Crystallex KRY
December 31, 2003 - 6:11pm EST by
2003 2004
Price: 2.76 EPS
Shares Out. (in M): 0 P/E
Market Cap (in $M): 370 P/FCF
Net Debt (in $M): 0 EBIT 0 0

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Crystallex International Corporation (“Crystallex” or the “Company”) is a Canadian-based junior gold producer with operations in the Bolivar State of Venezuela and expected output of over 80,000 ounces of gold next year. It is sitting on rights to one of the largest proven gold reserves in the world, which hopefully doesn’t lead to Bre-X associations – just keep reading. This is a proposal to buy common stock in the Company at $2.75 per share with price targets starting from $4 to $6 per share even before putting your gold bug hats on and you could let your imagination tell you how high this stock could go. This is a simple case of the market miscalculating the investment risks, which will be discussed below. My firm currently has a long position in this security.
The Company currently has operating mines with less than 1 million ounces of proven and probable (P&P) reserves (confirmed by drill holes every 50 meters and third-party independent engineers) which have the capacity to produce up to 100,000 ounces per year. However, outside of paying the bills, this existing business is irrelevant. The real juice is in the Las Cristinas 4,5, 6, and 7 gold deposits. Based on a feasibility study (high confidence in P&P reserves and cost to extract) recently completed by SNC-Lavalin (very well regarded engineering company) these deposits contain 10.2 million P&P ounces of gold and have a total resource of almost 22 million ounces of gold. Resource estimate includes P&P, measured & indicated (drill holes every 100 meters), and inferred (not a lot of drilling). Based on existing data and management’s experience with other large-scale deposits, Las Cristinas is expected to be a 30 million ounce P&P reserve. Newmont Mining, the industry gorilla, has close to 90 million ounces of P&P reserves.
Management’s intention is to start construction on Las Cristinas by mid-2004 (concensus is will not break ground as an independent company) and production by the end of 2005 at a production rate of about 300,000 ounces per year of gold output and to quickly ramp it up to almost double that production (and much higher if owned by a major gold producer), based on the current 10 million P&P number. Assuming (i) a $325 per ounce price of gold (currently over $415), (ii) SNC-Lavalin’s estimates for capital and operating costs, (iii) no benefit from the extra 20 million ounce potential of the deposits, and (iv) fully equity financing, at current stock levels, the initial capital costs (upgrade from 300,000 ounce run-rate will be debt-financed) the NPV-10 for this asset is almost $4 per share (NPV-10 is more common amongst oil and gas assets and undiscounted NAV is what’s used for gold assets, but let’s be conservative). Alternatively, if we look at recent acquisitions, which have been occurring around and above $100 per P&P (some with feasibility studies, some without and certainly none with 3x P&P expected size) and are obviously very accretive to the larger acquirors trading at a huge premium to those acquisition values, and use the $100 number and throw in the other Crystallex operations for free, $6+ per fully-diluted share is what we get. Considering (i) the risks below are not realistic risks as will be explained, (ii) the project will not be fully-equity financed, (iii) people have been using much higher gold prices in determining feasibility of projects, and (iv) this is a big reserve with some big players out there looking for ways to grow or at least sustain their annual gold production levels, these price targets are very conservative.

Management Risk: Michael J. Oppenheimer was previously the CEO and currently remains on the board. He has a checkered past, which includes his time with the Company. He was touting the Las Cristinas deposits perhaps years before the Company had legal ownership of it. He was held responsible for the recent problems the Company had for accounting for its hedge book.
There would be reason for alarm, were Oppenheimer still running the show. However, over the last year the Company has hired a talented and well regarded management team with senior level experience at various intermediate and major publicly-traded gold producers. Namely, the New CEO, Todd Bruce was previously the CEO of $1+ billion market value IAMGOLD and has a strong track record and reputation. Also, the new COO, Ken Thomas, was part of senior management at $12+ billion market value Barrick Gold and has lead experience with discovering and developing two other world-class gold deposits. Prior to risking their reputation and the opportunity of this once in 20 years gold boom, they did significant due diligence on all aspects of Crystallex. Oppenheimer currently owns approximately 280,000 shares and warrants to purchase 2.3 million more. There are approximately 175 million fully-diluted shares outstanding.
The hedge book accounting issues relate to the Company’s existing production and not the Las Cristinas operations (will not be hedged) and will just lead to the restatement of non-cash line items relating to the almost fully wound-down hedge book. Gold is gold and its presence has been confirmed by accredited third-party engineers.

Ownership Risk: Previously, Placer Dome (“PDG”) was the 70% Las Cristinas partner with Corporacion Venezolana de Guayana (“CVG”), which is a state corporation chartered with the development of industry and mining in the Guyana region of Venezuela. After 10 years and $120 million in exploration costs invested by PDG, the CVG revoked PDG’s development rights due to its use it or lose it policy, of which it reminded PDG many times. PDG stalled for several years due to low gold prices and a difficult financing environment (thanks to Bre-X). It would have cost it almost $500 million to develop Las Cristinas (Crystallex is doing it for a lot less since it is developing a gold only mine and not gold/copper as was PDG’s plans and which Crystallex determined is cost-inefficient). Previous to PDG losing its rights to Las Cristinas in July 2001, it wrote-off its investment in the assets (2000), offered to turnover the project to CVG for a royalty participation (April 2001), and then held an auction to sell its interest, which it sold to Vanessa Ventures (for very little; Vanessa currently has a $35 million market value). After discussions with a number of gold producers, the government-entity, CVG, granted 100% development rights for 40 years to Crystallex in 2002. The CVG appreciated the Company’s mining experience in Venezuela and its need to focus on this reserve, since it had no other significant ones.
Vanessa Ventures has an ongoing lawsuit claiming 70% ownership of Las Cristinas. From the (i)facts, (ii) piggy-backing the due diligence of new management, (iii) other major gold producers bidding for the business last year, and (iv) permission granted to the Company to break-ground and start production as soon as possible, this is nothing more than regular every day business noise which every company has. In fact, previously Crystallex acquired rights from someone else claiming ownership of Las Cristinas preceding the CVG and Placer Dome’s involvement and had a lawsuit hanging out there for a number of years. Were Oppenheimer not involved, the insignificance of this would be better appreciated by the market.

Geo-Political Risk: There has been a lot of instability in Venezuela. However, mining is an essential industry to Venezuela and in fact has gone uninterrupted during all this political turbulence. There are a number of foreign gold and other mining companies that have been operating in Venezuela for a number of years without any problems. They continue to invest in new projects and lenders are still providing the project finance through the current environment.

Financing Risk: Management intends to fully-fund Las Cristinas by the coming summer. The above valuation assumes 100% equity-financing at current stock levels through the initial capital requirements, but the Company has been in discussions with Deutsche Bank about more cost-efficient financings. There is appetite for 40% project finance in South American mining projects with nominal requirements for selling production forward. So unless gold falls $100 bucks per ounce within the next six months, funding this project is not a risk.


- Acquisition
- Breaking-Ground
- Initial Production
- Oppenheimer squeezed out
- Closure on lawsuit
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