Kumtor restructuring ‘impossible’ if Kyrgyzstan loses Ontario court case, says Centerra Gold

By bne IntelliNews October 30, 2014

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Centerra Gold has warned that a long-debated restructuring would would be jeopardised if the Kyrgyz government loses a legal dispute with Stans Energy, another Canadian mining company active in the Central Asian country. 

Centerra has been renegotiating its contract with the Kyrgyz government over the exploitation of the flagship Kumtor gold mine. According to the deal, the state will swap its 32.7% stake in Centerra Gold for half of a newly established 50/50 joint venture that will be in charge of running Kumtor. Yet a $118.2mn arbitration award obtained by Stans Energy against the Kyrgyz government now threatens to undo these plans because the Canadian company is targeting the state’s holding in Centerra. 

“Centerra notes that if the Kyrgyz Republic does not succeed in overturning the Stans arbitration award in the Russian courts, Centerra expects that Stans would likely succeed [..] in seizing a sufficient number of Centerra shares held by [state-owned gold producer] Kyrgyzaltyn to satisfy the award,” the company said in a statement issued on October 29. 

“If Stans ultimately seizes such shares, Kyrgyzaltyn would no longer hold a sufficient number of Centerra shares to contribute to the Heads of Agreement (HOA) restructuring transaction such that it could receive 50% of a new Kumtor joint venture. In such circumstances, the company believes that the restructuring of the Kumtor project in accordance with the HOA would be impossible.”

Kyrgyzstan, via Kyrgyzaltyn, is currently the largest single shareholder of Kumtor's operator Centerra Gold with a 32.7% stake. Kumtor makes up 10% of the national GDP and is the nation’s largest tax revenue generator and employer. Under pressure from both the opposition and a popular backlash against the mine's foreign owners, the government is seeking a better deal for the country. The government led by president Almazbek Atambayev, which so far has rejected opposition calls for nationalisation, struck a non-binding agreement with Centerra Gold for the restructuring of Kumtor in January 2014.  

Stans Energy has locked horns with the government over a 20-year licence at the Kutessay-II heavy rare earth elements mine in the Talas province. The license was revoked after a parliamentary recommendation in 2012. Robert Mackay, then CEO of Stans Energy, claimed the company had suffered from “an orchestrated attack by a Chinese [rare earth] organisation with ties to public figures in Kyrgyzstan” that had bribed MPs. 

Stans Energy brought its claims before an arbitration court at the Moscow Chamber of commerce & industry, where it obtained a $118.2mn award against the Kyrgyz republic in July. As the government failed to pay the sum, the company turned to the Ontario Supreme Court of Justice, seeking an enforcement of the arbitration award. The court issued a preventive injunction on October 14, which, among other things, prohibits the Kyrgyz Republic and Kyrgyzaltyn “from selling, disposing, exchanging, assigning, transferring, pledging or encumbering 47mn shares of  in the capital of Centerra Gold registered in the name of Kyrgyzaltyn [roughly 60% of Kyrgyzaltyn's total stake in Centerra worth some $255mn],” Stans Energy disclosed in a statement. 

Stans Energy is now seeking to extend the injunction until a definitive ruling over the enforcement of the award comes through. A date for the final hearing has not been set yet, David Vinokurov, Centerra Gold's vice president, told bne in a an email on October 25.

Should the Ontario Supreme Court upheld the arbitration award and Kyrgyzaltyn is forced to transfer to Stans Energy 60% of its shares in Centerra Gold, Kyrgyzstan  will not have enough shares left to claim a 50% stake in the new joint venture established to run Kumtor. 

It is not the first time that Centerra Gold, which has no direct interests in Stans Energy and Kutessay-II, has got caught in legal crossfire between the Kyrgyz government and third parties. In 2012 the Ontario Supreme Court frozd a Centerra Gold stake worth $8.5mn in a proceeding by Turkish company Sistem seeking to enforce an  award by an arbitration tribunal in Geneva. Sistem owned a hotel that local authorities seized in 2005. The court eventually upheld the arbitration award and ruled that the shares could be transferred to Sistem. 

Overall, the country is currently facing arbitration claims for some $800mn, local press reported Tokon Mamytov, Kyrgyzaltyn's chairman, as saying on October 29. 

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