Polyus takeover rumour for Crystallex and Gold Reserve looks unfounded

Was the story in the Canadian press last week that Polyus Gold of Russia was interested in acquiring Crystallex's and Gold Reserve's Venezuelan gold assets just a ploy to try and boost the two companies share prices?

Reports that began circulating last week in North America that Venezuelan assets claimed by Vancouver-listed Crystallex are a takeover target of Russia's leading gold miner Polyus staunched the steady decline of Crystallex's share price since December. Over the past 52 weeks, Crystallex has traded between a high, in April of 2006, of $6.25, and a low of $1.95, registered last June. Last week's news report gave the share price a 17% boost on the day, but it has since lost half that value; at a current price of $2.97 the price trajectory has resumed falling.

It appears though that the reported Russian takeover has no substance whatsoever. Crystallex said through Richard Marshall, Vice President of Investor Relations, that his company "does not comment on rumours and has nothing to report." In Moscow Polyus's spokesman Denis Davidov went further, suggesting to Mineweb that it is often the target of media plants intended to raise someone else's share price.

The North American media claims also included the report that Polyus had engaged a unit of the Bank of Montreal (BMO) -- either BMO Nesbitt Burns or BMO Capital Markets -- to advise on possible foreign gold asset acquisitions. The implication was that the BMO advisors may have been mediating between Polyus and Crystallex.

Another target, Gold Reserve, also with Venezuelan gold mining ambitions and with a common lack of mining authority, was also reported as a Polyus target. It too experienced a brief share price surge, up 11% on March 12. It has been trading over the past year between $9.75 last April and $3.33 this January. When the week's dust settled, Gold Reserve was down to $4.21 yesterday.

The claim that BMO was linked to Polyus made the two Canadian shares more valuable, if only for a day. BMO's chief investment banking executive, Yvan Bourdeau, was asked to clarify whether BMO, or any of its divisions or units, has been engaged by Polyus Gold for any purpose.

Ralph Marranca, a BMO spokesman, responded, telling Mineweb: "I don't think I can help you at this juncture. We have a longstanding policy that we do not disclose who our clients are nor the nature of our relationship with our clients. We do this out of respect for client confidentiality."

"I wouldn't put it past Crystallex's supporters," a North American mining expert told Mineweb. According to the last financial report issued by Crystallex, for the third quarter of 2006, the company is currently being sued "by an individual alleging misrepresentation, conspiracy and breach of contract". The damages claimed amount to C$1.75 million. No details are provided in the company report. The Canadian business and mining media appear to have missed the allegations of misrepresentation entirely.

In Venezuela, Crystallex has been waiting for almost three years now to receive the permits required to start mining the Las Cristinas deposit. There drilling indicates proven and probable gold reserves of about 13.6 million troy ounces. Gold Reserve has access and development rights to the Las Brisas deposit nearby; it is claiming 10.1 million oz of gold and 1.29 billion pounds of copper in comparably estimated reserves.

On March 6, one week before the rumour appeared, Crystallex CEO, Gordon Thompson, admitted in an interview before the share price lifted on the Polyus report, that the company is still legally prevented from mining.

Thompson said the mining authorization is "closer than we've ever been before. We're at the final step in the Venezuelan process, getting the environmental permit. The ministry of the environment came back to us about two months ago with seven areas they wanted us to deal with. And we've adequately dealt with those. It's our feeling that it should be here fairly soon. There's nothing in the way of it happening."

Anyone who may have been advising Thompson on what to say would have been disappointed at the market reaction. Crystallex's share price had been recovering from a 10-day long fall in February before Thompson spoke. But after his message had sunk in, the price recovery aborted, and the value started downwards once more. The fresh loss of confidence in Crystallex cost $137 million in market capitalization. The newspaper leak appeared immediately afterwards. It added $115 million.

"I think we have the greatest shareholders in the world," Thompson had been saying on March 6 -- "the most patient shareholders in the world. It's taken almost three years to get to the point we're at now. So shareholders are anxious because they want to hear news, they want to know the permit is there."

On March 12 Crystallex shareholders were told that Russian gold miner Polyus might either take the asset off their hands at a premium; or pay the money required to secure their permit. The Canadian stock market regulator smelled a rat, and Crystallex was obliged to issue this disclaimer on March 13:

"At the request of Market Regulation Services Inc., on behalf of the Toronto Stock Exchange, Crystallex International Corporation is making the following statement concerning the increase in its stock price and trading volume which may have been influenced by recent speculation in the press concerning the possibility of Crystallex being the target of an unsolicited takeover bid: 'As a matter of Corporate Policy, Crystallex does not comment on rumours or speculation. There are currently no corporate developments concerning Crystallex of which management of the Company is aware and the Company has no announcements to make at this time."

