Kyrgyzstan closing in on controlling stake in Kumtor

By bne IntelliNews June 5, 2013

bne -

In the wake of nationalist protests, the Kyrgyz government is closing in on a controlling stake in Kumtor - the country's biggest gold mine which has been at the centre of rising tension throughout the year.

Bishkek and Centerra Gold - the current controlling shareholder of Kumtor - are in talks over setting up a new joint venture that would own the mine, which has long been a focal point of debate in political circles, and was at the centre of the violent protests in late May and early June.

While the format has not yet been decided, the government is likely to get a controlling stake in the new venture, according to a statement from the Canadian investor. There are hopes that a new deal will pacify growing calls for the mine to nationalized; calls which sparked the recent unrest.

Under discussion is a proposal from Centerra for the government to exchange its minority equity stake in Centerra for a stake of equivalent value in the new joint venture, Kumtor Gold Company. Centerra has proposed that the venture be run equally by Centerra and Kyrgyzstan's state gold mining company Kyrgyzaltyn, with the chair of the company to be rotated on a yearly basis.

"[T]he parties are currently considering a potential restructuring transaction under which Kyrgyzaltyn JSC would exchange its 32.7% equity interest in Centerra for an interest of equivalent value in a joint venture company that would own the Kumtor Project," Centerra said in a June 4 statement.

Centerra and the Kyrgyz government have been in talks over the future of Kumtor since February, when the government announced a three-month deadline to renegotiate the 2009 investment agreement on the mine. The deal, agreed under former President Kurmanbek Bakiyev, is not in the country's interests, officials have said, as resource nationalism has built up throughout the country and region.

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. While it says it does not intend to nationalise the mine, officials say they want to end the tax regime offered by Bakiyev's government and extract higher environmental taxes.

The size of Bishkek's share in the new joint venture has not been announced, but is expected to hand control to the state. "In our valuation we already assume that a 51% stake in Kumtor will be given to the Kyrgyz government," writes Visor Capital in an analyst note. "In our model, Kumtor currently represents 80% of Centerra's current DCF valuation and 91% of 2013F revenue projections."

Speaking at a government meeting on June 4, Kyrgyzstan's First Deputy Prime Minister, Dzhoomart Otorbayev, said that the offer is being assessed with help from advisers PwC, and that the "government expressed its firm attitude, saying the restructuring should provide the Kyrgyz party with control over the joint venture. Neither the government nor the civil society will accept any other alternatives," he insisted, according to

The pressure on the government and Centerra was raised in the final week of May, when mass protests took place near the mine. Local residents resumed the calls for Kumtor to be nationalized, and blocked its access road and cut power supplies before order was restored on May 31.

Protests in support of the Kumtor demonstrators, organised by the nationalist opposition party Ata-Zhurt, have continued elsewhere. Activists have appointed their own mayor in the southern town of Jalal-Abad and blocked the highway between Bishkek and Kyrgyzstan's second city Osh. Efforts by government officials to restore calm in Jalal-Abad have so far been unsuccessful. Protesters are threatening to firebomb administrative buildings unless party leaders - arrested on charges of attempting to overthrow the government earlier this year - are released from prison.

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