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Kyrgyz Officials Outline Restructuring Plan for Lucrative Gold Mine

BISHKEK, May 16 2013 - As officials in Kyrgyzstan prepare to negotiate with their country’s largest investor in Bishkek this week, new details are emerging about how the Kyrgyz government wants to restructure the agreement covering operations at the country’s flagship gold mine.

Bishkek and Toronto-listed Centerra Gold are engaged in a protracted legal dispute over Kumtor, the largest gold mine operated by a Western company in Central Asia.

Earlier this year, a Kyrgyz state commission claimed Centerra owes approximately 467 million dollars for environmental damages. Then, in February, parliament gave Kyrgyz officials three months to negotiate a new operating agreement, which would be the third in 10 years.

Kyrgyz officials say the current agreement, negotiated under former president Kurmanbek Bakiyev in 2009, shortly before he was ousted amid violent street riots, was unfair. The company, which also operates a mine in Mongolia, argues that it negotiated in good faith with what was at the time the legitimate government, and has threatened to seek international arbitration.

It calls the 467-million-dollar claim — which other miners in Bishkek say is a negotiating tactic — “exaggerated or without merit.” Centerra officials also point out that the agreement gave the company confidence to invest almost one billion dollars in the mine since 2009.

Kumtor is critical to Kyrgyzstan’s economy. Last year the mine, which sits above 4,000 metres in the Tien Shan mountains, contributed approximately 5.5 percent of the country’s GDP. In 2011, a good year, the mine accounted for 12 percent of GDP and over 50 percent of industrial output. Earlier this month, Centerra announced its first quarter revenue rose 44 percent.

Negotiations are likely to focus on current operating agreement’s structure, a source close to the Kyrgyz side told Under the existing agreement, Kyrgyzstan owns close to one-third of the Toronto-listed company. That arrangement places Bishkek in a bind: if the government fines the company, it hurts its own potential dividends.

Bishkek is ready to divest itself of Centerra ownership, the source said, in return for “both a higher income stream and more direct control over operations at the mine.”

The current agreement “doesn’t allow the nation to properly exercise its function as a sovereign. It actually creates an internal conflict. The more they levy tax, the more they assess environmental penalties, the less revenue is available to them in dividends,” the source said, speaking on condition of anonymity due to the sensitivity of the negotiations.

“This structure may be very useful to Centerra, but it is very difficult to understand why, in 2009, the Bakiyev regime pressed for this structure. That reinforces the suspicions of corruption.”

Centerra has repeatedly denied allegations of corruption, and Kyrgyz authorities have not presented convincing evidence the company engaged in corrupt practices. But some believe the venal Bakiyev administration was eager to obtain stock options so it could one day sell them and embezzle the proceeds.

Kyrgyzstan’s shares are held by the state-run gold company, Kyrgyzaltyn. Kyrgyzstan “has every interest in seeing shareholder value maximised and Centerra run as a profitable and successful business,” Kylychbek Shakirov, Kyrgyzaltyn deputy chairman for economics and finance, said in a May 10 speech to shareholders.

Shakirov stressed that Kyrgyzstan is not seeking to nationalise the mine, but said his delegation was acting as a “responsible shareholder” by pushing for Centerra to use a new auditor (it has employed KPMG for a decade) and sideline a senior member of the board while he faces insider-trading allegations in Canada.

Shakirov also expressed “strong reservations” about proposals to offer senior Centerra managers pay raises, noting that in the past few years, compensation packages have risen “sharply as the company’s performance overall was falling.”

Centerra’s top five principals each earned, on average, over 1.6 million Canadian dollars in 2012, 56.7 percent more than they earned in 2010, according to the management information circular distributed at the shareholders’ meeting. Yet, over the past two years – while production has fallen and the company has faced repeated calls for nationalisation by some Kyrgyz politicians – the company’s value has fallen roughly 80 percent.

John Pearson, Centerra’s vice president for investor relations, told that the two sides “are making progress” as they approach negotiations, which parliament has said must be completed by Jun. 1.

“The discussions with the government are ongoing. Most recently in our discussion with the government we recommended that they retain external independent advisors on both the financial and legal fronts and they have done so,” he said.

Bishkek is said to have hired DLA Piper, the law firm, and Price Waterhouse Coopers as advisors.

In recent weeks, increased waste rock movement at Kumtor has highlighted long-standing environmental concerns, some of the thorniest issues in the negotiations. Centerra points to studies – including several commissioned by Bishkek – that absolve it of wrongdoing.

But questions remain about whether an accelerated pace of melting ice at the high-altitude mine is being encouraged by extraction activities there.

As part of its approach, Bishkek is expected to push for a review of environmental compliance standards, while it considers ways of tightening its own legislation related to mining’s environmental impact in general.

*Editor’s note: David Trilling is EurasiaNet’s Central Asia editor.

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