Friday, 14 June 2013

Kyrgyzstan's Kumtor Mine Becomes Political Football

Published in Analytical Articles

by John C. K. Daly (06/12/2013 issue of the CACI Analyst)

Last month’s demonstrations outside Kyrgyzstan’s Kumtor gold mine have highlighted local and governmental dissatisfaction with the terms of its existing 2009 contract with Toronto-based Centerra Gold Inc. The Kyrgyz government has given the company until October 1 to offer revised terms, threatening to nationalize the company if it does not agree. Given the importance of the site to both Centerra Gold Inc. and the Kyrgyz government as a revenue source, a compromise would seem to be the eventual outcome. Whether or not that can be achieved will depend upon the protracted negotiations currently underway between Centerra Gold Inc. and Bishkek.


BACKGROUND: On May 28 thousands of protesters demanding the nationalization of Kyrgyzstan’s Kumtor gold mine, the nation's largest, seized the Tamga electricity substation and cut off power to the facility. The protesters demanded the nationalization of Kumtor and that Toronto-based Centerra Gold Inc., having operated the Kumtor mine since 1997, build a more environmentally friendly infrastructure and provide both medical facilities and more financial benefits for the inhabitants of three local villages. Following the demonstrators clashing with police, two days later the Kyrgyz authorities declared a state of emergency around the mine, which lies in the east of the country in the Tien Shan Mountains in the Dzheti-Oguz district. Local activists proclaimed, “Kumtor will either belong to us or stop its work.”

The demonstration was the outcome of an opposition rally one and a half months earlier in Barskoon village near the mine, when then opposition leaders announced their intention to hold an indefinite protest action in the capital Bishkek’s central square to press their demands. Following discussions, they decided on a local protest.

The potential stakes are high for the Kyrgyz government. According to Kyrgyz government statistics, official assessment, Kumtor accounts for up to a quarter of the country’s GDP. Kyrgyzstan has 430 tons of potentially recoverable gold, worth more than US$ 105 billion at current prices. Kumtor is also responsible for more than 50 percent of Kyrgyzstan’s exports and Kumtor is the Kyrgyz Republic’s main resource of tax revenue.

In a bid to defuse the situation, on June 1 Prime Minister Zhantoro Satybaldiyev visited the site and updated protesters about the government’s discussions with Centerra Gold Inc. but added, “The company Kumtor must work. Kumtor is the future of Kyrgyzstan. I can’t promise you to change the existing (Kumtor) agreement in a matter of a day. I cannot, in a matter of one day, sort out all of these issues that have existed for the last 20 years. You have inspired me and I promise to defend the interests of Kyrgyzstan (regarding Kumtor).”

Centerra Gold Inc. estimated that the power cuts cost the company US$ 4 million in lost production. Staking out its negotiating position, Centerra Gold Inc. released a press statement on June 4 commenting that it hoped to resolve “matters through constructive dialogue. However, there can be no assurance that any transaction will be consummated or that the company will be able to successfully resolve any of the matters currently affecting the Kumtor Project.”

While the Kumtor area has a history of intermittent Soviet exploration dating back to the late 1920s, the actual discovery of the deposit was made in 1978 with Moscow undertaking exploration, audit sampling, drilling and geological interpretation work the following year. A decade later an initial reserve statement was issued by the USSR State Committee on Reserves in March 1990, but the Soviet government was too preoccupied with political events and a lack of advanced Western technology to begin exploiting the reserves prior to the collapse of the USSR in December 1991.

IMPLICATIONS: Kumtor is the largest foreign-owned mine in the former Soviet Union and remains essential to the Kyrgyz economy. The money that Kumtor generates is desperately needed by the Kyrgyz government, which has seen two presidents overthrown in popular actions since 2005, with powerful local clans defying the authority of central government. According to the CIA, in 2013 33.7 percent of the Kyrgyz population lives below the poverty line, while the country suffers from an inflation rate of over 7 percent.

