Crystallex Flounders as Circumstances Worsen

It has been some time since I have revisited this little company, but while Crystallex's (KRY) management tries to convince the investment community that all is well and to echo the rock legends Led Zeppelin that "The Song Remains the Same", the harsh reality is that circumstances have only worsened.

Crystallex's recently released financial statements are a disgrace. The company is producing a product at a greater cost that what it is sold for and there are other questionable comments which may be discussed in a future article.

One need only look at Crystallex's attempt to prop up the share price yet again by issuing a press release on August 20th to understand what is truly meant by the word desperate. The press release provides no news and could almost be considered misleading as it fails to disclose all of the facts surrounding the information that was provided. This is a hallmark of Crystallex so one need not be surprised as the press release only reinforced the reputation of the company of not being transparent and open to investors.

In the press release , Crystallex says that "the Company is not aware of any adverse corporate developments - other than general stock market conditions - which could account for the recent trading activity and that, to its knowledge, the process for the issuance of the environmental permit for Las Cristinas remains on track ." Readers should remember the last sentence for recall later in this article.

It may be true to say that there were no material corporate developments as yet that could account for the recent trading activity, but it would be surprising for Crystallex not to be aware of and acknowledge political developments in Venezuela that may have given investors a pause for thought.

As reported in previous articles, Venezuela's mining law and Constitution are undergoing revision and in an April 17, 2007 interview with Dow Jones, Vice Minister of Mining Ivan Hernandez said of the Mine Operating Agreement [MOA] that Crystallex's operating contract has some clauses that need to be revised and that "It will move from being a contract to a mixed company (jointly owned by the Venezuelan government.)" In a later interview with Reuters, Mining Minister Jose Kahn contradicted the statements made by Hernandez by claiming that no decision had yet been made.

Since then , Mining Minister Jose Kahn has hinted that perhaps a decision has been made. As reported by Venezuela's El Universal internet newspaper recently, Minister Kahn has suggested that article 302 of the constitution be amended to include the word "minera" which would "allow that the State, for reasons of sovereignty, development and national interest to reserve the operation of the mines." The Minister emphasized that this inclusion would allow the country to ease the transition of a change in the mining industry, in which mining concessions and contracts would be moved to a "mixed company" through which the country had majority control as had recently been done with oil projects within the country.

The ramifications of such a move for Crystallex would be devastating. Crystallex has an ill advised $100 million unsecured debt outstanding and a reading of the prospectus for that debt shows that there is a clause in that lending agreement that could literally cause Crystallex to cave in upon itself. If Crystallex loses majority control of Las Cristinas, the debt can be immediately called by the creditors. In addition, Crystallex would be forced to revise downwards their reserve and resource figures which as it stands is the only thing keeping the company afloat in the speculative stock arena. One can also safely reach the conclusion that any speculation of a buyout of the company will be suspended as the political risk, which is already at a high level, would increase exponentially.

The August 20th press release goes on to say that "The Company welcomed statements by the President of the Commission of Economic Development of the Venezuelan National Assembly, Ricardo Gutierrez, made last week during a radio interview regarding the status and outlook for the Las Cristinas Project. Mr. Gutierrez served as the First Vice President of the National Assembly in 2004 and 2005.

During the interview, Mr. Gutierrez said:

The Commission I lead, the Permanent Commission for Economic Development at the National Assembly, has started a series of actions before the Environment Ministry and the country's President, to conclude the issuing of the environmental permits.

Mr. Gutierrez further said:

The President (Hugo Chavez) is aware, and so are we, that the beginning of exploitation at the Las Cristinas gold mines has a special importance, it has an economic importance, as it would allow... a social importance, as thousands and thousands of families, dedicated to illegal mining, and who use mercury and work in deplorable conditions, can participate through formal jobs in this activity developed by Crystallex in the exploitation of gold in Las Cristinas .

While Crystallex is supportive of Mr. Gutierrez's promotional comments, they no doubt realize that the comments are all but meaningless. Crystallex is not unfamiliar with Mr Gutierrez. Mr. Gutierrez has after all been making similar statements for at least a year with absolutely no effect.

On June 5th 2006, another Venezuelan newspaper , El Diario de Guayana , reported that "After numerous calls for environmental permits to kick start gold-mining projects at Las Cristinas and Las Brisa del Cuyuni at Las Claritas, in Sifontes municipality, the president of Venezuela's Parliamentary Mining Commission, AN deputy Ricardo Gutierrez is scheduled to meet with Environment Minister (MARN) Jaquelin this week to insist that she should issue the necessary environmental permits to facilitate the kick-starting of the two projects, to substantially reduce pressure from the thousands of miners who do not have either claims or permits for small-scale mining who will otherwise be swallowed up by the two major mining projects" and that "The Mayoress says that she understands the process to kick-start these projects which can cause an impressively positive impact on the economies in southern (Bolivar) municipalities, and, at the highest possible levels, she has stressed the necessity that these projects should be given the green light a.s.a.p.

