CRYSTALLEX
INTERNATIONAL CORPORATION
Management’s
Discussion and Analysis
For
the Nine Month Period Ended September 30, 2008
(All
dollar amounts in US dollars, unless otherwise stated)
This
Management Discussion and Analysis (“MD&A”) of the financial condition and
results of the operations of Crystallex International Corporation (“Crystallex”
or the “Company”) is intended to supplement and complement the Company’s
unaudited interim consolidated financial statements and the related notes
covering the nine month period ended September 30, 2008. This
MD&A should be read in conjunction with those unaudited interim consolidated
financial statements as well as the annual audited consolidated financial
statements of the Company and the related annual MD&A for the year ended
December 31, 2007.
The
Company prepares its consolidated financial statements in U.S. dollars and in
accordance with Canadian Generally Accepted Accounting Principles. All dollar
amounts in this MD&A are in U.S. dollars unless otherwise
specified.
This
MD&A was prepared on November 12, 2008 and the Company’s public filings,
including its 2007 Annual Information Form, are available on
SEDAR at
www.sedar.com
Special
Note Regarding Forward Looking Statements
Certain
statements included or incorporated by reference in this Management Discussion
and Analysis, including information as to the future financial or operating
performance of the Company, its subsidiaries and its projects, constitute
forward-looking statements. The words “believe,” “expect,” “anticipate,”
“contemplate,” “target,” “plan,” “intends,” “continue,” “budget,” “estimate,”
“may,” “schedule” and similar expressions identify forward-looking
statements. Forward-looking statements include, among other things,
statements regarding targets, estimates and assumptions in respect of gold
production and prices, operating costs, results and capital expenditures,
mineral reserves and mineral resources and anticipated grades and recovery
rates. Forward-looking statements are necessarily based upon a number
of estimates and assumptions that, while considered reasonable by the Company,
are inherently subject to significant business, economic, competitive, political
and social uncertainties and contingencies. Many factors could cause
the Company’s actual results to differ materially from those expressed or
implied in any forward-looking statements made by, or on behalf of, the
Company. Such factors include, among others, risks relating to
additional funding requirements, reserve and resource estimates, gold prices,
exploration, development and operating risks, illegal miners, political and
foreign risk, uninsurable risks, competition, limited mining operations,
production risks, environmental regulation and liability, government regulation,
currency fluctuations, recent losses and write-downs and dependence on key
employees. See “Risk Factors” section of this Management Discussion
and Analysis. Due to risks and uncertainties, including the risks and
uncertainties identified above, actual events may differ materially from current
expectations. Investors are cautioned that forward-looking statements are not
guarantees of future performance and, accordingly, investors are cautioned not
to put undue reliance on forward-looking statements due to the inherent
uncertainty therein. Forward-looking statements are made as of the
date of this Management Discussion and Analysis and the Company disclaims any
intent or obligation to update publicly such forward-looking statements, whether
as a result of new information, future events or results or
otherwise.
Overview
The
Company’s principal asset is its interest in the Las Cristinas gold project
located in Sifontes, Bolivar State, Venezuela. On October 1, 2008, the Revemin
mill reverted to the State of Venezuela and the Company discontinued mining
operations at its El Callao properties.
Highlights
Las
Cristinas Permitting Events
Below
is a chronology over the last year and a half of the recent significant steps
that have been taken to secure the Permit:
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—
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In
June 2007, the Corporacion Venezolana de Guayana (“CVG”) was formally
notified by the Ministry of Environment and Natural Resources (“MinAmb”)
that all requirements had been fulfilled for the issuance of the
Authorization to Affect Natural Resources (the “Permit”) which will enable
construction of the mine to begin. MinAmb approved the EIS for the Las
Cristinas gold project, and requested the CVG post a construction
compliance guarantee bond and pay certain environmental taxes. Crystallex
posted the requested bond and paid the requested taxes. No impediments
were raised in discussions with Government officials at that time; they
subsequently confirmed that the Company was in good standing for the
issuance of the Permit.
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—
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In
early 2008, Mr. Rodolfo Sanz was appointed Minister of the Ministry of
Basic Industries and Mining (“MIBAM”) and President of the CVG, both
titles giving him direct responsibility for the Las Cristinas project.
Crystallex officials have met with the Minister on an ongoing
basis.
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—
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On
April 30, 2008, the Director General of the Administrative Office of
Permits at MinAmb issued a letter to the
CVG denying its
request for the Permit for the Las Cristinas project.
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—
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On
May 12, 2008, the Company filed a legal rebuttal to the position taken by
the Director General of Permits at MinAmb.
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—
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Crystallex
argued that the position taken by the Director General, which led to the
existing appeal against the Minister of MinAmb, is in conflict with the
Las Cristinas EIS approval, the Construction Compliance Guarantee Bond
request and Environmental Tax request already issued by MinAmb. Both the
posting of the Bond and payment of the requested Tax were satisfied in
2007 and Crystallex obtained receipt of acceptance. In addition, the
Company has said that the Ministry’s position appears to contradict normal
mineral mining practices in the Imataca Forest Region and does not conform
to the treatment of either current and/or historic projects. In addition,
Crystallex believes that the position of this official and statements made
by the Minister of MinAmb contradict Presidential Decrees, National
Assembly Resolutions, MinAmb Resolutions and MIBAM
Resolutions.
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—
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On
May 30, 2008, the Director General denied the legal rebuttal and advised
the Company of its rights under Venezuelan law to appeal directly to the
Minister of MinAmb.
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—
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On
June 4, 2008, the Company appeared by invitation at a public hearing of
the Economic Development Committee of the Venezuelan National Assembly
(the “National Assembly Committee”). At the hearing, Crystallex gave a
presentation addressing plans for mining at Las Cristinas. The
presentation included the Company’s plan for remediation and dealing with
the environmental issues at the project and its planned social projects
for the local communities such as employment and training projects. Senior
representatives of MIBAM who appeared before the Committee hearings
supported the position presented by Crystallex.
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—
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The
resolution issued by the National Assembly Committee states that the Las
Cristinas project has been in development for a significant period of time
with the support of several different branches of the Government. The
resolution further noted that there was a lack of coordination between the
various Government branches, and called for a positive solution which
should consider the macroeconomic policies and goals of Venezuela, as well
as the social needs of the people and the pre-existing environmental
damage at Las Cristinas.
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—
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On
June 16, 2008, the Company filed an appeal with the Minister of
MinAmb. The Minister is obligated to issue a decision on the
matter under Venezuelan law. Notwithstanding this obligation,
if the Minister has not issued a decision on the appeal within 90 business
days of the filing of the appeal, the Company can elect to take
a position in order to avail itself of
additional
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procedural
avenues under Venezuelan law deeming that the appeal has been
denied. Any such election by the Company does not relieve the
Minister of her obligation to issue a decision with respect to the
appeal.
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—
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On
June 18, 2008, the Company was invited by the Vice-Minister of MinAmb to a
meeting during which Crystallex was informed that MinAmb was instructed by
the Government of Venezuela to reconsider issuance of the Permit by
discussing with Crystallex possible modifications of the Las Cristinas
project to diminish the environmental impacts of the project and thus
enable the Permit to be issued.
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—
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On
August 4, 2008, the Company filed with MinAmb a report which dealt with
the MinAmb requests for (i) further improvements to the social projects in
the area, (ii) mitigating the impact of open vein deposit mining in the
currently affected areas of the Imataca Forest Reserve, and (iii)
improving the remediation plans at the end of the mine life as well as
repairing existing environmental damage caused by illegal
mining.
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—
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On
August 8, 2008, as part of the ongoing process regarding the issuance of
the Permit, a team from MinAmb led by the Vice-Minister of MinAmb
concluded a two-day site visit of the Las Cristinas
project.
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—
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On
August 20, 2008 the Vice-Minister of MinAmb issued an official letter
which indicated that, upon technical evaluation by MinAmb, the August 4,
2008 submission complied with government guidelines on environmental and
social matters and is technically viable. The letter noted that the
foregoing conclusions should be considered by the Minister in rendering
her decision on the Permit.
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—
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On
October 24, 2008, the Company filed a writ with MinAmb as a supplement to
the Company’s appeal requesting the Minister to take the Vice-Minister’s
August 20, 2008 letter into
consideration.
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Company’s
Approach to the Las Cristinas Permit
Except
for the Director General’s letters of April 30 and May 30, 2008, the Company has
received express and implicit confirmation of the Company’s rights and the
acceptability of performance from Venezuelan authorities with whom it interacts.
The Company believes that the Director General’s actions are ultra vires, and
subsequent proposals to address concerns have been formally met with a
favourable written response. Accordingly, it has been the judgement of the
Company that it is in its best interests to fulfil its obligations entirely and
to continue to pursue final permitting rights for Las Cristinas and incur the
consequential expenditures resulting from this pursuit.
