Crystellex clings to “valid and binding contract” for Las Cristinas

Vancouver Recent media reports suggesting that Venezuelan President Hugo Chavez will soon extend his “Bolivarian Revolution” to the mining sector has sent shares of companies actively developing projects in the South American nation into a tailspin. Shares of Crystallex International (KRY-T, KRY-X) have lost almost half their value in the past three months, despite the company’s efforts to reassure investors that it has a “valid and binding contract” to operate the bulk-tonnage Las Cristinas gold project in Bolivar state.

The Venezuelan government is proposing to acquire more than 50% of mineral projects not yet in production, and eventually transfer control of these projects to a state-owned mining company. Government officials have stated that new legislation along these lines could be put forward within weeks. Chavez has already ordered state takeovers of several foreign-owned oil projects after companies refused to accept government demands for increased revenue shares and operational control.

Crystallex states that it has received “no request or proposal for any change” to its operating contract for Las Cristinas. The company does not hold direct rights to the project, which is owned 100% by the nation of Venezuela, but has put forward plans to operate the project to produce an estimated 300,000 gold per year, starting in 2008, under terms and conditions specified in the operating contract.

The company also issued a release to clarify the “confusion” caused by media reports of the proposed changes to Venezuelan mining law, such as the incorporation of “mixed companies” in which the government would have a 51% interest. The company stated that the mixed company model under discussion is not applicable to the Las Cristinas contract, “as the draft mining law provides express recognition of existing contracts which are in proper execution and good legal standing.”

In March of this year, the Ministry of Basic Industries and Mining officially approved the company’s feasibility study for the project, as well as the terms and conditions of the Las Cristinas operating contract. Notwithstanding, Crystallex has waited several years — and continues to wait — for the final permit needed to start construction of the open-pit gold mine.

Since signing an engineering, procurement and construction management contract in April, 2004, Crystallex has spent $158 million to advance the project. The bulk of this is for equipment and services related to $293-million capital budget governed by the contract. Some equipment is in storage and will be shipped to Venezuela once final permits are in hand. The company’s cash position at the end of the latest quarter was $25.5 million. Capital expenditures were $21 million during the quarter, $2.1 million less than a year earlier, with the decrease attributed to “delays in permitting Las Cristinas.”

Crystallex has other gold-mining assets in Venezuela, which produced 11,767 oz. gold in the three months ended March 31, 2006, down from 12,789 oz. a year earlier. The company posted a net loss of $6.9 million in the latest quarter, compared with a net loss of $7.9 million a year earlier. Crystallex shares rebounded to $3.26 at the close of trading on June 13, up from a low of $2.10 a day earlier.

Also waiting for permits to develop a large gold deposit in Venezuela is Gold Reserve (GRZ-T, GRZ-X). The company’s operating plan was approved by the government in 2003, but other approvals and permits are pending, including the critical “Administrative Authorization to Affect Natural Resources for Construction of Infrastructure and Exploitation of Alluvial and Vein Deposits of Gold and Copper.” The company says obtaining these permits is necessary before it can finance, construct and operate the Brisas gold-copper project.