“Great investment opportunities come around when excellent companies are surrounded by unusual circumstances that cause the stock to be misappraised.”
– Warren Buffet
On August 5th, 2008 Venezuelan President Hugo Chavez issued 26 new laws edging the country deeper into a Cuban-style socialism. Chavez has declared that the country “will favor national interests over foreign interests.”
Predictably, Crystallex (AMEX: KRY) sunk 14% on the news.
They have been developing the Las Cristinas Mine in the environmentally sensitive Imataca Forest. The property holds an estimated 17 million ounces of gold.
Every time Chavez opens his mouth, Crystallex shareholders get kicked in the gut.
Fourteen months ago, Crystallex was trading at $4.89. You can pick up a share of the $212 million market cap company today for $.71 – an 85% discount.
Two other companies with Venezuelan mining interests, Gold Reserve (GRZ) and Rusoro [TSX.V: RML] have been similarly pummeled in recent months. Gold Reserve is trading at $1.40 – down from a 52 week high of $6.00. Rusoro is trading at $1.00 - down from a 52 week high of $2.70.
If you are a shareholder in Crystallex, Gold Reserve or Rusoro, you probably feel like an abused spouse. At this point the most emotionally appealing thing to do is to eject your tormentor from house (sell your stock).
But has Chavez’ big mouth obscured the inherent value in these companies?
I think so.
My reasoning comes from examining Chavez’ track record in the oil industry (which is 30 times bigger). He made loud noises about “nationalizing” the sector, which depressed stock prices and softened up the CEOs, and then he started negotiating.
“I don’t want the oil companies to leave,” Chavez admitted, “I want them to be minority partners.”
Exxon Mobil buys oil in 35 different markets. They’ve made $100 billion profit in 3 years. They can afford to tell Chavez, “Thanks, but no thanks.”
But very few of the CEOs who have done business with Chavez have bad things to say about him. Why? Because he’s playing the same game they are. Trying to create an environment in which he can make money. In that sense Chavez is completely predictable. The only twist is that his shareholders are the Venezuelan peasants.
After Chavez paid a 20% premium ($740 million) for an 82 percent stake in the country's largest private electrical utility, the CEO commented that it was “a good deal for investors.”
Crystallex, Gold Reserve and Rusoro control an estimated $36 billion of gold assets in Venezuela.
Chavez will need their help to get it out of the ground.
He is going to offer them a deal. Whether or not they take it, and whether the shareholders will see stock prices break previous highs, I do not know. But it is worth noting that in his nine years as President of Venezuela Chavez has yet to forcibly shut down a single project.
Chavez is a much straighter businessman than he is a politician.
Foreign mining companies will succeed in Venezuela if they can adapt to the rules of the new game. On this score I would have to give Rusoro the edge. On July 10th, 2008 Rusoro formally agreed to establish a 50-50 partnership with the state-owned Empresa de Produccion Social Minera Nacional. Rusoro CEO Andre Agapov stated: "We are delighted to be selected as the partner of choice for gold mining opportunities in Venezuela.”
Chavez makes so many hostile statements that it is sometimes difficult to think straight about Venezuela.
If we drift 1,200 miles south-west to Ecuador there is a useful external yard stick by which we can measure the value of Crystallex, Gold Reserve and Rusoro.
Two weeks ago Kinross Gold Corp (NYSE:KGC) made a friendly $1.2 billion all-stock offer for Aurelian Resources Inc. (OTC:AUREF) which owns a gold project in Ecuador with 13 million inferred ounces of gold.
If you think Ecuador is more investor-friendly than Venezuela, think again.
Ecuador’s President, Rafael Correa is just as left-leaning as Chavez.
In 2007, Crystallex mined 33,000 ounces of Venezuelan gold. Currently ALL the mines in Ecuador are shut down while Correa rewrites the revenue sharing formula.
But despite this uncertainly, the market assessed the Ecuadorian gold as being worth $61 an ounce in the ground.
Using that as a yardstick, and remembering that Hugo Chavez is a business pragmatist, the Venezuelan gold looks to be, in the words of Warren Buffet, “misappraised”.
Make money, not war.