Centerra’s Kumtor Gold Mine is Under Political Attack

By Kevin Michael Grace

Next Page 1 | 2

Few Canadians have heard of Kyrgyzstan, and fewer still could find it on a map. But the landlocked central Asian republic is of particular interest to one Canadian company, Centerra Gold TSX:CG. Its Kumtor Mine, located high (over 4,000 metres) in the Tian Shan Mountains, has produced more than 8.4 million ounces of gold since 1997. On June 18, a 300-page report by a parliamentary commission accused Centerra of stealing gold and devastating the environment. Centerra shares have fallen by more than half since then.

According to VP Investor Relations John Pearson, the commission’s claims are “unfounded.” He explains, “We’ve had a number of international independent companies that have audited the site, and all those independent audits have come back and said the site operates and meets and exceeds all the Kyrgyz standards from an environmental standpoint. It meets the international standards which are even more stringent than the Kyrgyz standards. So we certainly feel that the parliamentary report’s findings on environmental issues are without merit.”

Kumtor: Essential to both Centerra and Kyrgyzstan.

On June 22, the Kyrgyz Parliament voted narrowly against nationalizing Kumtor. Instead, it commissioned a report, due October 1, which will likely call for a revision of the document that governs Kumtor’s relationship with Kyrgyzstan, the New Agreements of 2009. While Centerra owns Kumtor and its output completely, the 2009 agreement gives Kyrgyzstan one-third ownership of Centerra. Its Parliament is apparently not satisfied with this.

After the votes, Centerra President and CEO Ian Atkinson said that the Kyrgyz Parliament resolution has no legal standing and reminded the government that it “undertook a number of legal obligations and binding commitments in the New Agreements.” According to Pearson, “We feel it’s a very solid agreement, done openly and transparently. The agreement was reviewed by six different parliamentary committees, and it went to the full Parliament and was ratified by the full Parliament. Then it was signed into law by the President and tested in the Constitutional Courts to see if it met [constitutional muster], and it did.”

According to the Telegraph, “The Kumtor mine accounts for more than half of [Kyrgyzstan's] industrial output and generates about an eighth of its national income.” To give an idea of just how important Kumtor is to the country, Centerra‘s announcement May 15 of reduced 2012 gold production guidance (from 642,000 ounces to 390,000 ounces) led to this pronouncement from Prime Minister Omurbek Babanov, “Kyrgyzstan’s annual GDP growth will fall to 1.8% from the original target of 7.5%.” According to Reuters, “Hard hit by the slump in Kumtor’s output, Kyrgyzstan’s GDP shrank by 6.4% in January-May of this year compared with the same period of 2011, data released by the National Statistics Committee showed… Industrial output plunged by 31.2% in year-on-year terms in the same period.”

Centerra‘s share collapse has already cost Kyrgyzstan $500 million in nominal value. And a unilateral revision of the 2009 agreement would make it an outlaw and further impoverish a nation already one of the poorest in the world, with nominal per capita income of only $1,070. Parliamentary Deputy Marat Sultanov has said that cancellation of the Kumtor agreement would cost $2 billion, money that the government clearly does not have.

An open letter from Kumtor Operating Company employees declares, “The so-called ‘patriots of Kyrgyzstan’ represented by some representatives of the Parliament and Government, who are grieving over national interests of Kyrgyzstan, do not understand that their thoughtless actions will lead to a complete halt of production at the Kumtor mine, where…three thousand employees and citizens of Kyrgyzstan are working and providing for their families. In the event of interruption of mine operations, about ten thousand people (employees and their families) will be left without means of livelihood, adding to the already long lines of unemployed in our country.”

The open letter refers to an ongoing campaign of sabotage at Kumtor, including “blocking roads, demanding compensations for unjustified reasons, blocking the Company’s transport and robbery of Company’s provisions, fuel, etc,” and accuses the government of turning a blind eye to the sabotage.

Asked his opinion of why certain elements in Kyrgyzstan have turned against Centerra, Pearson responds, “I wouldn’t want to speculate. You’d have to ask the commission and government.” Prime Minister Babanov visited Kumtor July 6. Pearson says, “It was the first time he had visited the…mine, and he was joined by members of the State Commission and a number of media and senior executives from Centerra and Kumtor.” According to Kyrgyz news agency 24kg, “He was very angry and mentioned endless violations.”

Given all that has happened to Centerra this year in Kyrgyzstan (including a 10-day strike by Kumtor employees in February), it is reasonable to ask how secure its investment there is. Pearson says, “We’ve operated there since 1997 and gone through two revolutions [in 2005 and 2010] and haven’t missed a day of production from the political standpoint. We feel we have a very solid agreement… We’re operating the mine under those terms and continue to operate and feel we will continue to operate.”

Next Page 1 | 2

Pages: 1 2