In
particular, the Company’s pursuit of the Permit has been further supported by
ongoing discussions with representatives of MIBAM and the CVG, the Vice-Minister
of MinAmb’s approval of the project modifications submitted in August 2008 and
continuing support for the development of Las Cristinas from the Economic
Development Committee of the Venezuelan National Assembly and from the local
communities, as well as confirmation of Mine Operating Contract (“MOC”)
compliance from both the CVG and MIBAM. The Company has not been
notified by MIBAM or any other government entity of any changes to the control
of the Las Cristinas project or to the MOC.
As
noted, the Minister of MinAmb is obligated to issue a decision on the Company’s
permit appeal; however, if no decision is issued within 90 business days, (or by
October 30, 2008), Venezuelan law allows the Company to elect to deem the appeal
as being denied in order to avail itself of additional legal
avenues. The Company is taking the necessary steps to protect its
shareholder and stakeholder rights, including the preservation of rights to
pursue further legal avenues both inside and outside of Venezuela.
Liquidity
and Capital Resources
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—
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Cash
and cash equivalents at September 30, 2008 were $44.6
million.
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—
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Assuming
expenditures at approximately the reduced rate following cost reductions
in the first three quarters of 2008, the Company forecasts that it will
have cash to fund its operations until the fourth quarter of 2009 (see
“Liquidity and Capital
Resources”).
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Financial
Performance
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—
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Loss
from continuing operations was $25.3 million ($0.09 per share) including
$2.9 million of unrealized foreign exchange loss for the nine months ended
September 30, 2008. Loss from continuing operations was $1.6 million
($0.01 per share) including $5.8 million of unrealized foreign exchange
gain for the three months ended September 30, 2008.
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—
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Loss
from discontinued operations at El Callao was $3.5 million and $6.0
million for nine months and three months ended September 30, 2008,
respectively.
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—
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Expenditures
were $17.0 million and $4.3 million on Las Cristinas for the nine months
and three months ended September 30, 2008,
respectively.
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Discontinued
operations
At the
end of September 2008, the Company ceased mining at the Tomi and La Victoria
mines due to the handover of the Revemin mill to Minerven, a Venezuelan
State-owned company, which was effective October 1, 2008. Subsequent
to October 1, 2008, the entire mill operating employees at Revemin and some of
the mining employees accepted offers of employment with Minerven. The Company
paid Minerven compensation for all severance costs relating to those employees
who were assumed by Minerven and is in the process of terminating most of the
remaining mining employees. The Company is also in discussions with Minerven
regarding the return of the Tomi and La Victoria properties to the State and
finalizing mine closure obligations.
Summary
of Quarterly Results (Unaudited)
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$,000
except per share
|
2008
|
2007
|
|
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Q3
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Q2
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Q1
|
Q4
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|
Revenue
(discontinued operations)
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$3,287
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$5,233
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$5,901
|
$4,809
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Loss
from continuing operations
|
$(1,613)
|
$(10,210)
|
$(13,441)
|
$(9,169)
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(Loss)
income from discontinued operations
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(5,960)
|
215
|
2,239
|
382
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Net
loss
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$(7,573)
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$(9,995)
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$(11,202)
|
$(8,787)
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Loss
per share from continuing operations – Basic and diluted
|
$(0.01)
|
$(0.03)
|
$(0.05)
|
$(0.03)
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Loss
per share – Basic and diluted
|
$(0.03)
|
$(0.03)
|
$(0.04)
|
$(0.03)
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|
$,000
except per share
|
2007
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2006
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|
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Q3
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Q2
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Q1
|
Q4
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Revenue
(discontinued operations)
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$2,188
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$2,848
|
$3,720
|
$5,720
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(Loss)
income from continuing operations
|
$(4,957)
|
$(8,997)
|
$893
|
($9,160)
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Loss
from discontinued operations
|
(1,765)
|
(3,126)
|
(3,712)
|
(2,457)
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|
Net
loss
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$(6,722)
|
$(12,123)
|
$(2,819)
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($11,617)
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|
(Loss)
income per share from continuing operations – Basic and
diluted
|
$(0.02)
|
$(0.03)
|
$0.00
|
$(0.03)
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|
Loss
per share – Basic and diluted
|
$(0.03)
|
$(0.05)
|
$(0.01)
|
$(0.04)
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Financial
Results Overview
Continuing
operations
The
Company recorded losses from continuing operations for the first nine months and
third quarter of 2008 of $25.3 million,(($0.09) per share) and $1.6 million
(($0.01) per share) respectively, compared to losses of $13.1 million (($0.06)
per share) and $5.0 million (($0.02) per share) for the comparable periods in
2007. The losses in the first nine months and third quarter of 2008 are
principally attributable to the aggregate of corporate general and
administrative costs, interest expense, and the effects of foreign exchange on
the translation of future income tax liabilities.
The
increase in the loss from continuing operations for the first nine months of
2008 compared to the first nine months in 2007 is due primarily to recording a
foreign currency loss of $7.4 million in 2008 compared to a foreign currency
gain of $12.0 million in 2007. These amounts include an unrealized foreign
currency translation loss of $3.4 million in 2008 compared to an unrealized gain
of $13.4 million in 2007 as a result of translation of future income tax
liabilities in the Venezuelan Branch. The increased exchange loss was offset in
part by a $6.0 million reduction in general and administrative expenses (2008:
$10.5 million vs 2007: $16.5 million) and a 2008 gain on sale of equipment of
$1.8 million. The decrease in the net loss in Q3 2008 compared to Q3 2007 is due
primarily to a reduction in general and administrative expenses, and an increase
in unrealized foreign exchange gain relating to the translation future income
tax liabilities.
Cash
flow used in operating activities was a deficit of $25.6 million for the nine
months of 2008 compared to a deficit of $24.1 million for the comparable period
in 2007. The cash flow deficit incurred in the first nine months of
2008 was largely attributable to $10.5 million of corporate general and
administrative expenses and cash interest payments of $9.4
million. Cash flow from operations for Q3 2008 was a deficit of $10.3
million and similarly, principally reflects cash payments for interest and
general and administrative expenses.
The
Company’s cash position at September 30, 2008 decreased to $44.6 million from
$61.5 million at June 30, 2008. Capital expenditures for Las Cristinas were
$17.0 million for the first nine months of 2008 compared to $21.4 million for
the comparable period in 2007 reflecting reduced expenditures as the Company
awaits the decision on the Permit.
Discontinued
operations – El Callao
The
Corporation’s El Callao operations in Bolivar State, Venezuela included the
following:
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·
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Tomi operations
– mined
ore from a number of open-pit mines and one underground mine, which was
delivered to the Revemin mill for processing.
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·
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La Victoria operations
–
mined ore from the La Victoria open-pit mine, which was delivered to the
Revemin mill for processing.
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·
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Revemin mill
– processed
ore from the Tomi and La Victoria operations.
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At the
end of September 2008, the Company ceased mining operations at El Callao due to
the handover of the Revemin mill to the State of Venezuela on October 1, 2008.
Subsequent to the handover of the mill to Minerven, a State mining company, the
entire mill operating employees at Revemin and some of the mining employees
accepted employment with Minerven. The Company paid Minerven compensation for
all severance costs relating to those employees who were assumed by Minerven and
is in the process of terminating most of the remaining employees. The
Company is also in discussions with Minerven regarding the return of the Tomi
and La Victoria properties to the State and finalizing mine closure
obligations.
El
Callao Operating Statistics
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Three
months ended September
30,
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Nine
months ended September
30,
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|
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2008
|
2007
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2008
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2007
|
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Mining
revenues
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$3,287
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$2,188
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$14,421
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$8,756
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Expenses
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(9,247)
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(3,953)
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(17,927)
|
(17,359)
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Loss
from operations
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$(5,960)
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$(1,765)
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$(3,506)
|
$(8,603)
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Gold
production (ounces)
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Tomi
Open Pits
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2,333
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1,712
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6,530
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6,422
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Tomi
Underground
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11
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2,812
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3,856
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10,445
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La
Victoria
|
1,188
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1,881
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6,488
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5,836
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Purchased
Material
|
246
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283
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1,011
|
2,083
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Total
gold production (ounces)
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3,778
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6,688
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17,885
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24,786
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Gold
sold (ounces)
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4,792
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6,430
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19,677
|
23,611
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Average
realized gold price
|
$686
|
$340
|
$733
|
$371
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Average
spot gold price
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$870
|
$668
|
$897
|
$666
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Mining
revenue was $14.4 million and $3.3 million for the first nine months and third
quarter of 2008 respectively, compared to $8.8 million and $2.2 million for the
corresponding periods in 2007. Gold sales were 19,677 ounces and 4,792 ounces
for the first nine months and third quarter of 2008 respectively, compared to
23,611 ounces and 6,430 ounces for the corresponding periods in
2007.
