Centerra Gold risks Kyrgyzstan collapse
By Fozil Mashrab
A legal dispute between the Kyrgyzstan government and Centerra Gold has entered a decisive stage for both sides after the Kyrgyz parliament instructed the government either to renegotiate a 2009 deal with the Canadian mining company or withdraw its mining license, though Kyrgyz Prime Minister Jantoro Satybaldiev recently ruled out any steps to nationalize the mine.
The parliament's instruction came in a February 22 resolution as Kyrgyz officials said that the previous deal between Kyrgyzstan and Centerra gave away overgenerous tax waivers and made other unnecessary concessions. Temir Sariev, the country's economy
minister, has said that the deal allows Centerra to pay 12% tax on its revenues while other mining companies in the country are required to pay a rate of between 17% to 20%. The 2009 deal was signed during the presidency of Kurmanbek Bakiev, who was ousted in a popular revolution in April of the following year.
Centerra has operated the Kumtor mine since 1993 through Kumtor Gold, a wholly owned subsidiary. Kumtor is one of the largest gold mines in the world, located in the Issik Kul region of Kyrgyzstan. Kumtor, which produces around 2 tons of gold a year, accounts for 12% of the country's gross domestic product (GDP) and for about 50% of its exports. The mine is the largest taxpayer in the country.
Labor, environmental and legal disputes with the government beset the miner throughout 2012 and resulted in sharp, 70% decrease in production, which greatly reduced revenue for the Kyrgyz government and hurting the economy as a whole. Kyrgyz GDP contracted by around 1% in 2012, though Sariev has claimed that excluding the Kumtor mine, the Kyrgyz economy grew by 3.5%.
Centerra, along with the prospect of renegotiating the 2009 contract, also faces more than US$300 million in penalties over allegations it polluted the environment around the Kumtor mine. A special committee under the Kyrgyz Geological Authority claims that for years poisonous chemicals used in gold extraction were left leaking, causing irreparable damage to the environment and exposing people to health risks. Centerra denies the claims.
As envisaged by Kyrgyz officials, a renegotiated deal would not only include a significantly higher tax on the company's opperations (amounting to an additional $105 million) but would also result in an increase in the Kyrgyz government's share in the mine from a current 33% to at least 50%. The Kyrgyz government also wants to have a greater say in the running of Kumtor Gold by appointing the chief executive officer.
Centerra claims that the 2009 deal was concluded in a transparent and honest way in accordance with Kyrgyz laws and legal procedures and approved by the erstwhile parliament. This makes Centerra's current Canadian CEO Ian Atkinson confident his company would win a dispute with the Kyrgyz state if it went to international arbitration. Concerning the allegation of enviromental damage, Centerra refers to the conclusions of various international expert groups who assessed the environmental impact of the mine and found no cause for alarm. Atkinson has said that all accusations and charges levied against the company, including claims the Centerra bribed Bakiev and government officials to extract concessions, are groundless.
Sariev, the economy minister, recently claimed that he had evidence of suspicious payments made to former Kyrgyz officials who negotiated the previous deal, while some Kyrgyz members of parliament demanded that all former Kyrgyz officials involved in approving the previous deal should be prosecuted as traitors.
It is no wonder that Kyrgyz officials of all stripes are demonstrating unity and treating the dispute with Centerra as an opportunity to show patriotism and win more support as public opinion seems to be fully behind Kyrgyz government in the dispute.
Centerra's Ian Atkinson characterized that Kyrgyz parliament February 22 resolution is illegal and that the deal signed in 2009 should be the only point of reference for settling of any legal dispute. He called on the Kyrgyz government to enter constructive talks to reach a resolution. He also said that it would not be in the interests of either side if failure to reach a mutually acceptable solution meant that the dispute dragged through international arbitration for years.
Kumtor is the main source of revenue for Centerra, whose shares have been plummeting recently because of its troubles in Kyrgyzstan. As such it also will want to avoid another "lost year" of falling production and revenues. The Kumtor mine accounted for over nine-tenths of the company's gold production in 2011.
Kyrgyz government is in an even more desperate situation as it can afford neither the legal costs of arbitration procedures nor another year of budget deficit and shrinking GDP due to its dependency on revenues from the Kumtor mine.
In early 2012 when the dispute was just starting, Centerra's officials were confident that they were better placed in the legal dispute with the Kyrgyz government. They might have believed that since Kyrgyzstan was facing huge budget deficits it would not be in a position to launch a major dispute with a company that was laying "golden eggs" (even if fewer than Kyrgyz officials would like). Top Kyrgyz officials were emboldened to take drastic measures against the mining company after it ignored pleas to extend emergency credit of several hundred million US dollars to help the country out its financial difficulties. In short, Centerra might have overplayed its hand when compromise was possible; now it also faces significant risks.
The only thing that might be still holding back the Kyrgyz officials from completely nationalizing the Kumtor mine is the fear that such a measure would frighten way other foreign investors from entering the mining sector. In the next several months, the Kyrgyz government is planning to auction off a number of large gold mines, but it risks alienating foreign buyers if it fails to honor the 2009 deal with Centerra and reach a compromise.
Kyrgyz President Almazbek Atambaev's claim, made on a visit to Turkey in January 2012, reflects the extreme frustration that the Kyrgyz authorities still feel today. In an address to the Turkish parliament, Atambayev said that in the previous decade gold worth $10 billion was extracted from the Kumtor mine, while Kyrgyz state coffers received only 3% of that money.
In the final analysis, both sides will be better served to reach a compromise solution without resorting to international arbitration, but that requires a spirit of give and take which seems to be missing at the present time.
In the event both sides bring the case to the international arbitration court and the Canadian company wins the case, it is most likely that the current Kyrgyz government might impose pressure to prevent the company from extracting gold from Kumtor and later force it to sell the mine to the Kyrgyz government at a low price.
Fozil Mashrab is a pseudonym used by an independent analyst based in Tashkent, Uzbekistan.
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