Christopher Pala in Washington -

The London-listed FTSE-100 company Kazakhmys, the world's only fully integrated copper producer, has been operating since October 2010 a large lead smelter in the Kazakhstan city of Shymkent that is responsible for poisoning tens of thousands of local children, bne can reveal.

While Kazakhmys executives deny the company owns the 78-year-old smelter and says it thus has no liability for the health problems that it has caused in Kazakhstan's third-largest city, taking operational control of the plant raises questions about whether the Kazakh company has properly disclosed the political and legal risks to its shareholders.

There is ample evidence that the Shymkent plant is a major health problem and an environmental catastrophe. Average levels of lead oxide in the air are 22-times the international norm and have led to high lead oxide levels in the blood of an estimated 40,000 local children. Lead oxide stunts brain development in children, even in small amounts.

At Kazakhmys' annual general meeting on May 11, outgoing chairman Vladimir Kim told Tom Mayne of Global Witness, a non-governmental organisation that focuses on poor corporate governance: "The Shymkent lead plant does not belong to Kazakhmys... The only connection between Kazakhmys and this plant is that we deliver lead dust."

Global Witness released a report on Kazakhmys earlier this year called "Risky Business," in which it accuses the company of failing to disclose ties to President Nursultan Nazarbayev and his closest aides.

Kazakhmys has done little to assess the environmental impact of the plant on the local population and has not commissioned an independent environmental study, despite the high population density around the plant. When confronted at the AGM with details of the potential health problems that the local population faces, Kazakhmys CEO, Oleg Novachuk, told Global Witness' Mayne: "We are not aware about any potential liability based on the information you mentioned."

However, a series of interviews senior Kazakhmys gave local media at the plant's reopening in October 2010 paints a very different picture. The officials clearly state that Kazakhmys took over operational management and reopened the Shymkent plant to recover an unpaid debt.

Lead levels

The smelting plant was built in 1934 just outside Shymkent, near Kazakhstan's southern border with Uzbekistan. Legend has it that seven out of 10 Soviet bullets fired during World War II were made with its lead. Over the years, the city expanded and the plant is now surrounded by residential housing.

The plant was privatised in 1996, becoming Yuzhpolymetall JSC, and in 2006 it began processing lead dust that's a by-product from a Kazakhmys copper smelter in Balkhash after the lead mine was exhausted. The Shymkent smelter closed in 2008 after lead prices fell to under $1000 per tonne making the plant loss-making, according to the management at the time. At the time of its closure, the Yuzhpolymetall owed Kazakhmys an undisclosed amount.

Yerzhan Ospanov, director of Metallurgic Development Complex of Kazakhmys, said in a Q&A interview in 2010 with the government news agency Kazinform that in order to recover the debt, Kazakhmys had "taken over operational management of production and financial activity in order to avoid non-productive expenses and to maximize profit." Ospanov's comments contrast with chairman Kim's comments at the AGM that its relationship with Kazakhmys is only that of a supplier.

The plant, Ospanov explained, is "headed by my colleague, Duisengali Baiguatov, the former director of the Balkhash smelter" and a long-time employee of Kazakhmys. Indeed, Baiguatov wears standard blue Kazakhmys overalls in a picture obtained by bne taken during the plant's inauguration attended by Ospanov, then-chairman Eduard Ogay of Kazakhmys and the governor of South Kazakhstan Region. "We sent our best managers to guarantee the best results," Ospanov says in the interview, including his brother, chief engineer Nurlan Ospanov. "The rest of the staff is made up of re-hired Yuzhpolymetall employees... Our business plan is to operate for at least three years." He made the same points to a reporter for Rabat, a local newspaper.

At the Kazakhmys AGM on May 11 in London's Lincoln Centre, Kim, the chairman who also announced he would retire within a year, volunteered that he expected the Shymkent lead smelter to close this year, without explaining why, Global Witness' Mayne tells bne. Thus, it appears clear that Kazakhmys took over operational control and financing of the smelter before reopening it, which it has said it will run long enough to recover its debts.

The company that manages the smelter, headed by Baiguatov, is called A-MEGA Trading, which one report on a Kazakh website last July describes as a subsidiary of Kazakhmys. However, the smelter itself, which employs about 900 people, apparently remains the property of Yuzhpolymetall, whose director and, according to one report, owner is Tursunbek Asanbayev, and which holds the license to emit pollutants. "In any case, if it can be demonstrated that Kazakhmys controls the operation of the plant, they could be held fully liable under British law, particularly if they did not perform any prior social and environmental impact assessments," says Mayne. "If this is the case, the liabilities of Kazakhmys could be very large indeed."

Neither the company's 2010 nor 2011 annual reports mention the operation, or any lead processing - a striking omission for a FTSE company given the size of the smelter. How much Kazakhmys spent to restart it, how much lead dust has been processed and how much revenue has been obtained remains unclear. Even the size of the debt that Shymkent owes Kazakhmys is not known. Ospanov, in his Q&A interview, declined to answer a direct question from the Kazinform reporter, Tatiana Pylayeva, saying only "the amount of the debt is not important. The fact that there is such indebtedness is important."

Clean-up calls

Last July, the South Kazakhstan region's governor, Askar Myrzakhmetov, appealed to the authorities to relocate the smelter. In an official report, he wrote that the lead content of the soil at a kindergarten's playground was 24,900 milligrams (mg) of lead per cubic metre (cm), or 800-times higher than permissible. As a result of the lead pollution, "diseases have increased in the city," he reported, adding that either the plant should be closed or the people who live around it moved.

Myrzakhmetov's predecessor, Nurgali Ashimov, who is now minister of environmental protection, was quoted in local newspaper Rabat as saying: "The plant should install filters, or should be closed."

Indeed, President Nazarbayev is often cited as having ordered an environmental clean-up as far back as 2007. None has been carried out, and last year 800 parents signed a petition calling for mass blood testing in the schools.

A study performed by the Colorado-based International Task Force for Children's Environmental Health presented at the American Industrial Hygiene Association conference in 2011 found that 95% of the children tested in the city had blood levels above the legal maximum, which is 10 micrograms of lead per deciliter of blood (µg/dl). The average was 20 µg/dl. Within 1 kilometre of the plant, the average was 32 µg/dl, while the highest score for a child was 103 µg/dl. Another study by the local government found that the lead in the soil, within 0.9 km of the plant, contained 21-times the allowable lead. The average lead content in the air was 0.0034 mg per cubic metre squared, 11 times higher than the maximum permissible average in Kazakhstan, itself twice as high as the one allowed in the US. "This is a human health disaster," says Jack Caravanos, a professor of public health at the City University of New York who studies lead poisoning around the world. "Lead in blood levels of 20 to 25 µg/dl cause serious and irreversible damage to the brain, particularly in small children."

Caravanos says that even if the factory closes, the high lead content of the soil makes it mandatory for the population to move to at least 5 km from the plant.

One financial analyst who tracks Kazakhmys, speaking on condition of anonymity, said he isn't surprised that this kind of liability is not reflected in the annual report. "It's not unusual around here," he says. "Investors don't care until the polluter gets punished."

John Smelt, Kazakhmys' director of corporate communications, did not respond to questions from bne.

Kazakhmys shares closed May 14 at £737, down 3.5%.