Bill Cara: Deloittes waves goodbye to Crystallex, Fri., Mar. 9, 2007, 1:42 PM

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March 9, 2007

Deloittes waves goodbye to Crystallex, Fri., Mar. 9, 2007, 1:42 PM

It’s never a good thing when an international auditing firm quits a high profile client. But it happens. Today Crystallex is looking for a new auditor.

The CPA Journal states that rules by the Securities and Exchange Commission may help to make the meaning of 'disagreements' more clear, and therefore, increase the reporting of auditor-client conflicts.

“When switching auditors, clients will now be required to provide a description of:
• Disagreements or reportable events where the former auditor advised the company and questioned the accuracy or reliability of the company's financial statements, internal controls, management's representation, or prior audits.
• Whether the audit committee discussed each of the disagreements or reportable events with the former auditors.

• Issues discussed with the new auditor during the company's two most recent fiscal years and any subsequent interim period before the new auditor's appointment and the new auditor's and former auditor's views regarding the issues.

• Whether the former auditor's report for either of the past two years contained an adverse opinion, a disclaimer, or was qualified or modified with a discussion of the nature of the opinion.

• Whether the former auditor resigned, declined to stand for reelection, or was dismissed.

• Whether the decision to change auditors was acted on by the audit committee or board of directors.

• Any management- imposed limits on the former auditor to respond to the inquiries of the new auditor regarding each disagreement and reportable event.”

I don’t think the Deloittes-Crystallex matter is serious or else the audit firm would disclose their reasons for quitting the engagement. But, clearly it doesn’t look good for the Company.

Having spent five years as an auditor with forerunner firms to KPMG and PricewaterhouseCoopers in Toronto, I have some experience to back up a possible explanation, but unless you were part of the decision-making or the negotiation, no one really knows the specific reason. There are too many grey areas to make a reasonable guess.

Sometimes these things happen when a Board changes control and wants a change for personal reasons. In this case, it appears from the news release that the auditor made the decision, so let’s look there for a possible reason.

Auditors don’t arbitrarily dismiss profitable engagements, so the factor(s) involved could be one or a combination of many possibles:

1. confidence in management, which sometimes occurs when a new CEO takes over, such as for example a personal issue that came up on the audit of a different company altogether, but about which the auditors simply refuse to deal with the new CEO

2. confidence in the consultants used to determine, as an example, new reserves

3. disagreement over scope of engagement that the auditors might believe is necessary to possibly get into restatement issues or some other matter that is concerning the auditor

4. difficulty in getting paid

5. difficulty in getting access to certain records that the auditors expect to be completely transparent

6. inability to get insurance coverage that would cover the perceived risk of the engagement

7. inability to audit all parts of the company such as in this case subsidiaries in Venezuela or offshore accounts

8. personal conflicts with a chief financial officer

At the end of the day, it could be the aggregation of several minor issues that somehow led to the final decision. To guess is to speculate.

Still, these things don’t look good.

Posted by Posted by Bill Cara on March 9, 2007 01:42:50 PM | Category: Cara Today in the Market

Discourse

Well let's look on the bright side, their Gold is still in the ground.

Maybe Deloitte has bigger fish to fry or problems of their own to deal with! :-)

Posted by: agaunv at March 9, 2007 1:57 PM [link]

No, it doesn't look good. Coupled with the interminable permitting process in VZ, this stock will likely head lower. I closed my position.

That said, I have a knack for throwing up my hands in disgust at bottoms.

Posted by: number2son at March 9, 2007 2:21 PM [link]

Bill:

In your past experience, if you had a position in a company with an issue such as KRY, would you sell now and ask questions later, or would you investigate for several days before making a decision?

Posted by: C.Note at March 9, 2007 2:21 PM [link]

Here is a thought I have seen on a bulletin board: is there potentially a conflict of interest if one of the companies they are negotiating with for a buyout has the same auditor? Deloitte is also Goldcorps and Polyus's auditor.

Posted by: moab at March 9, 2007 2:32 PM [link]

Just trying to connect the dots.

Polyus Gold may be eyeing Las Brisas, Las Cristinas Min 08/Mar/07 - Venezuela
http://tinyurl.com/362y39
I dont have subscription. BN America is the source. I just have the headline.

Polyus Gold Mining Group
Consolidated interim financial statements for the six months ended 30 June 2006.
http://tinyurl.com/3b8fxj
Signed by Deloitte but that was in 2006. I don't know if they still represent Polyus.

Would there be a conflict of interest if Deloitte wanted action on potential Polyus bid for Crystallex, if Deloitte was representing both?

I am not a corp tax expert. thoughts here?

Posted by: NYUgrad at March 9, 2007 2:38 PM [link]

IMO, the uncertainty increases the risk beyond my tolerance. For a company that is a speculative play to begin with, it's difficult to give it the benefit of the doubt. Consider closing out the position and moving the capital to another junior...in general they have all moved down about the same in percentage terms, at least for now...

