slipped 5.5 per cent on Monday. It remains down about 90 per cent from an all-time high of around $7 reached 2006.

Las Cristinas is considered one of the largest undeveloped gold deposits in the world but the low-grade ore will be expensive to process. Mr. Ing estimated cash costs of $350 per ounce. Crystallex has said there are proved and probable reserves of about 17 million ounces based on a $550 an ounce gold price. Gold closed at $1,240.80 (U.S.) on Monday.

Crystallex had hired investment bankers to broker a deal to keep the company afloat, with options ranging from an outright sale to a partnership. On April 1, when Crystallex announced its 2009 financial results, it said it did not have enough cash to make it through fiscal 2010.

China Railway had advanced $2.5-million to Crystallex during talks between the companies in exchange for the right to build common shares at 40 cents apiece, though a maximum stake of 19.9 per cent in Crystallex was set.

Crystallex shareholders will vote on the deal in August.