The Microcap Speculator

Love it or hate it, few would dispute that the decision on Crystallex’s (KRY) mining permit application was a make or break event. Unfortunately for Crystallex investors, Venezuela denied the permit. The decision effectively ends KRY’s plans to exploit Las Cristinas, one of the world’s premier gold formations.

CRYSTALLEX INTERNATIONAL CORPORATION (Toronto:KRY.TO - News)(AMEX:KRY - News) has become aware that the Director General of the Administrative Office of Permits at the Ministry of the Environment and Natural Resources of Venezuela (”MinAmb”) has issued a communication to the Corporacion Venezolana de Guayana (”CVG”), the owner of the Las Cristinas concessions, denying a request for the authorization to affect natural resources to carry out exploration activities in the mining area of Las Cristinas in Sifontes, Bolivar State.

In issuing the communication, the Director General cites sensitivities surrounding indigenous peoples, the small miners and the environment in the area generally known as the Imataca Forest Reserve, which contains a number of mining projects, which like those of Crystallex, are seeking the required permits to continue their development and exploitation.

On the news, Crystallex shares dropped as low as $.50 and closed at $.91. The company says it is considering options “including an application for reconsideration.” Its time for Crystallex to be honest with investors. If Chavez wanted Crystallex to get the permit, it would have received the permit. As I stated last August, the fact that the permit decision was taking so long suggested that Chavez was not lending his support.

I think its game over for Crystallex and Las Cristinas. I’m not sure what the company is worth without its flagship venture, but it sure isn’t worth its current market cap of over $280M.

DISCLOSURE: No position.

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A few items:

• BAB Holdings (BABB.OB) announced another $.02 quarterly dividend. Shares have recently traded in a price range of $.85-$.95. Though the trading is thin, the yield is fat. Just counting the regular dividends — not last quarter’s special dividend — BAB Holdings gives shareholders $.08 per year. At the bottom end of BAB’s price range, that amounts to a 9.4% yield, and at the top end, an 8.4% yield. Not too shabby!
• I’m still long the junior/mid-tier gold miner field bet posted Feb. 20. So far, the results are mixed: Gold Fields [[GFI]] is up about 10.6% since then, and Gammon Resources [[GRS]] is up a solid 26.4%. On the flip side, Golden Star Resources [[GSS]] is down 3.2% and U.S. Gold [[UXG]] is down 2.6%. My takeaway? The disparate results show the need to play this one as a field bet. That’s why when I decided to increase the bet yesterday, I added another stock, Tan Range Exploration [[TRE]], instead of adding to existing positions. Next add will probably be Western Goldfields [[WGW]]. The stocks still don’t reflect the recent rally in the underlying metal, or potential earnings power. As long as gold holds $900 over the next three months, I expect a slingshot move in the juniors and mid-miners.
• Microcap nursing-home stock Advocat, Inc. [[AVCA]] reports earnings next Wednesday. Though the stock is under pressure on light volume this week, I like it at these levels and may boost my holdings in advance of the quarterly report.
• Littlefield (LTFD.OB), the bingo hall operator frequently mentioned here as a play on aging baby boomers, was a little light on earnings. I’m out of the stock and have no plans to reenter until financial results improve.
• China 3C Group (CHCG.OB) continues to hit new lows, though it reaffirmed fiscal 2007 earnings projections of $.43 to $.47. At today’s price of $2.23, I think that the Chinese electronics retailer offers a pretty good risk/reward in front of the 2008 Olympics. I’m a buyer.

DISCLOSURE: Long BABB.OB, GRS, UXG, GFI, TRE, AVCA, CHCG.OB. No position in WGW (yet) or LTFD.OB.

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Jess G wrote to ask: Does the action in gold today make you bullish again on gold stocks?

I’m getting there. While I had some serious concerns that gold’s rally was coming to an end, the action today and yesterday show that the bulls still are in control. The pullback I anticipated turned out to be both mild (about 4%) and short (lasting only weeks between fresh highs). At the same time, most commodity indexes have hit new highs, crude is bumping $100, and copper has returned with a vengeance.

Those signals indicate that the path of least resistance for gold is up. To answer Jess’s direct question, I’m not fully bullish yet because the bottom I noted in the U.S. Dollar has held and many commodities in the ag complex look toppy, but I am dangling a foot into the bullish camp. I have no short positions in either the metal or miners, and may rebuild long positions in select junior and mid-tier miners.

UPDATE (3:50 ET 2-20-08): Over at Minyanville, the always sharp Lance Lewis reminds us that major gold miners report tonight and tomorrow. Unlike most earnings this season, upside surprises are more likely than disappointments. A few good reports could really light a fire under the complex in the short term, and this catalyst is enough to get me involved. I’m now long Goldenstar Resources [[GSS]], U.S. Gold [[UXG]], Goldfields [[GFI]], and Gammon Lake Resources [[GRS]].

UPDATE (4:10 ET 2-20-08): Agnico Eagle Mines just released record 4th quarter results. Hat tip to Lance Lewis.

DISCLOSURE: No positions. Long GSS, UXG, GFI, GRS.

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Only two weeks ago, gold was stuck in this multi-month spiral:

Because the long-term trend was bullish, the congestion was at the high end of the long-term range, and loosening central bank policies were likely to support the metal, I wrote that “I suspect we may be near a major breakout.”

Well, we got it. The yellow dog has shot up $50 since then:

This is a substantial breakout. While I expect enough volatility to turn the stomachs of even the staunchest bulls, the most dangerous move here is calling a top. Truthfully, nobody knows how high gold could go. Gold does have a number of fundamental factors that could point to a significantly higher trading range over time: (1) a decline in central bank selling; (2) higher demand from ETFs and retail investors; (3) declining US dollar; (4) emergence of markets in countries like India and China where gold has a more significant cultural role; (5) majors buying out of hedges; (6) [in my opinion this could be much more serious than most anticipate] a huge increase in reserve replacement costs as the trophy mines of the majors tail off in production, exploration and lifting costs increase, and experienced mining and geological experts become scarce.

For these reasons, I still like both the metals and the miners — especially juniors and mid-tier. I remain bullish on both of the junior miners I bought in mid-August, Goldenstar Resources: GSS (added at $2.66, closed today at $4.20) and Western Goldfields: WGDFF.OB (repurchased at $1.94, closed today at $3.15), and own a handful of others. Have a great microcap mining name? Send me an e-mail with a short paragraph on why you like it.

DISCLOSURE: Long GSS, WGDFF.OB, gold futures, silver futures.

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