* CRRC to own 2/3 of Las Cristinas, Crystallex the rest
* Chinese company joins list of those interested in mine
* Crystallex says government supports new partnership (Recasts, changes dateline, previously BANGALORE)
By Frank Jack Daniel
CARACAS, June 7 (Reuters) - A unit of China Railway Engineering Corp is buying a majority stake in a project to develop the vast Las Cristinas gold deposit in Venezuela's southern jungles, minority partner Crystallex said on Monday.
The Chinese company is the latest in a long line of prospectors drawn to Las Cristinas' estimated 17 million ounces of gold. Red tape and legal cases have stopped legal extraction of ore from the site for more than 20 years.
Canada's Crystallex KRY.TO purchased the rights to develop Las Cristinas several years ago, but has struggled to resolve a permit dispute with the leftist government of President Hugo Chavez.
"The Chinese provide both engineering and financing. And most importantly they are likely to have the protocol connection with the Chavez government in order to bring this project, which has been a stalemate, into production," said analyst John Ing of Toronto-based Maison Placement.
China Railway Resources Group Co Ltd (CRRC), a unit of giant Chinese contracting and engineering company CREC, will own two-thirds of the new joint venture, while Crystallex will own the remaining third.
"CRRC and Crystallex have met with the government of Venezuela to apprise them of this strategic partnership and are very pleased by the government of Venezuela's expression of support," Crystallex said in a statement.
CRRC is also leading efforts to revive the stalled environmental permitting process for Las Cristinas, and will provide capital to develop the project to commercial production, it added.
Chavez, who has nationalized large chunks of the OPEC nation's economy, said last year he wanted the mine to be developed in a joint venture between the government and Russian companies.
A deal has not been forthcoming and the project has stagnated. In recent weeks, soldiers and police have been clearing wildcat miners from the jungle near the mine. Chavez has even threatened to nationalize all gold concessions.
As with the Russian companies, such as Vancouver-based Rusoro (RML.V), some analysts believe China's good diplomatic relations with Venezuela will help the company get approval to go ahead with the mine's development.
The deal may give Crystallex a new lease of life. The Canadian company has so far recorded a $300.6 million non-cash write-down at Las Cristinas as it waits for permission to develop the project. In the first quarter of 2010 alone the company reported a $3.6 million non-cash write-down.
Maison Placement's Ing has a target of C$2 on the Crystallex stock, which was trading at 54 Canadian cents on Monday. The stock has recovered from a low of 27 Canadian cents in January.
China is a major financier of Chavez's socialist government and in April agreed to loan Venezuela $20 billion for large development projects.
Separately, CREC is constructing a $7.5 billion railway project in Venezuela linking southwestern Cojedes state and the eastern Anzoategui state.
Las Cristinas was first concessioned in 1963 and in the 1980s was operated by an Italian adventurer, Amalfi Grossi. Since he was expelled by the government in the 1980s only wildcat miners have extracted gold there.
Old-timers who still squeeze gold from the reddish earth in the devastated jungle around Las Cristinas say Grossi, who died a broken man, cursed the mine to prevent anyone else developing it.
Before Crystallex, Canada's now-defunct Placer Dome invested millions in the project before selling its stake for a nominal $50 when gold prices dropped.
Its ore grade is low and experts say it will cost about $500 an ounce to extract. Gold now sells for more than $1,200 an ounce.
Crystallex said CRRC had advanced $2.5 million during the negotiation of the deal and the investment was convertible into Crystallex shares at a price of 40 Canadian cents each.
The conversion price is at a nearly 27 percent discount to Crystallex stock's Friday close of 55 Canadian cents on the Toronto Stock Exchange.
Las Cristinas's proven and probable reserves are estimated at 16.86 million ounces of gold based on a $550 gold price assumption, Crystallex said.
Last month, the company said it was actively pursuing a resolution of the permit dispute and may file for international arbitration if a settlement was not arrived at. [ID:nSGE64I0PQ] (Additional reporting by Ashutosh Joshi in Bangalore)