Although
the Company sold fewer ounces of gold in the first nine months of 2008, as
compared to 2007, revenue was significantly higher in 2008 due to higher spot
gold prices and receiving Bs from gold sales at a rate materially higher than
the official rate (for the first nine months of 2007 gold sales to the Central
Bank of Venezuela were paid in Bs at the official rate). The realized
price more than offset the reduction in ounces sold and higher operating
costs.
The
lower production and increased expenses in 2008 were due to declining ore
grades, lower recovery and/or depletion of reserves at the Tomi and La Victoria
mines.
Income
Statement – Continuing Operations
Corporate
General and Administrative Expenses
Corporate
general and administrative expenses were $10.5 million and $3.3 million for the
first nine months and third quarter of 2008 respectively, compared to $16.5
million and $4.4 million for the corresponding periods in 2007. Higher
expenditures in 2007 reflect increased legal and advisory costs as the Company
came close to obtaining the Permit and then experienced delays from MinAmb which
resulted in additional legal expenses. General and administrative expenses
include stock-based compensation charges of $0.4 million for the first nine
months of 2008 compared to $2.1 million in 2007; the reduction was attributable
to no stock option grants in 2008 (the first nine months of 2007 includes option
grants to three new members of senior management), and no further option grants
being allowed as at the date of the Annual General Meeting held on June 25,
2008. The Company has planned a Special Meeting of Shareholders on November 18,
2008 to request approval of a new stock option plan in order to overcome the
limitation of the Company to grant further options under the previous stock
option plan.
Interest
Expense
Interest
on debt was $9.6 million and $3.2 million for the first nine months and third
quarter of 2008 respectively, compared to $9.5 million and $3.1 million for the
corresponding periods in 2007. The nine month figures include cash interest
payments of $9.4 million on the $100 million notes which bear interest at 9.375%
per annum, payable semi-annually in January and July and amounts for interest
accretion as the notes contain debt and equity components.
Foreign
Exchange Loss/Gain
In
addition to the unrealized foreign exchange gains and losses on translation of
future income tax liabilities described earlier, the foreign exchange results
include an unrealized gain of $0.5 million and a loss of $0.7 million for the
first nine months and third quarter of 2008 respectively, compared to unrealized
losses of $3.5 million and $1.2 million for the corresponding periods in
2007.
These
amounts were derived from the translation into U.S. dollars at the end of each
respective period of certain Venezuelan denominated assets and
liabilities.
Liquidity
and Capital Resources
Crystallex’s
principal sources of liquidity have been equity and debt financings. The Company
does not expect to generate positive cash flow after operating and corporate
general and administrative expenses until the Las Cristinas project is operating
at planned full capacity of 20,000 tonnes per day.
Once
the Company is in a position to commence development activities at Las
Cristinas, it will determine its overall funding requirements to cover the
period through to commercial production of Las Cristinas. The funding
requirement will include the balance of capital required to complete the
development of Las Cristinas, and funds to meet the Company’s general and
administrative expenses, debt service and financing fees. The Company intends to
fund its overall requirement with existing cash and is considering various
financing alternatives to supplement these funds including public market debt,
limited recourse project debt and equity.
The
Company is taking all prudent steps to protect its shareholder and stakeholder
rights and value, including the continued compliance with the obligations under
the MOC, as well as the preservation of rights to pursue further legal avenues
both inside and outside of Venezuela. The Company is in the process
of obtaining legal advice and considering the options available to it, in light
of the ongoing lack of a decision from the Minister of MinAmb in respect of the
Company’s administrative proceeding concerning the Permit. To date,
the Company has complied with the MOC. Maintaining compliance with
the MOC requires completing projects and maintaining security thus obligating
the Company to a minimum level of activities and expenditures related to the Las
Cristinas project.
In
parallel, the Company is reducing costs significantly. Since the beginning of
the year, the Company has reduced the number of its personnel in Canada and the
United States by 45%. Personnel have also been reduced in the
Company’s Caracas office, and at the El Callao and Las Cristinas
operations. The Company has also reduced the use of consultants,
eliminated most EPCM activities, is closing down operations at El Callao and has
reduced by 50% the monthly security costs at Las Cristinas. The
Company closed its Houston office on September 30, 2008.
Cash
and Cash Equivalents
On
September 30, 2008, the Company had cash and cash equivalents of $44.6 million
compared to $16.1 million at December 31, 2007.
The
change in the cash balance during the nine months ended September 30, 2008 is
reconciled as
follows
($ millions):
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Cash
and cash equivalents, December 31, 2007
|
$ 16.1
|
|
|
|
|
|
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Cash
used in operating activities
|
(25.6)
|
|
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Capital
expenditures – Las Cristinas
|
(17.0)
|
|
|
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Net
use of cash and cash equivalents
|
(42.6)
|
|
|
|
|
|
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|
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Proceeds
from sale of equipment
|
6.0
|
|
|
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Cash
from issuance of common shares
|
64.3
|
|
|
|
Cash
and cash equivalents from discontinued operations
|
0.5
|
|
|
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Effect
of exchange rate fluctuations on cash
|
|
|
|
|
and
cash equivalents
|
0.3
|
|
|
|
Cash
and cash equivalents, September 30, 2008
|
$ 44.6
|
|
At
September 30, 2008, the Company’s debt consisted of face value $100 million,
9.375% senior unsecured notes (the “Notes”) due December 2011. The Company may
redeem the Notes, in whole or in part, at any time after December 31, 2008 at a
redemption price of between 100% and 102% of the principal amounts of the Notes,
depending on the redemption date, plus accrued and unpaid interest and
additional interest, if any, to the date of the redemption.
Cash
Flow used in Operating Activities
Cash
flow from continuing operations was a deficit of $25.6 million and $10.3 million
for the first nine months and third quarter of 2008 respectively, compared to a
deficit of $24.1 million and $4.5 million for the corresponding periods in 2007.
The cash flow deficits are principally attributable to interest payments on the
Company’s $100 million of 9.375% Notes, corporate general and administrative
expenses, and changes in working capital.
Investing
Activities
Cash
used for capital expenditures for the Las Cristinas project was $17.0 million
and $4.3 million for the first nine months and third quarter of 2008
respectively, compared to $21.4 million and $5.6 million for the corresponding
periods in 2007.
Capital
spending at Las Cristinas has declined since peaking in
2005. Spending was reduced in 2008 due to the protracted delay in the
issuance of the Permit. The majority of the expenditures in the first nine
months of 2008 represent ongoing costs for administering, securing and
maintaining the Las Cristinas camp and for off-site equipment
storage. In addition, the Company has continued to build a medical
facility and sewage treatment plant as part of its obligations under the
MOC. Excluding the cost of medical equipment for the clinic, which
has not been ordered at this time, the estimated cost to complete both projects
would be approximately $1.9 million. The Company is in the process of obtaining
legal advice and considering the options available to it, in light of the
ongoing lack of a decision from the Minister of MinAmb in respect of the
Company’s administrative proceeding concerning the Permit and is reviewing these
commitments accordingly.
Equipment
with an original cost of approximately $63 million is located principally in
Houston (USA), Antwerp (Belgium) and Cape Town (South Africa). The equipment is
regularly inspected and maintained while in storage. In April 2008 the Company
sold equipment for $6.0 million cash to two unrelated purchasers and recorded a
gain of $1.6 million on the sales prior to the Company becoming aware of
the
issue
of the denial of the permit. The value of this equipment is not included in the
$63 million total. The Company does not currently have plans for additional
equipment sales, nor does the Company have any outstanding purchase orders for
additional equipment. All of the equipment worldwide is insured under
a marine insurance policy.
Financing
Activities
On
February 11, 2008, the Company completed a public offering of 32.89 million
units at CDN$2.10 per unit for gross proceeds of CDN$69.1 million including 4.29
million units issuable upon the exercise of the over-allotment option by the
syndicate of underwriters.
Each
unit consists of one common share of the Company and one-half of one common
share purchase warrant. Each whole warrant entitles the holder to purchase a
further common share of the Company at an exercise price of CDN$3.00 for a
period expiring on the later of: (i) August 11, 2009; and (ii) nine months
following the Permit date, where the Permit date is the 45th day following the
receipt by the Company of the Permit.
The net
proceeds received by the Company, after considering issuance costs of $4.6
million, was $64.1 million.
