Kyrgyzstan's rocky marriage with Centerra Gold

Kyrgyzstan's rocky marriage with Centerra Gold
Centerra Gold's Kumtor mine.
By bne IntelliNews February 7, 2016

Many Kyrgyz were left with a bad taste in their mouth when a British expat working at the country’s flagship Kumtor gold mine jokingly compared a local horse-meat sausage delicacy to a “horse penis” on his Facebook page. They poured out their anger on social media websites, while the authorities had a severe sense of humour failure: Michael McFeat was arrested and promptly deported.

The outrage reflects a lingering suspicion in the minds of many Kyrgyz that foreigners are exploiting the country’s riches and destroying its environment. This suspicion has long dogged the government’s relationship with Centerra Gold, the Canadian group that owns and operates Kumtor, and threatens to damage not just the mine’s future but the country’s investment climate, given Kumtor’s importance.

Kumtor is the country’s single largest contributor to gross domestic product, accounting for 7.4% of GDP and a quarter of the country’s total industrial production in 2014. The mine is also the nation’s largest taxpayer and employer.

Kyrgyzstan’s economic growth decelerated to 3.6% in 2014 from 10.9% in 2013, as Kumtor cut gold production to 567,693 ounces from 600,402 ounces in 2013. While production at Kumtor helped shore up economic growth during 2015 amid the regional slowdown, gold production fell further to 520,695 ounces and the country’s growth decelerated slightly to 3.5% by year-end. Kumtor’s gold production is expected to be between 480,000 to 530,000 ounces in 2016, according to Centerra.

The mine’s ownership has always been the biggest sore point. Kumtor is currently 100% owned by Centerra Gold through its wholly-owned subsidiary, Kumtor Gold Company, while Kyrgyzstan, via state mining firm Kyrgyzaltyn, holds a 32.7% stake in Centerra Gold. As of January 29, Centerra’s stock is up 51.9% since April 2009 when the government received its stake, but this has not made Centerra popular in Kyrgyzstan.

Several political factions have long called for the nationalisation of Kumtor, especially after the country’s second revolution in 2010. The agreements signed by the former regimes of Askar Akayev and Kurmanbek Bakiyev are widely seen as “unfavourable to Kyrgyzstan” and allegedly personally enriching for the individuals involved.

In 2013, 10 criminal cases were launched as part of a corruption probe at Kumtor. While some of the Kyrgyz top-level officials have been detained since, the investigations still continue. The former CEO of Centerra from 2004-8, Leonard Homeniuk, was detained in Bulgaria in July 2015 on corruption charges until he was granted bail in October. The controversies surrounding the investigations have not helped Kyrgyzstan’s image in the eyes of investors.

The current government, which is dominated by President Almazbek Atambayev, has so far rejected opposition calls for nationalisation but has sought a better deal for the country. It struck a non-binding agreement with Centerra Gold for the restructuring of Kumtor in January 2014. Under this deal, the government would swap its 32.7% stake in Centerra Gold for a 50% stake in a newly established joint venture in charge of running just the operations at Kumtor, thereby shedding their stake in Centerra’s other interests, such as the Boroo mine in Mongolia.

Yet the negotiations collapsed when Centerra Gold cut Kumtor’s proven and probable reserves to 6.1mn ounces of gold at the end of 2014 from 8.5mn ounces of gold a year earlier. At the end of 2014, Kumtor had 16.36mn tonnes of proven and 174.49mn probable reserves of gold ore.

Prime Minister Djoomart Otorbayev, who said that he no longer believed that “the creation of a joint venture would meet the interests of the country”, resigned on April 23, following another setback in the negotiations.

On December 22, the Kyrgyz government notified the Canadian mining group that it “intends to withdraw from the stalled talks” because the current agreement "ran counter to the country's national interests", leading to a great deal of confusion over what the government’s intentions and the future of the mine at the time actually were.

Looking ahead

The move can be seen as a step in the right direction, according to Andrey Zalepo, a Corporate Governance and Development Institute analyst. Discarding the country’s shares in Centerra while retaining ownership in Kumtor is “unsustainable in the long term”, since “it is obvious that Kumtor’s operations will soon start slowly coming to a close”, Zalepo said.

By maintaining a stake in Centerra the country could keep benefiting from the company, which “will continue to thrive thanks to developing its other projects” long after the mine closes down, the analyst believes. The company’s other ventures include the Hardrock Gold project in Canada and the Oksut project in Turkey.

In response to the government, Centerra put out a statement saying that it “will continue to engage constructively and in good faith with the government of the Kyrgyz Republic to resolve all outstanding matters”.

At the same time, Centerra added that, “there are no assurances that continued discussions between the government and Centerra will result in a mutually acceptable solution regarding the Kumtor project, that any agreed upon proposal would receive the necessary approvals under Kyrgyz and Canadian laws or that the Kyrgyz Republic government and/or parliament will not take actions that are inconsistent with the government’s obligations under the Kumtor project agreements.”

While political tensions do not bode well for the mine, things might be looking up for Kumtor in 2016 on the gold price side at least. Though gold prices fell by 13.9% in 2015, the prices are starting to rise in 2016, as investors turn to safe haven options such as gold amid falling oil prices and stocks and worries of global economic growth.

As of the end of January, gold had risen by 5.3% since December 31. Gold futures hit $1,116.40 per ounce on January 29. Expert opinions are divided on the future price: HSBC’s analysts expect gold prices to recover and average out at $1,205 in 2016, while Goldman Sachs forecasts gold to fall as low as $1,000 by year-end.

Safe haven buying of gold is probably a temporary trend, but the fate of Kumtor ultimately rests on the country’s willingness to maintain a good standing with Centerra, according to Zalepo. The analyst believes that, while the Kyrgyz government has taken steps in the right direction, the negotiations are more likely to continue dragging along than to achieve a successful resolution in 2016, since “the government is still having a hard time defining its wishes and goals to Centerra”.