Kyrgyzstan's flagship gold mine
loses its glitter By Robert M
Cutler
MONTREAL - Kyrgyzstan's economy so
far seems to be surviving what could prove a
catastrophic collapse in output at the Kumtor Gold
Mine, which accounts for no less than 60% of
Kyrgyzstan's entire industrial production. A
proposed audit of the mine operator is now at the
center of a dispute within the government.
Kumtor is owned 100% by Canadian company
Centerra Gold through Kumtor Gold Co, its wholly
owned subsidiary. The mine's activities, according
the official statistics, represented nearly
one-eighth of Kyrgyzstan's total gross domestic
product in 2011 - though closer to one-tenth so
far this year - and over half of all the country's
exports.
Accusations of ecological
malfeasance have plagued the project since 1998,
when a truck carrying nearly two tonnes of sodium
cyanide for industrial
purposes (it used for separating gold from ore)
fell into a river on the road to Kumtor. The
volume of water fairly rapidly diluted even so
large an amount of cyanide as to avoid threat to
human life, but the fish kill was immense and
collateral environmental damage was nontrivial.
The mine itself is over 4,000 meters above
sea level in the Tian Shan mountains, not far from
the Chinese border. (The same mountains are, on
the Chinese side, the legendary home to Kwan Yin
(Guanyin), the female aspect of the male Buddhist
deity (bodhisattva) known in Tibetan as Chenrezig
and in Sanskrit as Avalokiteshvara.)
Commercial production at Kumtor began in
1997 with an expected decommissioning date of
2010. In 2005 the working life of the mine was
extended to 2013 on the basis of continuation
exploration and development work. Then in 2009,
this was extended again, to 2019.
As a
result of the decline in output at Kumtor,
however, Kyrgyzstan's gross domestic product (GDP)
contracted in the first six months of 2012 to 5.6%
year on year. Remove Kumtor from the calculations
and GDP would have grown 3.9%, and industrial
output 8.2%, during that period, according to the
National Statistics Committee.
Industrial
output overall fell 31.6% in the January-June
period year on year, contrasting with a 14.9%
increase for 2011 over the year earlier period.
However, Kyrgyzstan's som, the national currency,
has been relatively unaffected, holding at around
47.1 to the US dollar following a gentle decline
from 44.8 in July a year ago. National debt of
US$2.98 billion is less than 55% of annual GDP,
and government ministers speaking to the press
still anticipate this ratio to continue its
decline from last year, when it was 58%.
Centerra mines gold in Mongolia, but the
Kumtor mine accounted for over nine-tenths of the
company's gold production in 2011, and the
company's shares on the Toronto Stock Exchange
have taken a big hit - they are down to almost a
three-year low of C$6.70 from an historic high of
C$23.12 only last September. The government of
Kyrgyzstan owns one-third of Centerra, and the
company's performance is raising concern.
The mine has lately been the site of
protests by the local population, with villagers
demanding land and jobs blocking the only road
leading to it. Discontent reached the point where
the Kyrgyzstani parliament was considering a vote
on nationalization before failing to reach a
consensus on the motion.
The legislators
voted down a move to nullify Centerra's contracts,
however, and approved instead a proposal to
establish a state commission to evaluate the
ecological damage, as well as unfavorable social
and economic consequences, that according to
critics is the result of Canadian mismanagement.
The commission also investigated alleged
violations of law and, while the company says it
follows all necessary national and international
standards, commission chairman Sabyr Japarov
called the situation an "impending ecological
catastrophe", as quoted by Reuters news agency.
Expert testimony at his hearings was not allowed
to continue after it contradicted his declaration.
At the end of last month, parliament finally voted
to revise Centerra's operating license, in
particular calling for an increase in the
government's current state of 33%.
Reports
in the Kyrgyzstan press refer to the
politicization of the review decision. It is
argued that many deputies on Japarov's commission
are from the Issyk-Kul region, where the mine is
located, and there is no technical expert
participation. However, Centerra officials give
the appearance of being unconcerned. They note
that the current contract was ratified by
parliament, signed by the prime minister and
president, and reviewed by the constitutional
court.
The government's response to the
Japarov report was to consider drafting a law on a
production-sharing agreement (PSA). At present,
Kyrgyzstan is paid in dividends as a major
share-holder; if a PSA were in force, then it
would instead get a share of the gold itself.
Criticism of the idea of changing the contract in
this manner was published in the Bishkek press,
mocking the notion.
It was suggested that
the mine would lie idle while drawn-out legal
proceedings would produce a result inimical to
Kyrgyzstan's interests. The national economy would
decline, if not crash, if the mine went off line
for any extended period of time.
Late last
week, the government's minister of economy and
antimonopoly policy, Temir Sariev, sat as chairman
at the first meeting of yet another special
government commission, and said that an
international audit company should evaluate
Kumtor's activity. The selection of the audit
company would be made by tender, he continued, and
companies that have worked with Centerra in the
past are excluded from bidding.
On Monday
this week, however, the government offered to
select an audit company without tender, in accord
with a newly published decree enabling it to do
so. Sariev insisted on the need to translate the
draft tender specifications quickly so as to have
documents on the basis of which to discuss with
the government its unilateral initiative to
circumvent the tender process.
Dr
Robert M Cutler (http://www.robertcutler.org),
educated at the Massachusetts Institute of
Technology and The University of Michigan, has
researched and taught at universities in the
United States, Canada, France, Switzerland, and
Russia. Now senior research fellow in the
Institute of European, Russian and Eurasian
Studies, Carleton University, Canada, he also
consults privately in a variety of fields.
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