Discontinued
operations
On
October 1, 2008, the Revemin mill reverted to the State of Venezuela and the
Company ceased all mining activities in El Callao. As such, cash flows for this
discontinued operation have been separately presented for 2008 and comparative
2007. Cash flows from/(used in) operating activities for the nine months ended
September 30, 2008 were $0.5 million (2007: $(7,626) million)
and $(2.0) million (2007: $(3.8) million) for the three months ended
September 30, 2008.
Contractual
Obligations and Commitments
The
Company’s significant contractual obligations and commitments on an undiscounted
basis, as at September 30, 2008, are tabled below:
|
Millions
|
Less
than
One
Year
|
1
- 3
Years
|
4
- 5
Years
|
More
Than 5 Years
|
Total
|
|
Long
term debt repayment
|
$ -
|
$ -
|
$100.0
|
$ -
|
$100.0
|
|
Asset
retirement obligations
|
1.0
|
2.4
|
-
|
-
|
3.4
|
|
Social
commitments
|
1.9
|
-
|
-
|
-
|
1.9
|
|
Total
contractual obligations
|
$2.0
|
$2.4
|
$100.0
|
$ -
|
$105.3
|
Under
the terms of the MOC, the Company has undertaken to make all investments
necessary to develop and exploit the Las Cristinas deposits. Based on
a revised estimate from a technical report which was completed in November 2007,
a further $254 million (exclusive of VAT) would have to be spent on Las
Cristinas to meet this obligation after the receipt of the Permit.
The
Company has excluded its normal course purchase arrangements due to their
discretionary nature and/or short notice period for termination of
contracts.
Off-Balance
Sheet Arrangements
The
Company does not have any off-balance sheet arrangements with special purpose
entities.
Related
Party and Other Transactions
The
Company paid underwriting fees of $2.8 million (2007: $3.3 million) to Macquarie
Capital (Canada) Ltd. which retains the Chairman of the Company as an employee,
in relation with the February 11, 2008 public offering.
The
amounts charged to the Company for the services provided have been determined by
negotiation among the parties. These transactions were in the normal
course of operations and were measured at the exchange value which represented
the amount of consideration established and agreed to by the related
parties.
Restatement
of 2007 Quarters
In the
process of preparing the annual 2007 consolidated financial statements, the
Company reviewed its accounting practices in respect of certain expenditures
made in connection with its Venezuela Branch but funded by its Canadian
operations with respect to Las Cristinas. The Company determined that such
expenditures, previously treated as deductible for tax purposes, that have been
capitalized in the Canadian operations, may not be deductible in Venezuela
thereby creating a difference between their accounting and tax values in
Venezuela. For Canadian GAAP purposes, the amounts determined to be potentially
non-deductible as at September 30, 2007 totalled $58.9 million of which $52.3
million related to 2006 and prior years. The Company recorded future tax
liabilities of $13.5 million as at September 30, 2007 and $23.5 million as at
December 31, 2006. Due to the decline in the parallel rate of the Venezuelan
Bolivars to the USD from December 31, 2006 to September 30, 2007, there is a
resultant unrealized foreign exchange gain on the opening future income tax
liabilities upon revaluation into US dollars.
The
2007 results were significantly impacted due to the change in Bs rate to the USD
from 2,150 at December 31, 2006 to 3,650, 4,100, 5,010 and 5,500 at the end of
Q1, Q2, Q3, and Q4 2007, respectively. Accordingly, unrealized foreign currency
translation gains of $9.3 million, $1.6 million, $2.5 million and $1.0 million
were recorded at the end of Q1, Q2, Q3 and Q4 2007, respectively.
The
estimated future income taxes represent a net accounting entry derived from the
current lack of deductibility in the Venezuela Branch of certain expenditures
related to Las Cristinas which were funded by the parent entity in Canada. These
costs will be amortized for accounting purposes but may not be for income tax
purposes. Accordingly, the future income taxes represent an undiscounted
estimate of the tax effect of this difference, and therefore are not payable at
the present.
Critical
Accounting Estimates
Critical
accounting estimates are those estimates that have a high degree of uncertainty
and for which changes in those estimates could materially impact the Company’s
results. Significant estimates used include those relating to the timing and
receipt of the Las Cristinas Permit to construct, gold prices, recoverable
proven and probable reserves, available resources, available operating capital,
fair value of stock options and warrants, income taxes and required asset
retirement obligations. These estimates each affect management’s
evaluation of asset impairment and the recorded balances of inventories, site
closure and asset retirement obligations.
Adoption
of New Accounting Policies
Changes
in accounting policies – Sections 1400 and 3031
The
CICA issued new accounting standards which are effective for interim and annual
consolidated financial statements for the Company beginning on January 1,
2008.
Handbook
Section 1400, “General Standards of Financial Statement Presentation”, was
amended so as to include the criteria for determining and presenting the
Company’s ability to continue as a going concern. Handbook Section 3031,
“Inventories”, establishes standards for the measurement of inventories,
allocations of overhead accounting for write-down and disclosures.
There
is no material impact to the Company’s consolidated financial statements on
adoption of these new accounting standards.
Future
accounting pronouncements – Section 3064
The
CICA has issued a new standard which may affect the financial disclosures and
results of operations of the Company for interim and annual periods beginning
January 1, 2009.
Section
3064, “Goodwill and Intangible Assets”, establishes revised standards for
recognition, measurement, presentation and disclosure of goodwill and intangible
assets. Concurrent with the introduction of this standard, the CICA withdrew EIC
27, “Revenues and Expenses during the Pre-Operating Period”. As a result of the
withdrawal of EIC 27, the Company will no longer be able to defer costs and
revenues incurred prior to commercial production at new mine
operations.
The
Company has not yet assessed the impact of Section 3064 on its consolidated
financial statements.
Financial
Instruments
The
balance sheet carrying amounts for cash and cash equivalents, accounts
receivable, accounts payable and accrued liabilities approximate fair value due
to their short-term nature. The estimated fair value of debt is
$50,000,000 as at September 30, 2008 ( December 31, 2007: $82,000,000) and is
determined by discounting the contractual cash flows using the risk-free
interest rate and the Company's credit spread as inputs. The Company's
credit spread is an unobservable input as there is limited trading of the
Company's debt in the market. The Company has estimated its credit spread
by taking into account several factors including general credit conditions,
company specific news, the movement of the Company's stock, and the limited
trading activities of the Company's debt.
Outstanding
Share Data
A
summary of common shares, common share options and common share purchase
warrants at November 12, 2008 are tabled below:
|
|
Common
Shares Issued
|
294,817,719
|
|
|
|
Common
Share Options
|
10,535,522
|
|
|
|
Warrants
|
28,695,000
|
|
|
|
Fully
Diluted Common Shares
|
334,048,241
|
|
Controls
and Procedures
The
Company maintains disclosure controls and procedures which are designed to
provide reasonable assurance that information required to be disclosed by the
Company is recorded, processed, summarized and reported within the time periods
specified by regulations. The Company performed an evaluation, under the
supervision and participation of management, including the Chief Executive
Officer and Chief Financial Officer, of the effectiveness of the design and
operation of its disclosure controls and
procedures
as of the end of the period covered by this report. Based on this evaluation,
with the exception of those weaknesses identified in the December 31, 2007
annual MD&A, the Chief Executive Officer and Chief Financial Officer
concluded that the Company’s disclosure controls and procedures were effective
as of the end of the period covered by this report. Management of the Company is
in the process of addressing the areas of weakness identified as at December 31,
2007.
Risk
Factors
The
business and operations of the Company and its affiliates are subject to risks.
In addition to considering the other information in the Company’s 2007 Annual
Information Form, which is available on SEDAR at
www.sedar.com
, an
investor should carefully consider the following factors. Any of the following
risks could have a material adverse effect on the Company, its business and
future prospects.
Risks
Associated with Operating in Developing Countries
The
Company’s mineral exploration and mining operations are located in Venezuela and
may be adversely affected by political instability and legal and economic
uncertainty that might exist in such country. The risks associated with the
Company’s foreign operations may include political unrest, labour disputes,
invalidation of governmental orders, permits, agreements or property rights,
risk of corruption including violations under U.S. and Canadian foreign corrupt
practices statutes, military repression, war, civil disturbances, criminal and
terrorist actions, arbitrary changes in laws, regulations and policies,
taxation, price controls, exchange controls, delays in obtaining or the
inability to obtain necessary permits, opposition to mining from environmental
or other non-governmental organizations, limitations on foreign ownership,
limitations on the repatriation of earnings, limitations on mineral exports,
high rates of inflation and increased financing costs. These risks may limit or
disrupt the Company’s projects or operations, restrict the movement of funds or
result in the deprivation of contractual rights or the taking of property by
nationalization, expropriation or other means without fair
compensation.
