Toronto-based Crystallex had a mining contract to develop a massive gold deposit in Venezuela called Las Cristinas.

Photograph by: Petr Josek, Reuters

Crystallex International Corp. was close to securing US$135-million in financing before it entered creditor protection last Friday, according to an affidavit from its chief executive.

Now that the filing has been made, the management team has to show stakeholders that it has a viable refinancing plan that benefits everyone. It will be a significant challenge, as any value in Crystallex is dependent on winning a legal fight years in the future. Some bondholders are also eager to seize control of the company.

Toronto-based Crystallex had a mining contract to develop a massive gold deposit in Venezuela called Las Cristinas. But in 2008, Hugo Chavez’s government denied a permit that the company needed to build the mine, without providing a real explanation. The mining contract was later terminated.

Crystallex’s cash reserves gradually depleted, and it was forced into insolvency after US$100-million of notes came due on Dec. 23. Crystallex is now seeking US$3.8-billion from Venezuela in international arbitration.

By raising US$135-million before Dec. 23,, Crystallex would have had enough funds to deal with the notes and fight the arbitration.

According to a sworn affidavit from CEO Robert Fung that was filed with the Ontario Superior Court of Justice, Crystallex had “soft” commitments for the full US$135-million, provided that a lead investor emerged. It also received “serious” expressions of interest from a potential lead investor who would take up US$50-million of new notes.

But as the deal neared completion, the un-named investor told Crystallex that it needed the financing to be approved by a court to avoid the risk of litigation. Given that zealous bondholders have already filed two lawsuits against the company, it was an understandable request.

Crystallex looked at various options to obtain court approval for the financing, but ultimately decided that an insolvency process was necessary.

At around the same time, a separate investor made an unsolicited proposal for a debtor-in-possession financing. Crystallex tried to negotiate a last-minute deal, but the board concluded that it did not want to accept the investor’s terms “without a broader canvass of the market to determine whether more favourable terms were available.”

While the arbitration process carries a great deal of risk, Crystallex thinks the odds of winning — or getting a favourable settlement — are very high. In his affidavit, Mr. Fung said that Venezuela has a history of both settling cases and honouring arbitration awards. He noted that the government recently settled with Mexican cement manufacturer Cemex SAB for US$600-million, and also said it wants to settle multi-billion-dollar disputes in the oil sector.

The Toronto Stock Exchange has suspended trading of Crystallex shares and will delist them on Jan. 6.

link: http://www.canada.com/business/Crystallex+close+securing+financing+before+filing+protection/5915588/story.html