Why Gold Reserve, Not Crystallex, is the Better Bet in Venezuela

Includes: CRYFQ, GDRZF
by: Trey Wasser

In his recent report, JL Bane brings up some interesting points regarding the situation at Crystallex (KRY). He also generated some strong comments from shareholders supporting the Company. I have never owned KRY although I have looked at it for a trade from time to time. I am long Gold Reserve (GRZ) and would love to see Las Cristinas approvals. I think it would be a positive for GRZ as Las Cristinas and Brisas are designed to share certain infrastructure costs.

But, I just can’t get comfortable with KRY.

Perhaps the most important point that Mr. Bane brings up is regarding the copper. The fact that the KRY plan does not include processing the copper and their MOA does not even include the rights to mine copper. If they are not going to process the copper, what will they do with it? If the copper is left in the waste rock, the resulting AMD (acid mine drainage) could be a very serious environmental problem. This is one of the key differences from Brisas, where copper will be processed from the ore. If they have to change their mine plan to include processing the copper, not only could this cause an extended delay, it would open the door for the government to re-negotiate the MOA.

Mr. Bane also brings up a very valid point about the share structure and debt at KRY. The Company makes a couple of trips to the equity markets every year. They now have over 250MM shares outstanding and $100MM in debt. KRY will still need to raise a significant amount of capital to build this mine, if it is approved. The budget for Brisas is about $700MM, I assume that Las Cristinas will have a similar budget. Other than Las Cristinas, they have two tired old gold mines in Venezuela. I suspect that the mine closure liabilities at Tomi and La Victoria exceed the value of the remaining gold.

That leads me to another issue with KRY. They have been operating in Venezuela since they purchased the Tomi concession in 2000. They are an experienced operator and obviously have relations with the authorities and the government through their existing mines. It makes you wonder why they are not getting better treatment and why their environmental plan is taking so long to be approved. The revolving door at the corporate offices can not be helping either.

Lastly, it is important to remember that Las Cristinas is a contract to mine, not a mining concession. KRY does not own the deposit. This may make financing more difficult. It also gives the government a way to increase their ownership without affecting other mining company’s concessions and the perception of the future of mining in Venezuela. Re-negotiating a contract, would probably not be viewed the same as nationalizing mining concessions.

As I have already stated, I do not own any KRY. However, if KRY is a good investment with a $1B+ market capitalization, then GRZ is dirt cheap valued at $350MM. GRZ has their permits and has begun construction. Financing now seems to be falling into place. The Company announced an offering of 16MM shares and $70MM in convertible bonds yesterday. With over allotments, this should mean close to $200MM in new equity. This should pave the way to a bank financing for the $700MM needed to build the mine. Interestingly, the stock was up yesterday, when the financing was announced. Not many times will you see a company announce a financing that dilutes shareholders by over 50% and have their stock rise.

I think that GRZ may also soon find a partner for this project. Goldfields (NYSE:GFI) and Hecla (NYSE:HL) have successful mining operations in Venezuela. While Hecla is very happy being in Venezuela, they may be hesitant to increase their exposure due to the effects on their stock price. But, Goldfields entered Venezuela just last year with their purchase of Bolivar. Bolivar’s main asset was the Choco 10Mine. The mine produces just 30,000 ounces per year and has about 1.2MM in reserves. Goldfields paid $381MM for Bolivar. It seems unlikely that a company their size would enter Venezuela without much larger aspirations. As a South African company, they may also have a different view of Chavez and his policies. GRZ also has an interesting exploration project at Choco 5, near Goldfield’s operations.

Brisas is scheduled to produce about 450,000 ounces of gold and 60MM pounds of copper per year at a cash cost of only $126. Resources are over 10MM ounces of gold and 1.3B pounds of copper. Brisas may not be quite as large a deposit as Las Cristinas, but it is still a monster.

Disclosure: The author is long GRZ, GFI and HL but has no positions in KRY.


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