Risks
Specific to Operations in Venezuela
Political
and Economic Instability
The
Company’s mineral properties are located in Venezuela and as such the Company
may be affected by political or economic instabilities there. The risks
associated with carrying on business in Venezuela, in addition to those
highlighted above, include, but are not limited to violent crime, which is
prevalent throughout the country and includes kidnapping, smuggling and drug
trafficking especially in remote areas. Changes in resource development or
investment policies or shifts in political attitudes in Venezuela may adversely
affect the Company’s business. Operations may be affected in varying degrees by
government regulations with respect to restrictions in production, price
controls, export controls, exchange controls, income taxes, expropriation of
property, maintenance of claims, environmental legislation, land use,
unauthorized mining activities, land claims of local people, water use and mine
safety. The effect of these factors cannot be accurately predicted.
Environmental
Permit Still Required
Development
of Las Cristinas and the ultimate commencement of commercial production are
dependent upon receipt of the Permit, which will allow the Company to proceed to
put in place financing to fund construction. As the Las Cristinas project is the
Company’s primary project, the continued delay in receipt of the Permit could
have a material adverse effect on the future of the Company’s business, and may
result in the need for additional financing. There can be no
assurance that the Company will be successful in its appeal to the Minister of
MinAmb or as to when or if the Permit will be granted.
Exchange
Controls
Venezuela
currently has exchange controls that affect the ability of companies doing
business in Venezuela to convert Venezuelan source income into foreign currency.
The Central Bank of Venezuela enacted such exchange control measures in 2003 in
order to protect international reserves. The exchange rate, originally fixed at
approximately 1.6 Bs/USD, has since been adjusted twice upwards and presently
stands fixed at 2.15 Bs/USD. There can be no assurance that exchange controls
will not
continue
and, if they do, that they will not adversely affect the Company’s operations,
including its ability to satisfy its foreign currency obligations or to receive
fair value in U.S. dollars.
Lack
of Ownership Rights
Under
the Venezuelan Mining Law of 1999 (“
VML
”), all mineral resources
belong to the Republic of Venezuela. In accordance with the VML, the
Government of Venezuela has reserved for itself the right to directly explore
and exploit the Las Cristinas deposits and has elected to do so through the
CVG. See “Las Cristinas Project – Mine Operating Contract” in the
AIF. The Mine Operating Contract is an operation agreement and does
not transfer any property ownership rights or title rights to the gold produced
to the Company. Rather, the Company has been authorized to exploit
the Las Cristinas deposits for the CVG in accordance with the Mine Operating
Contract.
The
interests of the Company in the Las Cristinas deposits are contingent upon the
Company continuing to satisfy its obligations under the Mine Operating
Contract. Failure to do so could result in the CVG having the right
to terminate the Mine Operating Contract. In addition, the CVG is
party to an agreement dated May 16, 2002 with MIBAM. As the CVG’s
rights thereunder are contingent upon the CVG continuing to satisfy its
obligations, while the Company has no reason to believe the CVG is not
performing its obligations thereunder, any failure to do so could result in
MIBAM having the right to terminate such agreement, thereby effectively
terminating the Mine Operating Contract. Furthermore, any failure by the CVG to
assert its rights under its agreement with MIBAM could have a material adverse
effect on the Company’s rights under the MOC. To date, the no assertions of
contractual breaches by the Company have been received.
Lack
of Copper Rights
In
addition to gold, the Las Cristinas deposits also contain very low levels of
copper, 0.11% on average. Under the Mine Operating Contract, the
Company is only entitled to exploit the gold contained in the Las Cristinas
deposits. Based on the feasibility studies carried out by the Company
and following discussions with the CVG, the Company has determined that
exploiting the copper contained in the Las Cristinas deposits would detract from
the economics of the Las Cristinas project. Furthermore, it may not
be technically viable to produce a marketable copper concentrate from the main
Las Cristinas deposit as the copper is too low grade. The Company
does not need the right to exploit the copper contained in the Las Cristinas
deposits in order to exploit the gold and does not currently intend to negotiate
with the CVG for the right to exploit the copper contained in the Las Cristinas
deposits.
Although
the Company does not believe that the MIBAM would do so, the MIBAM retains the
right to grant exploitation and other rights with respect to the copper
contained in the Las Cristinas deposits to the CVG or a third
party. The Company has been advised by its Venezuelan counsel
that:
|
(a)
|
if
the MIBAM grants the right to exploit the copper contained in the Las
Cristinas deposits to the CVG, subject to fulfilling all necessary
requirements of Venezuelan law (including the additional grant by the
MIBAM to the CVG of the right to negotiate the exploitation of the copper
with third parties), the CVG has agreed under the terms of the Mine
Operating Contract to negotiate the exploitation of the copper with the
Company; and
|
|
(b)
|
if
the MIBAM grants the right to exploit the copper contained in the Las
Cristinas deposits to a third party, the Company’s right under the Mine
Operating Contract to exploit the gold contained in the Las Cristinas
deposits would, as a matter of Venezuelan law, take precedence over the
third party’s right to exploit the
copper.
|
If the
MIBAM grants the right to exploit the copper contained in the Las Cristinas
deposits to the CVG, there can be no assurance that the MIBAM will grant to the
CVG the additional right to negotiate the exploitation of the copper with third
parties or that the Company will be able to negotiate an agreement with respect
to the exploitation of the copper with the CVG. Also, if the MIBAM
grants the right to exploit the copper contained in the Las Cristinas deposits
to a third party, or if the MIBAM grants the right to exploit the copper
contained in the Las Cristinas deposits to the CVG and the CVG grants the right
to exploit the copper to a third party, there can be no assurance that the
Company will be successful under
Venezuelan
law in asserting that its right to exploit the gold contained in the Las
Cristinas deposits takes precedence over the third party’s right to exploit the
copper.
Proposed
Amendments to Mining Laws
The
Company’s business may be affected by amendments or changes to mining laws,
regulations and requirements in Venezuela. At any time, a number of
draft mining laws may be proposed. There is no assurance when or if a
draft mining bill will be enacted into law or what the final provisions of such
law will be, if enacted. Any changes to current Venezuelan mining law
may adversely affect the Company’s ability to develop and operate the Company’s
Venezuelan properties.
On
February 1, 2007 the National Assembly of the Republic of Venezuela issued the
“Law which Authorizes the President of the Republic to Issue Decrees with Rank
and Force of Law in those Matters Delegated” (the “
Decree Law
”), which empowers
the President of Venezuela to approve changes to certain laws without consulting
Congress for a period of 18 months. The Decree Law does not include any direct
mention of, or references to, mining matters and, accordingly, such matters
remain within the exclusive competence of the National Assembly. In
order for amendments to the mining law to be enacted into law, they must be
accepted in the Venezuelan National Assembly and undergo a review by the
Permanent Commission of Energy and Mines. The detailed provisions of
the Draft Mining Bill are then debated in the National Assembly, and finally the
Draft Mining Bill must be approved by the President of Venezuela. There is no
assurance that the Government of Venezuela will not issue further decrees or
otherwise attempt to modify existing mining rights or other laws affecting the
Company, its Venezuelan properties and its ability to operate in
Venezuela.
Arbitration
Proceedings
The
Company is a party that is interested in, but is not a party to, an ongoing
arbitration. See “Legal Proceedings — Withdrawal of MINCA Litigation — Vanessa
Arbitration” in the 2007 AIF, available electronically at
www.sedar.com
and
www.sec.gov.
Unauthorized
Miners
The
Company’s operations may also be affected by the presence of unauthorized miners
which is not uncommon in the gold mining areas of the Guyana Shield area of
northern South America, including Venezuela. The methods used by unauthorized
miners to extract gold are typically harmful to the environment and may be
disruptive of authorized mining operations. Although the Company, in conjunction
with the local authorities, employs strategies to control the presence of
unauthorized miners, there can be no assurance that these strategies will be
successful or that the Company’s operations will not be adversely affected by
the presence of unauthorized miners.
Imataca
Forest Reserve
In
addition to the general risks associated with environmental regulation and
liability, the Las Cristinas deposits are located within the Imataca Forest
Reserve (the “
Forest
Reserve
”). On September 22, 2004, Presidential Decree 3110, which
establishes an ordinance plan and regulations for the use of the Forest Reserve,
permits various activities (including mining) in up to 13% of the Forest Reserve
and establishes the legal framework for such activities, was issued.
Presidential Decree 3110 was issued in response to previous Presidential Decree
1850, the latter was issued in May 1997.
Decree
1850 reserved an even larger part of the Forest Reserve for various activities
and became subject to a legal challenge before the Venezuelan Supreme Court. The
Venezuelan Supreme Court issued a prohibition order on November 11, 1997
prohibiting the relevant government authorities from granting concessions,
authorization and any other acts relating to various mining activities in the
Forest Reserve under Decree 1850 until the Venezuelan courts ruled on the merits
of the nullity action. It is possible that Presidential Decree 3110 could be
similarly challenged and that such challenge, if ultimately successful, could
prevent the Company from exploiting or fully exploiting the Las Cristinas
deposits.
