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Crystallex saga heads for resolution
Trading halt presents buying opportunity, say some

By Thom Calandra, CBS.MarketWatch.com
Last Update: 11:54 AM ET Jul 17, 2003
SAN FRANCISCO (CBS.MW) - The so-called "cheap paper" of small gold miner Crystallex International may get even cheaper when trading resumes in the embattled Toronto company, but not for long.

The potential operator of the vast Las Cristinas gold deposit in Venezuela is in the midst of an accounting review of tricky gold derivatives on the Crystallex balance sheet. A review by new auditors Deloitte & Touche likely will be completed in the next week or 10 days.

Until then, shareholders who own Crystallex shares in Toronto (KRY) or on the American Stock Exchange (KRY) must play the waiting game, hoping against hope the shares are not savaged after the second trading halt this year.

Those who understand the enormous worth of the company's Las Cristinas concession will be buying more shares in Crystallex when Canadian regulators -- the Ontario Securities Commission and the B.C. Securities Commission -- give the green light on trading, regardless of the scope of restatements from accountant Deloitte & Touche.

That's because, quite simply, even the harshest of all possible restatements of the way Crystallex executives treated call contracts and the forward sale of gold produced from working mines in Venezuela and Uruguay in 2000 and 2001 and possibly 2002 will have little or no material impact on operations.



"The asset is unaffected," said Richard Sacks, a large shareholder, referring to Las Cristinas. "Their hedge book is their hedge book, no matter what the notional gain or loss they have to restate," says Sacks, from Phoenix Advisory Services in Chicago.

Or as another large shareholder told me, "You don't own this because of earnings or gold production or restatements. You own it because of 10 million ounces in Venezuela."

Gold miners, among them the world's largest, Newmont Mining (NEM), have restated their treatment of the derivatives that miners use to squeeze extra income from gold sales during a span of flat to falling bullion prices. The difference here is that Newmont and others calculated their restatements and published them in official filings at the same time they alerted the public to new numbers.

Crystallex's restatements almost surely will address the "mark to market" calculations of call options and other derivatives used to manage the sale of gold. Crystallex this year already has restated once

To be sure, large shareholders and some analysts are calling for the resignation of CEO Marc J. Oppenheimer, who has excellent relations with government figures in Caracas but no standing at all within the gold industry. Oppenheimer did not return my telephone calls this week.

"There is a people issue here," says Robert Bishop, the savvy mining analyst who believes the company will change hands at some point soon. "The market does not like Oppenheimer," says Bishop of Gold Mining Stock Report, who along with subscription service The Calandra Report still sees a far higher stock price for Crystallex shares in coming days, weeks and months.



Bishop expects investors "will be buying the stock at some point after it starts trading, whatever the restatement of the restatement turns out to be. The company is in play." See: Crystallex and The Calandra Report.

Some fund managers who own the stock expect new chief operating officer Ken Thomas to take over leadership of Crystallex, with Oppenheimer relegated to nurturing his relationships with Venezuela authorities. Thomas helped develop South American gold properties for Barrick Gold (ABX), among the world's largest bullion producers.

Others expect the company to anoint an investment banker to accelerate a corporate transaction. At Crystallex, company spokesman Richard Marshall said company executives were forthright in their dealings with regulators. "We told the Securities & Exchange Commission in April our financials would change, and after further review, we decided to restate,' Marshall told me this week.

John C. Doody, veteran analyst at Gold Stock Analyst, explained the company's mark-to-market loss on so-called hedges was $18 million at year-end 2002. Crystallex, says Doody, "has been operating under a black cloud for quite a while. Oppenheimer has zero credibility due to a history of misleading announcements, hiding the size of the hedge book until recently, missing public production forecasts by miles."



Doody told me this week he expects Glamis Gold (GLG), a mid-sized gold miner, to pay between $3 and $5 a share for Crystallex. In June, Bishop at Gold Mining Stock Report was first to report to The Calandra Report the sighting of CEO Oppenheimer at the Glamis shareholder meeting.

As for how much a hungry gold miner, eager for the 10 million or so proven and probable gold ounces of Las Cristinas, would pay for Crystallex, Doody notes that Placer Dome (PDG) just paid $100 per proven and probable ounce for a property in Tanzania. That property just began operating at $200-per ounce cash cost, with projected production of 220,000 ounces per year.

"Las Cristinas doesn't have a production facility, but its cash costs will be lower, so assume that's a wash," says Doody. Some 9.5 million ounces at $100 per ounce, divided by approximately 110 million fully diluted Crystallex shares, is $8.64 per Crystallex share. This will never fly unless there is an aggressive bidding war. Figure a 50 percent discount due to Venezuela and its (political) issues. Looks like $4.32 a share, plus or minus $1.

Doody predicts "shareholders will jump with joy. I see Glamis the buyer due its very richly valued paper."

Those who read The Calandra Report know exactly where I stand on the Crystallex story. It's a drama that won't end until the company changes hands, most likely before the New York Institutional Gold Conference set for early September in New York. The stock market is valuing an approximately 21-million-ounce Las Cristinas resource, some 9.5 million ounces of that considered a proven reserve, at roughly $6 an ounce.



Gold miners these days have few choices for such rich pickings in a vast resource. Potential projects of comparable scale are few and far between and include Bema Gold's (BGO) Kupol project in Russia, where early drill results are projecting astonishingly high levels of mineralization.

Crystallex International shares before they stopped trading were selling for $1.54 on the American Stock Exchange. When they resume, expect the shares within minutes or hours or at the most, a day or two, to trade higher.

For more, see Thom Calandra's StockWatch: Crystallex to see light of day