For the past couple weeks, Jim Cramer’s been talking up the stock of the Canadian mining company Crystallex International Corporation (AMEX:KRY) on his radio and TV shows. The thesis on this company is based around Las Cristinas, a gold mine in Venezuela owned but not yet mined by the company. But that situation should change soon as all but one of the Venezuelan government agencies required have granted permission for Crystallex to tap the mine.

The last of these permits is expected soon. An active gold mine would bring many jobs to the country, which is starving for employment.

Why should we care about Las Cristinas and Crystallex? Because the current evaluation does not price in the full potential of the mine, one of the largest untapped gold mines in the world. Gold demand and gold prices are rising steeply and if the Las Cristinas mine comes online for Crystallex, they stand to make a lot of money. Cramer’s estimation is that the stock’s price should be somewhere between $12-$15 assuming the mine works out.

So I have to admit. I’ve bitten on this one. Cramer’s argument is sound. I’m a casual follower of the Mad Money television show and Real Money radio show, and I’ve never seen or heard Jim back a stock trade so emphatically.

It’s hard to trade on Cramer’s recommendations. A stock is likely to raise 25% or more the day after he backs it on Mad Money. It seems his radio show still has a slightly smaller following; so you’d have better luck listening there if you are keen to buy on his recommendations right away.

I’d like to say that I got in on the trade before Jim’s monologue on Mad Money April 6th, after which the stock jumped over $1 in after-hours trading, but I didn’t. That’s okay I thought: $5.50 is still far below the $12 we can expect this stock to rise too. Still, I like to buy on a pull back. So I took a look at the chart for KRY to see how it’s been trading in the past hoping to get some idea of how low it might pull back after Jim’s plug (using my own gut-based technical analysis). Well, no luck there. The stock’s six-month chart is as steady an incline as I’ve ever seen. This stock doesn’t have pull backs.

After some deliberation, I decided to throw my money in at $5.55. I bought just 75 shares, hoping to buy another 75 if there was a major pull back. Since I’ve bought the stock it’s climbed over $6, and then did have a pull back to under $5.30 which I missed (hard to day trade at work). Currently, it’s just shy of $6 at $5.91.

But wait you say, I thought this stock didn’t have pull backs. Well that was then and this is now. With the full attention of the press and the casual market, this stock has a different investor base than it did before. You can expect to see a typical jagged rise as this stock climbs to the expected $10+ region. When the Las Cristinas deal is signed off on, you’ll see another large jump. But, heaven forbid, if the deal is blocked or President Chavez decides to nationalize the mine, we could be looking at a $3 stock again.

So it’s a bit of a gamble, but the story is good. While we wish we all got in when Cramer mentioned the stock on his Real Money radio show (1 day and over $1 before he featured the trade on Mad Money) or even better yet gotten in on the deal back in January, we shouldn’t pass up a possible double or triple just because the stock is already on the up and up.

Cumulative totals for key operating items for Crystallex for years ending Dec. 31, 2003 thru 2005 are:
Net losses: $ (167,347,481)
Property write-downs: $ (49,509,590)
Mining revenue: $56,564,778
Operating expenses: $ 64,356,954
General & Administrative: $54,059,228
Cash flow from operations $ (104,724,603)
Shareholders’ deficit: $(215,467,693)
Even if Crystallex realizes a best case operating scenario going forward, it appears that it could take several years just to recoup all the operating losses.
In the most recently completed financing that Crystallex reportedly closed February 1, 2006, 10,799,000 shares and 16,330,000 warrants were issued and $31,317,100 was reportedly paid for these shares and options. The share price in this offering is $2.90, if no warrants are exercised, or $3.86 if all warrants are exercised. The exercise price to purchase shares for these warrant holders is $4.50, and Crystallex is now trading above $5.00 thanks to Cramer, so the warrants are in the money. So one could surmise that all the warrants may begin to be exercised beginning the later of: (i) 61 days from the closing date of the private placement (Feb. 1, 2006); and (ii) 45 days following the receipt of the permit for the corporation’s Las Cristinas Project in Venezuela (received on March 26, 2006). Therefore, these warrant holders will be able to start exercising around May 10, 2006. That means there will be a potential 16,330,000 shares that could hit the market at that time for sale. Still think it is a good buy? One final fact, and it is one that the Las Cristinas Project is in Venezuela, and that makes the future prospects somewhat unpredictable for rather obvious reasons. The end.

Crystallex (AMEX:KRY) released theirYear End Results yesterday. It’s pretty dense. Some of the more interesting numbers:

2005 Revenues: $25 Million

2005 Total Recovered Ounces (of gold): 53,178

“Average annual production over the mine’s life was estimated to be 504,000…”

The math here is more complicated than I’m making it out to be. But you can see that when Las Cristinas goes online, Crstyallex will be mining roughly 10x the amount of gold they are today. Ignoring differences mining costs, you could assume that their revenues would also multiple by 10: $250 Million per year.

Here’s another simplified calculation. Estimate reserves in Las Cristinas = 13.6 Million ounces of gold. The estimated cost to retrieve that gold (including royalties) is $228. Assuming a sell price of $400, that sets the value of the mine at roughly $2.4 Billion… or about twice their current market share.

The math above is simplified, but I believe there is enough margin for error in there to still make the stock a buy.

I do want to look into the options stuff you are referencing; it’s a bit disconcerting. I’ll be the first person to say that this investment is a gamble.

Jason is wrong in saying Chavez may nationalize the mine, that occured in 2002. KRY has a operating contract that was reviewed and re-ratified on March 26th.

Robumic is wrong as well as there has been no permit issued, the other key to the private placement is that it was one Investor not a bunch of investors as is normally the case, so to suggest 16 million shares will hit the market all at once is a poor anology, especially if you do your research on the intentions of the investor. Do your homework boys!!

KRY is a BUY BUY BUY

Any word on the permit? What are the chances this permit might be obtained before June 16th? I recall Kramer mentioning he thought it would happen in the first week of June…

Comments are closed.