Venezuelan
Decree No. 1257 establishes the environmental assessment requirements for mining
projects. The Company was advised that the Las Cristinas project is not a new
project and, accordingly,
Article
40 of Decree 1257 does not apply since no significant increase in environmental
impact is predicted.
General
Risk Factors
Title
to Mineral Properties
Acquisition
of title to mineral properties is a very detailed and time-consuming
process. Title to, and the area of, mineral properties may be
disputed or impugned. Although the Company has investigated its title
to the mineral properties for which it holds concessions or mineral leases or
licenses, there can be no assurance that the Company has valid title to such
mineral properties or that its title thereto will not be challenged or
impugned. For example, mineral properties sometimes contain claims or
transfer histories that examiners cannot verify; and transfers under foreign law
often are complex. The Company does not carry title insurance with
respect to its mineral properties. A successful claim that the
Company does not have title to a mineral property could cause the Company to
lose its rights to mine that property, perhaps without compensation for its
prior expenditures relating to the property. Furthermore, the MOC
does not transfer any property ownership rights to the Company.
In 2005
the Government of Venezuela announced that it would be changing the mining title
regime from a system where title was granted in the form of joint ventures or
either concessions or operating contracts to a system where all new economic
interests would be granted in the form of operating contracts. In order to
effect this change, the Government advised that it would need to create a
national mining company which would be the nation’s contracting party covering
the entire country of Venezuela. The Government also indicated that, given this
change in title regime, it would also be appropriate to review all existing
mining companies in a single comprehensive exercise to ensure that only
companies found to be in compliance with their existing title terms and
conditions would qualify for the new title.
This review was
completed as of December 31, 2005.
There
is no assurance that the Government will not issue further decrees or otherwise
attempt to modify existing mining rights.
Environmental
Regulation and Liability
The
Company’s activities are subject to laws and regulations controlling not only
mineral exploration and exploitation activities themselves but also the possible
effects of such activities upon the environment. Environmental legislation may
change and make the mining and processing of ore uneconomic or result in
significant environmental or reclamation costs. Environmental legislation
provides for restrictions and prohibitions on spills, releases or emissions of
various substances produced in association with certain mineral exploitation
activities, such as seepage from tailings disposal areas that could result in
environmental pollution. A breach of environmental legislation may result in the
imposition of fines and penalties or the suspension or closure of
operations.
In
addition, certain types of operations require the submission of environmental
impact statements and approval by government authorities. Environmental
legislation is evolving towards stricter standards,, increased fines and
penalties for non-compliance, more stringent environmental assessments of
proposed projects and a heightened degree of responsibility for companies and
their directors, officers and employees. Permits from a variety of regulatory
authorities are required for many aspects of mineral exploitation activities,
including closure and reclamation. Future environmental legislation could cause
additional expense, capital expenditures, restrictions, liabilities and delays
in the development of the Company’s properties, the extent of which cannot be
predicted.
In the
context of environmental permits, in particular the approval of closure and
reclamation plans, the Company must comply with standards and laws and
regulations which may entail costs and delays depending on the nature of the
activity and how stringently the regulations are implemented by the permitting
authority.
In
accordance with applicable laws, the Company has provided various forms of
financial assurances to cover the cost of reclamation activities. However, there
can be no assurance that the Company will not incur reclamation costs that are
in excess of such financial assurances. While the Company plans to
establish
a reserve for reclamation activities, there can be no assurance that the
combination of the reserve and financial assurances will be sufficient to meet
future reclamation standards, if such standards are materially more stringent
than existing standards. The Company does not maintain environmental liability
insurance. The Company has adopted high standards of environmental compliance;
however, failure with or unanticipated changes in Venezuela’s laws and
regulations pertaining to the protection of the environment could adversely
affect the Company.
Additional
Funding Requirements
Under
the terms of the Mine Operating Contract, the Company is required, among other
things, to make all necessary investments and complete all works necessary to
reactivate the Las Cristinas deposits, to design, construct and operate a
processing plant to process gold for its subsequent commercialization and sale
and to return the mine, its installations and equipment to the CVG upon
termination of the Mine Operating Contract. In order to carry out the
Las Cristinas project and its other mining projects, the Company will need to
raise substantial additional financing. In establishing its funding
requirements, the Company has assumed that costs incurred during the
construction phase of Las Cristinas will receive an exoneration from the 9%
Value Added Tax (“VAT”). Venezuelan Law allows for but does not guarantee the
granting of exoneration of VAT on goods and services, including expenses in
Venezuela, related to the construction and development of mining
projects. Crystallex will apply for an exoneration of VAT during the
construction phase of Las Cristinas. If the Company does not receive
the construction period VAT exoneration, sufficient additional funds would need
to be raised to cover the development phase. The construction period VAT can
then be recovered by the Company during the production phase of the Las
Cristinas project.
The
Company may decide to meet its additional funding requirements through one or
more of non-recourse project debt and other forms of public markets debt and
equity. If the Company elects to raise commercial bank limited recourse project
debt, the Company will need to demonstrate to potential lenders compliance with
the Equator Principles, which are a set of guidelines adopted by a number of
international financing institutions to address the environmental and social
issues associated with project financing transactions. The Equator Principles
are largely based on policies and guidelines established by the International
Finance Company. Although the Company has completed an Environmental Impact
Study to international standards, which was approved by the Venezuelan Ministry
of the Environment and includes plans to comply with the Equator Principles,
there can be no assurances that potential lenders will conclude that the project
is in compliance with the Equator Principles. In this case, some
institutions may decide not to lend to the project, or the financing timeline
may be extended while the Company addresses the concerns of the
banks.
Despite
the financings that have been completed by the Company, the Company has limited
access to financial resources and there can be no assurance that sufficient
additional financing will be available to the Company on acceptable terms or at
all. Failure to obtain such additional financing could result in a delay or the
indefinite postponement of the Las Cristinas project and other mining projects
of the Company and could also result in the Company defaulting in the
performance of its obligations under the Mine Operating Contract.
Reserve
and Resource Estimates
The
Company’s reported mineral reserves and resources are estimates
only. As a result, there can be no assurance that they will be
recovered at the rates estimated or at all. Mineral reserve and
resource estimates are based on limited sampling and are uncertain because the
samples may not be representative. Mineral reserve and resource
estimates may require revision (either up or down) based on actual production
experience. Market fluctuations in the price of metals, increased
production costs or reduced recovery rates may render estimated mineral reserves
and resources uneconomic and may ultimately result in a restatement of mineral
reserves and resources. In addition, short-term operating factors,
such as the need for sequential development of mineral deposits and the
processing of new or different ore grades, may adversely affect the Company’s
profitability in any particular accounting period. If its mineral
reserve and resource estimates are incorrect, the Company will not correctly
allocate its financial resources, causing it either to spend too much on what
could be a less than economic deposit or to fail to mine what could be a
significant deposit.
Mineral
Exploration and Exploitation
Mineral
exploration and exploitation involves a high degree of risk. Few
properties that are explored are ultimately developed into producing
mines. Unusual or unexpected formations, formation pressures, fires,
power outages, labour disruptions, flooding, explosions, tailings impoundment
failures, cave-ins, landslides and the inability to obtain adequate machinery,
equipment or labour are some of the risks involved in mineral exploration and
exploitation activities. The Company has relied on and may continue
to rely on consultants and others for mineral exploration and exploitation
expertise. Substantial expenditures are required to establish mineral
reserves and resources through drilling, to develop metallurgical processes to
extract the metal from the material processed and, in the case of new
properties, to develop the mining and processing facilities and infrastructure
at any site chosen for mining. There can be no assurance that the
Company will discover mineral reserves and resources in sufficient quantities to
justify exploitation or that the funds required to exploit any mineral reserves
and resources discovered by the Company will be obtained on a timely basis or at
all. The economics of exploiting mineral reserves and resources
discovered by the Company are affected by many factors, many outside the control
of the Company, including the cost of operations, variations in the grade of
material mined and metals recovered, price fluctuations in the metal markets,
costs of mining and processing equipment, continuing access to smelter
facilities on acceptable terms and other factors such as government regulations,
including regulations relating to foreign exchange, royalties, allowable
production, tax deductibility of expenditures, importing and exporting of
minerals and environmental protection. There can be no assurance that
the Company’s mineral exploration and exploitation activities will be
successful.
