Crystallex and the Venezuela Situation: Eliminate Emotion and Stick to the Facts

Nationalization seems to be a hot button in Venezuela. Chavez was pushing hard on it yesterday. I think that for Crystallex (KRY) shareholders, this excitement will set up a buying opportunity, as KRY shares have plummeted.

My rationale is that Venezuela already owns the mining properties held by Crystallex and they have contracted the mining rights to others. Miners like Crystallex are merely guests in the country, and they have been fit and proper guests. So we shall see.

The Crystallex phone lines are jammed.

click to enlarge

KRY end of day chart


I sincerely hope that this Venezuela situation teaches some of my readers a lesson in perspective and patience. The sell side play you like a drum, beating on your emotions at every opportunity. Successful pro traders eliminate emotion and stick to the facts. What came out yesterday after 3pm was a headline article from Alex Kennedy, a reporter for Bloomberg, and the usual "stuff" from Raul Gallegos, a Dow Jones reporter. These people are not traders. They are reporters who get paid to publish "sticky" articles.

Mr. Kennedy used the words "transforming the country into a socialist state". Did anything really change yesterday? Let's hear a clear statement directly from the Venezuelan government and from the companies involved before we start listening to such loose words from reporters.

In the case of the telephone company CANTV, there is no majority owner. There is a 28.5 pct minority stake that has been agreed to be sold (but not closed) between the proposed seller Verizon (NYSE:VZ) and the proposed buyer Mexican billionaire Carlos Slim. The deal was for US$676.6 million (and has been extended to Feb. 28, 2007). If the country wants to buy this minority stake plus the interests held by others, I believe they will offer fair value. Otherwise, the nation stands to lose every foreign investor presently holding assets there, which I don't think is the plan of Mr. Chavez.

As to the electric power corporation involved in the Dow Jones article, it is already, as I understand it, the national power company. It very well may be that the new government will vote to re-nationalize these private companies.

In Bahamas, like in many other countries, the government owns the Electric company and the Telephone company, and yet Bahamas (or similar countries) are not known as "socialist states".

When the government of Venezuela privatized these companies, it received substantial funds. Under international law, it would be required to re-purchase shares if it intends to re-nationalize them. Dow Jones News says "What's at Stake: Whether Mr. Chávez turns the world's fifth-biggest oil exporter into a Cuba-style socialist state." Clearly there is an inference here that private assets would be confiscated, and I think, based on the evidence, that is entirely misleading.

My final comment is that if you want to trade capital by reacting emotionally to conjecture by reporters, then you will lose.

Today, and in days following, this story will be fleshed out. I am going to take a guess that what Mr. Chavez is doing is nothing more sinister than moving these utility companies to a new Government Ministry and laying the groundwork for new legislation that his government intends to pass. Perhaps that will involve re-nationalization, and if so, I believe we will then discover the facts.

I am not a Venezuela expert, so this is mostly conjecture on my part, which in my case is preferable to any story from Messrs Kennedy or Gallegos. You, clearly, may think otherwise.

As a trader, with reference to Crystallex, I do recognize the damage that volatility like this creates. The uncertainty will shake out long-term holders. I am also hoping that many of the sellers of KRY today are short sellers. They will have to buy those shares back in the market.

I went through SEC filings for VNT (Venezuela National Telephone), plus research material at several other sources. I also re-read the newswire stories. The paucity of facts in published material that is replete with inference and rehash, including in headlines and summaries, is mind boggling.

As of last evening, VNT had not been notified by government of any re-nationalization program. The current Chairman and CEO, Mr. Roosen, is the same man who has held that position since June 1995, well before the company was privatized. We need to hear from this person rather than from reporters who are referencing Cuba's Fidel Castro in their stories.

We need to hear from Verizon, which is the owner of 28.5 pct of VNT. They have been dealing with Mr. Chavez as President of Venezuela since 1999. They know him well.

Finally, we need to separate this issue of nationalizing utility companies from the issues related to the contracting of mining rights to foreign-owned companies, including those involving iron ore (and steelmaking), nickel and aluminum as well as gold. We need to recognize that under Venezuelan law, effective since Oct 1999, the country's mineral as well as hydrocarbon resources belong to the nation. Let's hear from Anglo American and from Gold Fields before we start trashing Crystallex.