Why would planting a rumour that BMO was advising a Russian takeover of Las Cristinas and Las Brisas persuade Crystallex or Gold Reserve shareholders that their scrip had any value?

The last Crystallex financial report refers to its principal bank lender as Standard Bank. The data released indicate also that a bank loan to Crystallex of $12.8 million as of 2005 was paid down to $3.5 million the following year. Standard Bank, according to the Crystallex report, was paid $4 million cash in two tranches, after two private share placements were made in February and August 2006. The timing of those share sales was unfortunate, at least for Crystallex, as its shares were trading at relative lows in both months; price spikes, driven by purported news from Venezuela, occurred later.

Crystallex also reports that in May of 2006, Standard Bank "elected to convert into common shares the $7.5 million principal amount of the loan". This transaction gave the bank 3.8 million shares; that is, less than 0.2% of the total share issue. Accounting for some extras, the share price at which Standard received its scrip was equivalent to $2. Two months earlier, according to Crystallex's report, it cleared an obligation to the Vengroup of Venezuela by issuing shares at an equivalent of $2.90. According to Bloomberg data, between March and June of 2006, Crystallex's shares were trading on the market between $3 and $4.

Total debt of the company is currently $85 million. Revenues reported for the nine months to September 30, 2006, were $22 million, based on the production of 36,600 oz of gold from the Tomi mine concession in southeastern Venezuela. A net loss reported for the period (unaudited) was $10.3 million. The company reports investing $36 million in the Las Cristinas project in the nine-month period of 2006; $74 million in the same period of 2005.

There is a reference in the company's 3Q report to a financial advisor, but no identity is disclosed. The only bank identified in the report is Standard Bank.

If a public and investor relations firm were involved in this month's rumour-mongering, no engagement with one is identifiable from Crystallex's published releases. The promotional literature that has appeared in the North American media has suggested that Venezuela has been in arms trade with Russia, buying helicopters and other weapons. A possible political motive, attributed in print by the share price boosters to the Polyus rumour, is that the sale of the company gold mine assets prior to the issuance of the permits - a risk that most other companies would not take - could be a way for Venezuela to pay back Russia for the arms.

Only an effort to boost Crystallex's share price could suggest such unsubstantiated nonsense. In Moscow, the Canadian rumour was either ignored by brokers, or treated sceptically. Vladimir Katunin of Aton told Mineweb: " Personally, I think this deal would be rather strange. I don't understand why Polyus needs an asset in Venezuela when it has a lot of its own assets, which require additional investment and are hungry for cash? Also, I don't believe that Polyus will be able to avoid the political risks Crystallex has run into 'because of the good relations of Russia and Venezuela'."

Katunin added that if Polyus expands outside Russia it "will go somewhere in the CIS countries - Kyrgizstan, Kazakhstan, etc." There is evidence, as Mineweb has reported, of attempts by Polyus chief executive Yevgeny Ivanov and owner Mikhail Prokhorov to try to reverse their stock into a major Canadian miner, like Kinross. But these negotiations failed because of a substantial disagreement over the valuation of Polyus.

Ivanov's acquisition tactics have included paying premiums for gold assets, but only within Russia. For Ivanov to attack cross-border assets would require minimal capital investment for a rapid turnover of the asset to another buyer -- at a substantial profit to Polyus. Crystallex and Gold Reserve cannot meet those criteria.

But this is not the first time that Canadian shares, based on Venezuelan gold assets, have been promoted by an alleged Kremlin connection. Last October and November, during the flotation of Vancouver-listed Rusoro Mining, a Canadian group called Vanguard Shareholder Solutions, also based in Vancouver, inspired several apparently independent research reports, each of which claimed that Russia's growing relationship with Venezuela's government would benefit Rusoro's business. The most recent of these promotions, issued on March 1, repeated the claim that the Russian stakeholders in Rusoro are "politically connected in Moscow", and that Venezuelan President Hugo Chavez "has special relationship with Russia's President Putin".

Two of the Russians connected to Rusoro, Andrei Agapov and Dmitry Ushakov, told Mineweb they had social acquaintance with Prokhorov. That was as close as they got to the Kremlin -- and it's a very long way. Polyus also told Mineweb it had nothing whatever to do with Rusoro. Vanguard has refused to say if it had any link to Crystallex.

Rusoro listed on the TSX Venture board in Vancouver on November 9. From a pre-listing share price of less than one Canadian dollar, it jumped to a high of C$4.50, and has since fallen to a low of C$3.25. Current price is C$3.40.

Rusoro and Vanguard disclosures indicate that Vanguard was engaged by Rusoro for a combination of a monthly cash retainer and stock options