Uninsurable
Risks
Mineral
exploration and exploitation activities involve numerous risks, including
unexpected or unusual geological operating conditions, rock bursts, cave-ins,
fires, floods, earthquakes and other environmental occurrences and political and
social instability. It is not always possible to obtain insurance
against all such risks and the Company may decide not to insure against certain
risks as a result of high premiums or other reasons. Should such
liabilities arise, they could negatively affect the Company’s profitability and
financial position and the value of the common shares of the
Company. The Company does not maintain insurance against
environmental risks.
Competition
The
competition to discover and acquire mineral properties considered to have
commercial potential is intense. The Company competes with other
mining companies, many of which have greater financial resources than the
Company, with respect to the discovery and acquisition of interests in mineral
properties and the recruitment and retention of qualified employees and other
personnel to carry on its mineral exploration and exploitation
activities. There can be no assurance that the Company will be able
to successfully compete against such companies.
Dependence
on One Mining Property
Future
results for the Company depend largely on the Las Cristinas project, which may
never be developed into a commercially viable mining operation. Any event, or
combination thereof, which adversely affects the Las Cristinas project (whether
the property itself or the Company’s ability to finance and/or construct and
operate a commercially viable mine on the property), would adversely impact the
Company’s future performance.
Production
Risks
The
Company prepares estimates of future production for Las
Cristinas. Once Las Cristinas is in production, failure to meet these
estimates could adversely affect the Company’s future profitability, cash flows
and financial position. There can be no assurance that the Company
will achieve its production estimates.
The
Company’s actual production may vary from its estimates for a variety of
reasons, including actual ore mined varying from estimates of grade, tonnage,
dilution and metallurgical and other characteristics; short-term operating
factors such as the need for sequential development of ore bodies and the
processing of new or different ore grades from those planned; mine failures,
slope failures or equipment
failures;
industrial accidents; natural phenomena such as inclement weather conditions,
floods, droughts, rock slides and earthquakes; encountering unusual or
unexpected geological conditions; changes in power costs and potential power
shortages; shortages of principal supplies needed for operation, including
explosives, fuels, chemical reagents, water, equipment parts and lubricants;
labour shortages or strikes; civil disobedience and protests; and restrictions
or regulations imposed by governmental or regulatory authorities or other
changes in the regulatory environments. Such occurrences could result
in damage to mineral properties, interruptions in production, injury or death to
persons, damage to property of the Company or others, monetary losses and legal
liabilities. These factors may cause a mineral deposit that has been
mined profitably in the past to become unprofitable forcing the Company to cease
production. These factors also apply to the Company’s future
operations. For example, it is not unusual for new mining and
processing operations to experience unexpected problems during the start-up
phase.
In
addition to the general production risks outlined above, one of the most
significant physical production issues the Company faces in the Las Cristinas
project is the heavy amount of rainfall the area receives (an average of 3.3
m/year). MDA has accounted for anticipated time lost due to rainfall in
scheduling production and determining equipment
requirements. Crystallex believes that the allowances made are
consistent with the range of practice employed by the iron ore and bauxite
mining industry in the same high rainfall regions in Venezuela as well as
comparable mining operations in similar or greater rainfall regions of Guyana,
Suriname and Brazil. Regardless, actual mining experience with the combination
of wet saprolite and high rainfall rates may require adjustment of these
estimates.
Regulations
and Permits
The
Company’s activities are subject to wide variety of laws and regulations
governing health and worker safety, employment standards, waste disposal,
protection of the environment, protection of historic and archaeological sites,
mine development and protection of endangered and protected species and other
matters. The Company is required to have a wide variety of permits
from governmental and regulatory authorities to carry out its
activities. These permits relate to virtually every aspect of the
Company’s exploration and exploitation activities. Changes in these
laws and regulations or changes in their enforcement or interpretation could
result in changes in legal requirements or in the terms of the Company’s permits
that could have a significant adverse impact on the Company’s existing or future
operations or projects. Obtaining permits can be a complex,
time-consuming process. There can be no assurance that the Company
will be able to obtain the necessary permits including any renewals thereof on
acceptable terms, in a timely manner or at all. The costs and delays
associated with obtaining permits and complying with these permits and
applicable laws and regulations could stop or materially delay or restrict the
Company from continuing or proceeding with existing or future operations or
projects. Any failure to comply with permits and applicable laws and
regulations, even if inadvertent, could result in the interruption or closure of
operations or material fines, penalties or other liabilities.
Gold
Price Volatility
The
gold price can fluctuate widely and is affected by numerous factors beyond the
Company’s control, including industrial and jewellery demand, inflation and
expectations with respect to the rate of inflation, the strength of the U.S.
dollar and other currencies, interest rates, gold sales by central banks,
forward sales by producers, global or regional political or financial events,
and production and cost levels in major gold-producing regions. The
gold price is also subject to rapid short-term changes due to speculative
activities. During the period 1998 to 2007, the gold price fluctuated between a
low of U.S.$253 per ounce and a high of U.S.$841 per ounce. To date in 2008 the
price of gold has reached a high of U.S.$1,011 per ounce and has averaged $897
per ounce during the first nine months of 2008.
The
Company’s revenues, cash flow, profitability and the market price of the common
shares of the Company are significantly affected by changes in the gold
price. If the gold price is below the cost of production at any of
the Company’s operations for a significant period, the Company may be required
to suspend or terminate production at the affected operation. In
addition, the Company may be required to restate its mineral reserves and
resources, write down its investment and increase or accelerate reclamation and
closure charges at the affected operation. Any of these developments
could negatively affect the Company’s profitability, cash flows and financial
position. Accordingly, even if the Company discovers and produces
gold, there can be no assurance that the gold price will be high enough to
enable the Company to sell the gold produced by it profitably.
Currency
Fluctuations
Currency
fluctuations may affect costs at the Company’s operations. Gold is
sold throughout the world based principally on a U.S. dollar price, but a
portion of the Company’s operating expenses is in non-U.S. dollar
currencies. Any appreciation of these non-U.S. dollar currencies
against the U.S. dollar could negatively affect the Company’s profitability,
cash flows and financial position.
Credit
and Market Risks
The
Company may enter into financial agreements (financial instruments) with major
international banks, other international financial institutions and other
accredited third parties in order to manage underlying revenue and future cash
flow exposures arising from commodity prices. Financial instruments,
which subject the Company to market risk and concentrations of credit risk,
consist primarily of cash and accounts receivable.
Market
risk is the risk that the value of a financial instrument might be adversely
affected by a change in interest rates or currency exchange rates. The Company
manages the market risk associated with commodity prices by establishing and
monitoring parameters that limit the types and degree of market risk that may be
undertaken.
Credit
risk is the risk that counterparty might fail to fulfil its performance
obligations under the terms of a contract. The Company limits the amount of
credit exposure in cash and cash equivalents by placing these in high quality
securities issued by government agencies and financial institutions. The
Company’s cash equivalents consist of Government of Canada Treasury Bills,
denominated in U.S. dollars. The Company also has concentrations of credit risk
with respect to accounts receivable as the accounts receivable are due from the
Venezuelan Tax Department.
The
Company can be exposed to credit risk in the event of non-performance by
counterparties in connection with metal forward and option contracts. The
Company does not obtain any security to support financial instruments subject to
credit risk but mitigates this risk by dealing only with a diverse group of
financially sound counterparties and, accordingly, does not anticipate loss for
non-performance. Further, the Company minimizes its credit risk in derivative
instruments by entering into transactions with high-quality counterparties whose
credit ratings are high and by monitoring the financial condition of its
counterparties. The Company continually monitors the market risk of its
activities. The Company currently does not have metal forward and option
contracts.
Dependence
on Key Employees
The
Company’s business and operations are dependent on retaining the services of a
small number of key management personnel. The success of the Company
is, and will continue to be, to a significant extent, dependent on the expertise
and experience of the directors and senior management. Since late
2005, the Company has experienced the loss of a number of senior management
employees due to delays in receiving the Las Cristinas Permit. The
loss of one or more key employees could have a materially adverse effect on the
Company. The MinAmb letter denying the Las Cristinas Permit may make
it more difficult for the Company to retain key employees. The Company does not
have a senior management retention program.
Compliance
with Sarbanes-Oxley Act of 2002
Passed
by the U.S. Congress on July 30, 2002, the Sarbanes-Oxley Act of 2002
(“Sarbanes-Oxley”) requires companies to, among other things, have management
provide a report on the Company’s internal controls with respect to financial
reporting. The Company has complied with this particular aspect of
Sarbanes-Oxley for its fiscal year ended December 31,
2007. Management’s evaluation of, and report on, the Company’s
internal controls over financial reporting is set out in the 2007 Annual
Management Discussion and Analysis under the section Controls and Procedures –
Internal Control over Financial Reporting. Based on this evaluation, the Chief
Executive Officer and Chief Financial Officer concluded that the Company’s
disclosure controls and procedures were not effective as at December 31, 2007
and the Company has described the plans to remediate the material weaknesses
described therein.