"The last thing I did," she says, "was when Minister of Environment, Jaquelin Farias and I joined the President of the Republic, Hugo Chavez for a meeting with community councils in Tucupita, when I was able to express to the Minister the absolute necessity that the environmental permits should be issued with all possible speed. She responded with a smile: 'Oh, you! Yet again, you and your mines!'"

"Following that, I met with Ricardo Gutierrez (the AN Mining Commission president) who said that he is well aware of the importance of the two projects to the region and that he will meet with the Environment Minister this week to get the issuance of the permits moving."

That was over a year ago.

Crystallex even covers these statements in a June 13th, 2006 press release commenting on the Venezuelan mining policy.

In it Crystallex says "In addition the media in Venezuela reported last week that Deputy Ricardo Gutiérrez, President of the Commission of Mines of the National Assembly had met with the Mayor of Sifontes district to express their joint support for the rapid commencement of the Las Cristinas project by Crystallex. Deputy Gutiérrez also stated that he had arranged to meet with the Minister of MARN to express his commission's support for the rapid development of the Las Cristinas project by Crystallex ."

The point, as many will understand, is that Mr. Gutierrez or his parliamentary committee has no say in the issuance of the permit and for all of his blather and bullocks, he has accomplished nothing so there is really no reason to rely on his comments other than to facilitate an air of progress.

What is very interesting is Crystallex's lack of disclosure when acknowledging statements of Mr. Gutierrez in their latest press release. Crystallex quotes Mr. Gutierrez as saying that "When asked if President Chavez could speed up the permitting process, Mr. Gutierrez confirmed, "The permits have already been prepared by the Environment Ministry, and the President can speed this up."

Crystallex does not reveal that in the "radio interview" they refer to was staged by one of its more rabid promoters, Vheadline news and it's "editor", Roy S Carson. Both Roy Carson and the publication that he uses to promote Crystallex are already well known for having published numerous stories supporting Crystallex that have proven to be entirely false.

Crystallex also does not admit that Mr. Gutierrez's comments about the permits having been prepared and that Mr. Chavez could speed up the process are derived from an earlier account of his that is based upon an unproven account of a conversation he claims to have had as was detailed in a August 13th Vheadline article in which he says that " in a meeting with Environmental vice-minister Merli Garcia, she gave assurances that all permits have been processed and that the technical studies have been ready and waiting since June of this year but that because of media reports claiming questionable decisions had been made, the environmental permits had been forwarded directly to the Head of State (President Chavez)."

While I am reticent to believe anything that is printed by Vheadline , several questions do raise their respective heads for consideration. Are Mr. Gutierrez's comments true ? If they are then what is of greater import is that Environmental vice-minister Merli Garcia has said that the permit and studies have been forwarded to President Chavez's office . This is not a part of the normal screening process as described by the company. As this new information does not seem to jive with Crystallex's comments that "the environmental permit for Las Cristinas remains on track" it is the responsibility of Crystallex's management to explain the apparent discrepancy. Needless to say, I am not holding my breath for an explanation.

A move by the Environment Ministry to shuffle the ultimate decision to President Chavez seems decidedly off track . What is there to decide? The EISA has been approved, Crystallex has acquiesced to the demands of the MinAmb to pay its taxes owed and to arrange the placement of a required bond. At this point the elusive permit should be shoe-in.

Have all permits been forwarded to the office of Mr. Chavez for approval due to "media reports claiming questionable decisions " or is this the only one and if it is the only one, what are these "questionable decisions" and why has Crystallex been singled out ?

Crystallex, it seems is playing on both sides of the fence. They promote Mr. Gutierrez's comments as being of a reliable nature but fail to address the primary question created by his comments about the permit having been forwarded to the offices of Mr. Chavez or why there was a need for this step to occur. Conversely, Crystallex claims that everything is on track and that they are in continuous contact with senior government officials to move this process forward so if they know that the Mr. Gutierrez's information is faulty, there is no good reason other than for the sake of promotion, to quote him at all.

There is nothing else to be said of Crystallex's press release other than what the reader now knows. It looks designed to display only the attractive parts of the overall puzzle with an apparent disregard for addressing the whole truth or its consequences. That is the consumate definition of Crystallex's operating procedure

Caveat Emptor.

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Disclosure: none