New Venezuela Mining Laws Unlikely to Affect Crystallex

Recent press reports concerning Crystallex (KRY) have noted that there is a new mining law currently passing through the Venezuelan parliament that may affect the company’s future profitability. Press speculation has centered on the declarations of Ivan Hernandez, vice president of MIBAM (the Venezuelan ministry that oversees mining activity in the country) and the apparent refutations of Hernandez’s declarations from his superior, José Khan, minister in charge of MIBAM. It is our view that investors have misinterpreted the impact of the proposed legislation, thus creating an attractive investment opportunity.

To recap: In two reports published Tuesday by Raul Gallegos of Dow Jones Newswires, Mr. Hernandez stated that a) Venezuelan steelmaker SIDOR, majority run by Ternium (TX), was being considered as a target for nationalization and b) the new mining laws currently going through legislative review in parliament would force KRY into a joint venture operation with the Venezuelan state, comments that caused TX and KRY to drop in Tuesday trading on heavy volumes.

However, on Wednesday afternoon Peter Millard, also reporting for Dow Jones Newswires, quoted Hernandez’s boss, José Khan, as saying that there were no plans to nationalize SIDOR. Khan flatly refuted the idea and apparently got close to calling his inferior at the ministry a liar, saying that “It was not true”. Other sectors the Venezuelan business community also had harsh words for Hernandez; the head of the steelmaker’s union said that Hernandez had turned his back on the steelworkers, and the head of the steelmakers management confederation called Hernandez “irresponsible”. Rare indeed to see management and unions at a steelworks united as one voice!

TX had dropped the day before by 11%, but on this news it recovered by 5% in late Wednesday trading. However, the jitters still felt by the market have not let it climb back to the $30 seen in Monday trading.

TX 5 day chart

Concerning KRY, a rather irritated Mr. Khan was also quoted by newswires on Wednesday saying that he did not know whether the new legislation currently in process at congress would affect the future of Crystallex or not, remarking, “I don’t know, the law hasn’t been approved yet”. The market sensed a difference in tone in this denial by Khan and KRY stock did not manage to rebound from the drop caused by Mr. Hernandez’s comment of Tuesday, the stock closing Thursday at U$3.78, down 9.4% since Monday night. The damage was not limited to KRY and TX, however. Gold Reserve Inc. (GRZ), a company that should be celebrating the elusive environmental permit awarded to them two weeks ago, was also hit hard by the news and ended Thursday 7.8% from Monday’s close. Although clearly separate companies, GRZ and KRY would appear to suffer the same fate at the hands of Venezuelan government comments and the newswire services that report them.

However, there is every reason to believe that the current legislation under review in the Venezuela congress will not affect the future operations of Crystallex. The evidence comes from the legal document published by KRY yesterday covering a separate issue in current affairs at the company.

KRY 5 day chart

KRY is currently going through a period of financing. The company is going to market in a bought deal placement to raise in the region of CAD$50m via the sale of 12.5m shares of the company at CAD$4.25. Their final short form prospectus was published yesterday, the closing date for the subscription being April 24th. In the report section covering possible risks to the company, KRY addresses the issue of the new mining law. We would strongly suggest that all investors read the prospectus report thoroughly and to their own satisfaction, however it would seem that the following paragraph from yesterday’s publication, and particularly the highlighted part near the end, cast more light on the proposed mining law than minister Khan was prepared to grant to the reporters that badgered him Wednesday.

Due to the uncertainty surrounding the creation of a national mining company, possible amendments to the Draft Mining Bill prior to its enactment into law (which could include control of all mining projects without fair compensation by the Venezuelan Government or other amendments which may not be in the Corporation’s favor) and the possible introduction of other draft mining laws, the Corporation cannot provide any assurance that changes to current Venezuelan mining law will not materially adversely affect the Corporation’s ability to develop and operate the Corporation’s Venezuelan properties, although, based on a review of the current Draft Mining Bill by the Corporation’s Venezuelan counsel, Management believes that the Corporation’s properties will not be affected adversely if the Draft Mining Bill were enacted into law in its present form.

Of course, one must take into account that the interpretation of the mining draft content is made by the hired counsel of KRY itself and not by a neutral third party. Also, it is not impossible that the Venezuelan congress adds at a future moment new clauses that might affect the KRY business model for Las Cristinas. That said, it seems clear that KRY has made extensive inquiries into the content of the new law and is happy that they will be able to go ahead as previously planned. The message is that the mining law as proposed yesterday, April 19th 2007, does not affect the Las Cristinas project.

We have noted in previous articles published here that market reaction to rumor, hearsay and off-the-cuff quotes from inside Venezuela has been over-exaggerated on many occasions in the past. In two articles published early in the year, we recommended that investors buy Venezuelan exposed stocks due to over-imagined political risk and have been rewarded by those calls.

Once again, the knee-jerk reaction of the markets to news on companies operating inside Venezuela has left the door open for the savvy investor to make a positive difference in a short time by sticking to facts and not allowing political agendas affect trading decisions. We believe that KRY is very confident about the future development process that will take place as soon as the final environmental impact permit is granted by the Venezuelan environment ministry [MARN] and is not unduly worried about the contents of the new mining bill. We therefore expect KRY to quickly recover from the sharp drop in share price experienced this week on the back of statements by Mr. Hernandez that do not stand up to close examination.