ANALYSIS: Las Cristinas - See to believe - Venezuela

By Laura Superneau / Business News Americas

CRRC is the resources subsidiary of China Railway Engineering Corporation, which ranks among the world's largest civil construction firms. Under the partnership, CRRC will lead efforts to crack the permitting impasse and provide all capital necessary to develop Las Cristinas - in Bolivar state - in exchange for a two-thirds stake in the mine. Crystallex will pay back its one-third of capex from future cash flows.

The initial reaction to the June 7 announcement was a 50% leap in Crystallex's share price to Cdn$0.82 - its highest point since October 2008 - but the stock sank back to close at Cdn$0.52, lower than its previous close. Two days later came more seemingly good news: a bought deal financing for up to Cdn$40.3mn (US$39.3mn) with a syndicate led by Macquarie Capital Markets Canada and including GMP Securities. But the stock did not react and has continued to trade at Cdn$0.44-0.47 since then.

Crystallex's share price has suffered in recent years due to the lack of permits. The company inked the mine operating contract with the concession holder, state heavy industry holding CVG, in 2002. In 2003 it unveiled a feasibility study for a 20,000t/d operation, followed by a feasibility study in 2004 to double throughput after startup. Then the permit wait began.

A series of developments in early 2006, which culminated in the supposed approval of Las Cristinas by the basic industries and mining ministry (Mibam), led the stock to hit a high of Cdn$7.17 during trading on the TSX on April 10 of that year. However, the price soon declined as it became apparent the permitting issues would continue.

While some analysts contacted said their firms had quit covering KRY a few years ago as the stock's attractiveness faded - including GMP Securities - there are indications of fresh interest in the miner. US-based Liberty Analytics announced on June 9 it had begun independent research coverage.

John Ing, gold analyst and CEO of independent investment dealer Maison Placements Canada, called the CRRC agreement very positive. "The Chinese coming in will resolve the issues of one, the environmental permit, and two, financing, because they have very deep pockets," he said, adding CRRC is well equipped technically to bring the project on stream quickly.

The partners will update the Las Cristinas feasibility study and are looking at tripling the operation's size from the original 20,000t/d, according to the analyst. The potential value of the deposit is undeniable; proven and probable reserves amount to 16.8Moz based on a US$550/oz gold price, as of 2008.

But while a Chinese state partner could be seen as having an in, as Venezuela has partnership and cooperation agreements with the country, it may still be difficult for most Western investors to feel comfortable with Las Cristinas.

The project that looked so attractive in the early 1990s has taken many hits: low gold prices, ownership battles, changing policies. Venezuela's continuous lack of a clear mining policy - despite a stint working to encourage private mining investment in the 1980s - has prevented the development of the project and the sector.

The World Bank's 2010 Doing Business project, which measures regulatory plusses and minuses in 183 countries, ranked Venezuela 177. And the Bolivarian Republic ranked last overall among 72 jurisdictions in the Fraser Institute's 2009-10 Survey of Mining Companies. Its worst ranked categories were political stability, taxation regime and labor regulations followed by regulatory inconsistencies and uncertainty, and security.

Respondents put a bit more faith in Venezuela's raw mineral potential and expressed relatively greater certainty regarding environmental regulation, native peoples' land claims and delineation of protected areas.

While the officially documented reasons Crystallex has had permit problems relate mostly to environmental and indigenous community issues, it is difficult to believe there is no political element. Mibam said earlier this year it was in the process of returning the deposit to state control, and in early 2009 President Hugo Chavez said that a JV between the state and a Russian state-owned company would control the project. On previous occasions Venezuela also said it would give the project to Russian-owned Rusoro Mining (TSX-V: RML).

It almost appears that the government agencies in charge of granting permits are unclear on what they are expected to do. Venezuela's environment ministry (MinAmb) in 2007 approved the Las Cristinas EIS and asked Crystallex to pay a construction compliance bond and environmental tax, which the company did. But in 2008, MinAmb denied the miner a necessary permit to affect natural resources, citing sensitivities related to indigenous peoples, small-scale miners and the Imataca forest reserve.

Conflicting information - perhaps the result of a lack of cohesion among government agencies - also persists in creating confusion. Crystallex reported that together with CRRC it met with the Venezuelan government to inform of the strategic partnership, to a positive reception, and that the partners are working closely with officials to obtain permits. Meanwhile, Venezuelan news agency Intopress reported that Mibam has not changed its position against renovating Crystallex's concession nor received any formal documentation of the deal with CRRC, citing a "totally reliable" Mibam source.

Success at Las Cristinas would be a long-awaited reward for Crystallex and its shareholders, and perhaps encourage a similar move at other projects like the neighboring Las Brisas gold deposit, owned by US-based Gold Reserve (NYSE, TSX: GRZ), which has a parallel story to tell. But the majority of mining industry players is probably waiting to see the first gold bar to believe.

lieve