There
can be no assurance that the Company will be able to adequately remediate its
currently known weaknesses or that the Company’s internal controls over
financial reporting will be free of material
weaknesses
in future periods, which could cause the market price of the Company’s common
shares to decline and could lead to shareholder litigation. In
addition, the discovery of additional material weaknesses will likely result in
the Company having to incur costs to fix the internal controls for financial
reporting as well as costs to remediate any financial inaccuracies. Management
is in the process of remediating the material weaknesses discovered in fiscal
2007. The aggregate final costs of addressing such weaknesses, however, cannot
be assured. Any remediation costs for the discovery of additional material
weaknesses in future periods are unknown.
Common
Share Price Volatility
The
market price of the common shares of the Company could fluctuate significantly
based on a number of factors in addition to those listed in this document,
including:
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the
Company’s operating performance and the performance of competitors and
other similar companies;
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the
public’s reaction to the Company’s press releases, other public
announcements and the Company’s filings with the various securities
regulatory authorities;
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changes
in earnings estimates or recommendations by research analysts who track
the common shares or the shares of other companies in the resource
sector;
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changes
in general economic conditions;
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the
arrival or departure of key personnel;
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acquisitions,
strategic alliances or joint ventures involving the Company or its
competitors; and
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gold
price volatility.
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In
addition, the market price of the common shares of the Company are affected by
many variables not directly related to the Company’s success and are, therefore,
not within the Company’s control, including other developments that affect the
market for all resource sector shares, the breadth of the public market for the
common shares and the attractiveness of alternative investments. The
effect of these and other factors on the market price of common shares on the
exchanges on which the Company trades has historically made the Company’s share
price volatile and suggests that the Company’s share price will continue to be
volatile in the future.
Potential
Dilution
As at
November 12, 2008, the Company has outstanding options to purchase 10,535,522
common shares of the Company and warrants to purchase 28,695,000 common shares
of the Company (including 12,250,000 warrants that do not become effective until
after the receipt of the Permit). The issue of common shares of the Company upon
the exercise of the options and warrants will dilute the ownership interest of
the Company’s current shareholders. The Company may also issue additional
options and warrants or additional common shares from time to time in the
future. If it does so, the ownership interest of the Company’s then
current shareholders could also be diluted.
Enforcement
by Investors of Civil Liabilities
The
enforcement by investors of civil liabilities under United States federal
securities laws may be adversely affected by the fact that the Company is
organized under the laws of Canada, that most of its officers and directors and
most of the experts named in this Annual Information Form are residents of
Canada, and that a substantial portion of the Company’s assets and the assets of
a majority of the Company’s directors and officers and the experts named in this
Annual Information Form are located outside the United States. Furthermore, it
may not be possible to enforce against the Company or its directors, officers or
experts, judgments contained in U.S. courts. The Company believes that a
monetary judgment of a Canadian court predicated solely on the Canadian civil
liability regime would likely be enforceable in the U.S. if the Canadian court
in which the judgment was obtained had a basis for
jurisdiction
in the matter that was recognized by a U.S. court for such purposes. However,
the Company can provide no assurances to this effect.
Operating
Losses are Expected to Continue in the Near Future
The
Company expects that it will continue to incur losses, and possibly incur
increased losses, until the Las Cristinas mine is operating at full
capacity. The Company expects that this trend will reverse if
and when gold is produced from the future Las Cristinas mine in commercial
quantities at prices equal to or in excess of the prices assumed in the 20,000
TPD Feasibility Study. There can be no assurance that the Company will become
profitable in the near future.
Future
Hedging Activities
The
Company has not entered into forward contracts or other derivative instruments
to sell gold that it might produce in the future. Although the Company has no
near term plans to enter such transactions, it may do so in the future if
required for project financing. Forward contracts obligate the holder to sell
hedged production at a price set when the holder enters into the contract,
regardless of what the price is when the product is actually mined. Accordingly,
there is a risk that the price of the product is higher at the time it is mined
than when the Company entered into the contracts, so that the product must be
sold at a price lower than could have been received if the contract was not
entered. There is also the risk that the Company may have insufficient gold
production to deliver into forward sales positions. The Company may enter into
option contracts for gold to mitigate the effects of such hedging.
No
Payment of Cash Dividends in the Near Future
Given
that the Company is currently in the pre-development stage for its principal
property, the Las Cristinas project, the Company intends to retain its earning
to finance the growth and development of the business rather than pay dividends
to shareholders. The Company does not intend to declare or pay cash dividends in
the near future, nor has it done so since its inception. In the event that the
Company decides to declare and pay cash dividends in the future, such a decision
will made entirely in the discretion of the board of directors and shall be
dependent on factors such as the existing earnings, capital requirements, future
business opportunities, financing agreements and market conditions for the
Company’s shares and the underlying commodities markets.
Document
3
Form
52-109F2 - Certification of Interim Filings
I,
Robert A. Fung, Chief Executive Officer of Crystallex International Corporation,
certify that:
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1.
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I
have reviewed the interim filings (as this term is defined in Multilateral
Instrument 52-109
Certification of Disclosure in
Issuers' Annual and Interim Filings
) of Crystallex International
Corporation (the issuer) for the period ending September 30,
2008;
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2.
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Based
on my knowledge, the interim filings do not contain any untrue statement
of a material fact or omit to state a material fact required to be stated
or that is necessary to make a statement not misleading in light of the
circumstances under which it was made, with respect to the period covered
by the interim filings;
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3.
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Based
on my knowledge, the interim financial statements together with the other
financial information included in the interim filings fairly present in
all material respects the financial condition, results of operations and
cash flows of the issuer, as of the date and for the periods presented in
the interim filings;
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4.
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The
issuer's other certifying officer and I are responsible for establishing
and maintaining disclosure controls and procedures and internal control
over financial reporting for the issuer, and we have:
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a.
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designed
such disclosure controls and procedures, or caused them to be designed
under our supervision, to provide reasonable assurance that material
information relating to the issuer, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which the interim filings are being
prepared;
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b.
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designed
such internal control over financial reporting, or caused it to be
designed under our supervision, to provide reasonable assurance regarding
the reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with the issuer's GAAP;
and
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5.
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I
have caused the issuer to disclose in the interim MD&A any change in
the issuer's internal control over financial reporting that occurred
during the issuer's most recent interim period that has materially
affected, or is reasonably likely to materially affect, the issuer's
internal control over financial
reporting.
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Date:
November 12, 2008
“Robert
A. Fung”
__________________________________
Robert
A. Fung
Chief
Executive Officer
Document
4
Form
52-109F2 - Certification of Interim Filings
I,
Hemdat Sawh, Chief Financial Officer of Crystallex International Corporation,
certify that:
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1.
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I
have reviewed the interim filings (as this term is defined in Multilateral
Instrument 52-109
Certification of Disclosure in
Issuers' Annual and Interim Filings
) of Crystallex International
Corporation (the issuer) for the period ending September 30,
2008;
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2.
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Based
on my knowledge, the interim filings do not contain any untrue statement
of a material fact or omit to state a material fact required to be stated
or that is necessary to make a statement not misleading in light of the
circumstances under which it was made, with respect to the period covered
by the interim filings;
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3.
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Based
on my knowledge, the interim financial statements together with the other
financial information included in the interim filings fairly present in
all material respects the financial condition, results of operations and
cash flows of the issuer, as of the date and for the periods presented in
the interim filings;
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4.
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The
issuer's other certifying officer and I are responsible for establishing
and maintaining disclosure controls and procedures and internal control
over financial reporting for the issuer, and we have:
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a.
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designed
such disclosure controls and procedures, or caused them to be designed
under our supervision, to provide reasonable assurance that material
information relating to the issuer, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which the interim filings are being
prepared;
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b.
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designed
such internal control over financial reporting, or caused it to be
designed under our supervision, to provide reasonable assurance regarding
the reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with the issuer's GAAP;
and
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5.
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I
have caused the issuer to disclose in the interim MD&A any change in
the issuer's internal control over financial reporting that occurred
during the issuer's most recent interim period that has materially
affected, or is reasonably likely to materially affect, the issuer's
internal control over financial
reporting.
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Date:
November 12, 2008
“Hemdat
Sawh”
__________________________________
Hemdat
Sawh
Chief
Financial Officer
SIGNATURES
Pursuant to the requirements of the
Securities Exchange Act of 1934, the registrant has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly
authorized.
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CRYSTALLEX
INTERNATIONAL CORPORATION
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(Registrant)
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Date:
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November
14, 2008
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By:
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/s/
Hemdat Sawh
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Name:
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Hemdat
Sawh
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Title:
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Chief
Financial
Officer
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