Trouble between the Toronto-listed Centerra Gold Inc. and the Kyrgyz government broke into the open in Bishkek in January, when Economy Minister Temir Sariyev, who heads a state commission on Centerra Gold Inc.’s work in the country, remarked that “agreements the government signed with Centerra Gold Inc. between 1992 and 2009 were dubious. They were all approved by a narrow circle of persons, without wide public discussion and not entirely in Kyrgyzstan's interests.” Sariyev added that Centerra Gold Inc. “unjustly enjoys special conditions” under a “murky” 2009 agreement, signed when fugitive President Kurmanbek Bakiyev was in power. Under the 2009 contract, Centerra Gold Inc. paid the Kyrgyz government a 14 percent tax on gross revenue from Kumtor, which Kyrgyzstan wanted to increase to 17-20 percent, as paid by other mining companies working in the country. Sariyev added, “If they pay in line with our laws … they will pay 5 billion soms (US$ 105 million) more than they have been paying under the current agreement. In case there is no agreement … then we will recommend that the government cancel the current concession agreement.” The following month the Kyrgyz Parliament requested that the government renegotiate the 2009 deal by June.

In 2009 Centerra Gold Inc. acquired the site from Cameco, which in 1992 began to develop the deposit with the Kyrgyz government. Development of the Kumtor gold deposit began in 1994 and was completed in early 1997 at a cost of about US$ 450 million.

A further pressure point that the Kyrgyz government is applying to the Kumtor mine is charges that it is damaging the local environment. A state commission has accused Centerra Gold Inc. of damaging the environment at Kumtor with its mining activities and in February sent Centerra Gold Inc. a claim for US$ 315 million relating to alleged environmental damages at Kumtor. Kumtor has long raised environmental concerns about the safety of downstream water supplies, as the facility uses “heap leaching” to extract the gold from the ore, which is crushed into pebble-sized fragments and then sprayed with a dilute alkaline cyanide solution to separate the gold. The mine sits atop glaciers whose springtime melt-water feeds fresh water into the Naryn River, which flows towards Tajikistan, Kazakhstan, and Uzbekistan and authorities fear that pollution from the mining operations and massive tailings heaps could leach toxic materials.

The protests had no significant effect on Kumtor’s output, with Centerra Gold Inc. reporting that the facility is on target to meet its production goals for 2013. However, Centerra Gold Inc.’s troubled relationship with the Kyrgyz government has had a significant impact on its share price, which has fallen 54 percent since January.
Centerra Gold Inc. is the largest Western-based gold producer in Central Asia, and the Kumtor mine has produced more than 8.6 million ounces of gold between 1997 and the end of 2012. In 2012 alone, Kumtor produced over 315,000 ounces of gold.

Centerra Gold Inc. is currently holding talks with the Kyrgyz government about a new ownership arrangement, telling reporters that the two sides are considering a swap to shift ownership of Kumtor from Centerra Gold Inc. to a joint venture with the government whereby the Kyrgyz government’s Kyrgyzaltyn JSC would exchange its 32.7 percent equity interest in the Kumtor gold mine for a stake of equivalent value in the new joint venture.

On June 4, after an appeal from Deputy Prime Minister Joomart Otorbaev requested more time for talks, the Kyrgyz Parliamentary foreign affairs, agrarian policy and the fuel and energy committees extended the government’s negotiations with Toronto-based Centerra Gold Inc. to change the Kumtor Project Agreements by four months to October 1. The new joint venture will be registered in Kyrgyzstan, managed by a board of directors split equally between Centerra Gold Inc. and KyrgyzAltyn, with an annual rotation of the chairman of the board by each partner.

CONCLUSIONS: While the situation at Kumtor has been defused for the moment, the facility’s future depends on the negotiations between the Kyrgyz government and Centerra Gold Inc. over the next three months. The one thing that seems certain is that both parties need one another, and that a face saving compromise would be the best way forward. For Centerra Gold Inc. to give the government a direct share in Kumtor would go a long way towards quelling the nationalism that has roiled the situation, while the Kyrgyz government is well aware that it cannot operate the facility on its own. Whatever the outcome of the negotiations, it seems certain that operations at Kumtor will not proceed as before.

AUTHOR’S BIO: Dr. John C. K. Daly is a Nonresident Research Fellow of the Central Asia-Caucasus Institute and President and CEO of Central Asian Biofuels Ltd.

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