Further troubles for miners in Kyrgyzstan

By bne IntelliNews April 3, 2013

bne -

The pressure on international mining companies continues rising in Kyrgyzstan, with another pair of investors facing disputes with government officials and local residents as resource nationalism increases.

Canada's Stans Energy admitted on April 2 that it risks losing its licence to develop two rare earths deposits in Kyrgyzstan after legal proceedings were launched by the state prosecutor's office. Kazakh mining giant Kazakhmys has also been the target of a protest by local residents who claim the company has violated environmental standards at the Bozymchak deposit.

Stans announced in a statement that the Kyrgyz state prosecutor has launched legal proceedings against both it and Kyrgyzstan's State Geological and Mineral Resources Agency (SGA). The prosecutor aims to nullify the minutes of a December 21, 2009 meeting that granted state-owned Kutessai Mining the licences for the Kutessay II and Kalesay deposits. Stans Energy's local subsidiary, Stans Energy KG bought Kutessai Mining eight days later.

Since the April 2010 revolution, the Kyrgyz government has sought to cancel many of the mining licences issued under the previous regime, citing the high level of corruption in the sector.

However, Stans insists in its statement that it considers the prosecutor's claim to be "baseless, with no legal merit". The company's 100% owned mining licenses for both properties were obtained lawfully, through transparent government auction, on December 29, 2009, it says. Stans asserts the auction was "open and previously advertised" and that the $855,000 paid was double the value the Kyrgyz authorities had earlier attributed to the property.

"We have every piece of paperwork filed since we began our business ventures in Kyrgyzstan and there is no doubt in my mind that our legal team will thwart this attempt on our licenses, just as they have successfully done in the past," said Stans' president and CEO Robert Mackay in a statement. "Our lawyers have always been meticulous in ensuring that all of Stans Energy's business dealings within Kyrgyzstan have adhered to the laws of the country, and this commitment will never change as we work towards bringing the Kutessay II Heavy Rare Earth mine back into production."

Visor Capital writes in a note that the announcement "signals a further battle for the company to retain its licences for its rare earth mine in Kyrgyzstan." However, it also suggests that the Canadian company is unlikely to lose the licences entirely.

"Kyrgyzstan is unlikely to be able to operate ... complicated projects like Stans' Kutessay, or Centerra Gold's Kumtor by themselves. We thus do not expect a complete withdrawal of these licences." Instead, the investment bank says the case is a symptom of the country's continuing development, and that economic logic will win in the end. "Kyrgyzstan is a 'young democracy' and we believe that it takes some time for such economies to establish a stable legislation and mature investment climate. However, as long as mining contributes a significant part of the country's GDP, we expect the outcome of the dispute to be rather rational."

Meanwhile, in the Jalal-Abad region of Kyrgyzstan, residents of the village of Kok-Serek have blocked a road to the Bozymchak deposit, which is being developed by Kazakhmys Gold Kyrgyzstan, the local unit of the Kazakh mining giant. Residents claim the company has violated environmental standards. However, Kazakhmys said in a statement that it has not yet started work at the deposit because of various obstacles that have put back the start of mining from the original plan of 2011 to 2014.

Looking at the wider picture, Kazakhmys and Stans are among several mining companies whose operations in Kyrgyzstan are being impeded by growing resource nationalism. The highest-profile case concerns Kumtor, Kyrgyzstan's largest producer of gold and a major contributor to the country's GDP. Bishkek has started talks with Toronto-listed Centerra Gold with the aim of renegotiating the investment agreement on the mine to get a more favourable deal. Parts of the population, and opposition groups including the nationalist Ata-Zhurt party, insist the government is not going far enough, and want to see Kumtor and other foreign-owned mines renationalised.

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