Under-mined in Kyrgyzstan

By bne IntelliNews August 2, 2012

Clare Nuttall in Almaty -

The Kyrgyz government's decision to revise its agreement with Centerra Gold on the country's largest gold mine, Kumtor, has been a blow to hopes of a stable regime for investors following the 2010 revolution. Not only is Toronto-listed Centerra entering a new period of uncertainty while a government commission decides how to revise the agreement, other investors have been spooked by the resurgence in resource nationalism in Kyrgyzstan.

The Kyrgyz parliament voted on June 27 in favour of revising the agreement on the Kumtor gold mine in order to get a better deal for the impoverished Central Asian country. MPs want to see Kyrgyzstan increase its stake in Centerra above the 33% it has held in the Toronto-listed company since 2009, claiming the country should have greater control over the largest foreign-owned gold mine in the former Soviet Union.

Under the new parliamentary decree, the Kyrgyz government is required to revoke decrees and licenses relating to Kumtor. A special commission, comprising members of the parliament, government and presidential administration as well as independent experts, is being set up, with the intention of submitting a revised agreement by November 1, local news agency Kabar reports. A crumb of comfort for Centerra was that the parliament stopped short of backing an expropriation proposal put forward by MP Sadyr Zhaparov, whose committee had prepared a highly critical report on Centerra's management of the mine.

Centerra issued a statement immediately after the parliament vote saying that it believes the resolution is "not legally binding on the Kyrgyz government", and that the government and relevant state agency "cannot revoke its decrees and licenses without meeting the relevant criteria for revocation set out under applicable law". "Centerra believes that the parliamentary report's findings are without merit," Centerra president and CEO, Ian Atkinson, said in the statement. "Kumtor has operated in full compliance with Kyrgyz and international standards and this has been proven over the years in systematic audits by Kyrgyz and international experts."

Economic fallout

The drop in production at the Kumtor mine in the first half of this year has already damaged Kyrgyzstan's economy. After a revival in growth in 2011, Kyrgyzstan's economy contracted by 5.6% in January-June, following a fall in production at Kumtor, which accounts for about 12% of the country's total GDP. This was partly for technical reasons, but a 10-day strike in February and a blockade of the only road leading to the mine in May have also hit production.

The investment bank Visor Capital says that although no final decision has been taken by the Kyrgyz government over the Kumtor mine, it reckons Centerra will have to agree with at least some of the proposed changes to the investment agreement. Visor Capital also warns that in a climate of growing resource nationalism, where the Kyrgyz parliament is currently trying to revoke other licenses owned by foreigners, "we can't rule out that it might also consider revoking Kumtor's mining license."

The decision to revoke the Kumtor agreement has also alarmed Kyrgyzstan's small investor community. The country's second revolution in 2010 was followed by the immediate nationalisation of numerous assets judged by the interim government to have had connections to ousted president Kurmanbek Bakiyev and his family. Combined with illegal property seizures by a volatile and highly politicised population, this raised fears of expropriation among investors, who put new projects on hold until more stable times. With the peaceful handover of power to President Almazbek Atambaev in 2011 and the formation of a new coalition government, there were widespread hopes of more stable times. But growing resource nationalism has been a continued source of concern for investors and the attack on Kyrgyzstan's largest investor has shattered hopes that the country has entered a new and more stable era.

Aside from the situation at Kumtor, smaller mining companies involved in Kyrgyzstan have also suffered. Talas Gold, a company developing a deposit in the high mountain Talas region, had its operations attacked twice in 2011 and suspended work after its mining camp was torched by armed horsemen.

The Kyrgyz government does, however, appear to be divided over the line to take on foreign investors in its natural resources sector. The author of the report on Centerra, Zhaparov, is the leader of the nationalist Ata-Zhurt party, which is currently in opposition, although his stance is backed by some members of the ruling coalition. On the other side of the debate, Deputy Prime Minister Djoomart Otorbaev said on June 14 that there would be no changes to the Kumtor operating agreement. Officials from Atambaev's office have also spoken out on the damage they say the decision will cause to the economy, with one official claiming to Reuters that it could cost Kyrgyzstan "millions of dollars."

Actually, it already has.

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