Two speculative gold plays

Within the mining industry as well as in the oil & gas industry, geopolitical risks are becoming more and more influential on share prices. This became quite clear this week when Chavez mentioned in a speech that all that was once privatised should be nationalised again. He specifically mentioned his desire to re-nationalise CANTV (Compañia Anonima Nacional Telefonos de Venezuela). The share price (NYSE:VNT) plunged as a result and took many other funds with it. Among these were certain mining funds that have at least part of their operations in Venezuela, including Crystallex International Corp (AMEX:KRY) and Gold Reserve Inc. (AMEX:GRZ). The risk in the mining sector was already priced into these two companies' shares last year when GRZ dropped from its April peak of USD 9.58 to USD 3.96 two months later. The same happened with KRY, which fell from USD 6.07 to USD 2.84, also in two months' time. Not helped by gold moving sideways for a period of eight months since its April peak, both stocks are now not far from where they were in June last year. The problem is clearly not their reserves. Both companies share prices are way too low if you take all proven & probable reserves into account. For only one reason: geopolitical fears. Crystallex issuing a press release to eliminate investor fears after Chavez' speech this week did not help the share price and was completely ignored. The Government of Venezuela has previously even confirmed that the present contract will be honoured by both parties, i.e. Chavez & Crystallex. The financial world now seems to neglect the 13.6 mio ounces of proven & probable reserves that Crystallex holds. With a market capitalisation of USD 785 mio, the market cap per ounce ration lies at USD 58. For comparison's sake, this is less than one tenth of that of Kinross Gold (NYSE:KGC) and Bema (NYSE:BGO). Gold Reserve has an estimated 10.1 mio ounces of gold and 1,290 mio ounces of copper at its major project Las Brisas in Venezuela, which means that it has an even more ridiculous market capitalisation per ounce of USD 11.30! And even though GRZ has a similar agreement with the Venezuelan Government, this too was ignored by investors. Then there is also a bilateral treaty that offers some protection to Canadian companies in case of nationalisations. So all and all, we can say that the risks are to a great extent priced into the stocks and there is a great possibility that the stocks moved down too much on the news and that fears have been overrated. Would, in my humble opinion, these companies have had all their operations in politically stable countries, both share prices would have been at least 300% higher based on their reserves. It's a simple calculation. The only thing to rate is the risk and will always be a subjective rating. But the potential rewards certainly outweigh the risks and I therefore recommend both stocks as buy candidates. My preference however goes to Gold Reserve Inc for a number of reasons, of which the market capitalisation per ounce is the most obvious one. Do however still keep the risk in mind and therefore consider this a speculative buy. I would set price targets for this year at USD 6 for Crystallex and at USD 12 for Gold Reserve Inc.