Posted by: 2nd_ave at March 9, 2007 2:59 PM [link]

Found some more intel...

http://www.deloitte.com/dtt/cda/doc/content/mining_eng.pdf

Deloitte & Touche and who they represent in Mining. According to this document they do still represent Polyus Gold.

Posted by: NYUgrad at March 9, 2007 3:07 PM [link]

As Bill said, at this point it is pure speculation on a speculative stock.

This is a spec play in my portfolio, time frame is long, I won't act until more information is known, but I am guessing that it may be a future buy before a future sell.

Great way to shake out the last of the weak hands.

Posted by: g034 at March 9, 2007 3:11 PM [link]

KRY: Interestingly enough, this news has not reopened the flood gates.

Posted by: writersblock at March 9, 2007 3:24 PM [link]

C.Note, and others,

I don't think any future dealings or possible dealings of a corporation come into play in a decision by an auditor to quit the engagement.

As for my deciding if that auditor's decision is sufficiently important to cause me to sell, I have to say in this case it would not be. I would look for facts and watch the trading before making further decisions.

I do agree with g034 that "weak hands" would possibly be shaken out over this incident.

Management could have done a better job, over the years, to control the speculation and rumors about this company, I feel. And, on the other side, some of the comments I have read on bull-boards (sent to me) are deserving, I think, of follow-up by securities regulators. People should think twice before stirring up the pot.

At the end of the day, this Company needs an environmental permit to move forward. That's 98 pct of the story. There is also some current drilling being done that may possibly expand reserves somewhat. It's beyond me why people think there is more to it than that.

Posted by: Bill Cara at March 9, 2007 3:32 PM [link]

Thanks every one.
I just want to know if any one has some thoughts on HBM. The stock declined a lot since it reported the wonderful Q4 and yearly numbers. I am long on this one. Is this a good opportunity to buy more on weakness? Thanks for the comments.
Have a great weekend.

Posted by: SmallCapFan at March 9, 2007 6:42 PM [link]

HBM?
Don't know that stock, symbol, what exchange?

Posted by: Rigdon at March 9, 2007 6:59 PM [link]

Rigdon,
the company is HUDBAY MINERALS INC. Its ticker is HBM on TSE (HBM.to). Here is the summary of its results:
- Earnings increase 277% to $165.8 million
- Basic earnings per share grows 154% to $1.32
- Operating cash flow before non-cash working capital changes, climbed to
$148.5 million
- Revenue increases 81% to $313.1 million
- Cash (less debt) $362.6 million at December 31, 2006
- Cash cost per pound of zinc sold, net of by-product credits "negative"
US$0.21

2006 Financial Highlights
- Earnings increase 562% to $564.0 million
- Basic earnings per share grows 412% to $5.32
- Operating cash flow before non-cash working capital changes, climbed to
$490.8 million
- Revenue increases 73.2% to $1.129 billion
- Cash cost per pound of zinc sold, net of by-product credits "negative"
US$0.43

Posted by: SmallCapFan at March 9, 2007 7:07 PM [link]

I think one advantage of an individual investor is the ability to respond quickly (ie, buy or sell) to market conditions. I don't mind exiting on uncertainty and then buying back (if warranted) on clarification.

Posted by: 2nd_ave at March 9, 2007 7:08 PM [link]

If anyone has access to after-hours quotes, can you please tell me the lowest KRY trade you see. An acquaintance told me he sold about an hour post mkt. at $2.30, which i'm incredulous about. I can't find anything below $2.70 anywhere; thx. in advance.

Posted by: jaxson at March 9, 2007 7:29 PM [link]

Thanks, SmallCapFan, will do my homework.
Sounds very interesting.

Posted by: Rigdon at March 9, 2007 7:41 PM [link]

HBM was reported by RobTV this week. Model price by Acker Finley was around $40, currently trading near $21.

Posted by: SiO2 at March 9, 2007 7:57 PM [link]

Bill did a post on Hud Bay a while back:

http://www.billcara.com/archives/2006/10/hudbay_minerals_under_the_micr.html

Posted by: moab at March 10, 2007 10:20 AM [link]

"I think one advantage of an individual investor is the ability to respond quickly (ie, buy or sell) to market conditions. I don't mind exiting on uncertainty and then buying back (if warranted) on clarification."

I agree completely and act accordingly.

Posted by: number2son at March 10, 2007 12:15 PM [link]

Found this article yesterday on Canada.com Financial Post

http://tinyurl.com/2vsq5s
Headline reads
"Russian miner eyes bid for Crystallex"
Lori Mcleod, Financial Post
Published: Saturday, March 10, 2007

Posted by: NYUgrad at March 11, 2007 2:50 PM [link]

March 9, 2007

Deloittes waves goodbye to Crystallex, Fri., Mar. 9, 2007, 1:42 PM

Discourse

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