Gold Mine Reorganization in Kyrgyzstan Spurs Political Controversy

The restructuring of one of Kyrgyzstan's most lucrative state-controlled economic assets is fueling political controversy in the Central Asian nation. Members of the Kyrgyz parliament continue to insist the government's decision to reorganize the operations of the Kumtor gold mine "contradicts the state's interests." Some legislators say the deal should be scrutinized to ensure that proceeds reaped by the government are properly allocated, and are not diverted for the personal benefit of top officials.

Kumtor had been a joint venture between the Canadian corporation, Cameco, and the Kyrgyz government. In late June, Kumtor became the key piece in a new venture involving Cameco subsidiaries and the Kyrgyz government, called Centerra Gold Inc. Among the other assets held by Centerra are majority stakes in Mongolia's Boroo gold mine, and the REN joint venture in the US state of Nevada. The new entity carried out an initial public offering (IPO) on the Toronto Stock Exchange in late June. According to Centerra spokesman Bob Lillie, the IPO of 70.2 million shares was fully subscribed, with shares trading near the $15.50 (Canadian) offering price.

Under terms of the old Kumtor joint venture, known as KGC, the Kyrgyz government held a two-thirds interest. Kumtor's restructuring left the state holding company, Kyrgyzaltyn, with a roughly 27 percent share of Centerra. Soon after the IPO, however, the Kyrgyz government liquidated 7.5 million shares of its holdings, reducing its stake in the company to about 16 percent. The stock sale generated about $116.25 million (Canadian) for the Kyrgyz government, the KyrgyzInfo news agency reported.

Lillie, the Centerra spokesman, said Cameco sought the restructuring in order to "decouple" its assets in gold mines from its core businesses of uranium production and nuclear energy. Cameco, which owns 54 percent of Centerra, wanted "the market to put a value on it [Kumtor]." He went on to say that Cameco was unlikely to seek a larger share of Centerra. He indicated that Cameco may even decide to decrease its interest in Centerra at some unspecified point in order to focus on its nuclear energy activities.

For over a year, the Kumtor reorganization has been a source of acrimony between Kyrgyzstan's executive and legislative branches of government. During legislative hearings in mid 2003, MPs first heard that the government was considering a drastic overhaul of Kumtor's operational structure. In June 2003, the parliament adopted a resolution that any changes to Kumtor's 1992 operating agreement would require legislative approval.

The government pressed ahead with the reorganization without seeking the consent of the legislature. On December 31, 2003, Prime Minister Nikolai Tanayev signed a decree that accelerated Centerra's creation. The move provoked an outcry, mainly from opposition parliamentarians. "A parliamentary resolution takes precedence over a government decree," asserted MP Ishenbay Kadyrbekov. "The government's actions were not legitimate."

Three parliamentary committees in February determined that Tanayev's decree concerning Kumtor violated the June 2003 legislative resolution. The government announced shortly thereafter, however, that its decree would stand, and the deal would proceed. Officials defended their decision by insisting it was, and remains, the best way to attract additional investment to improve the mine's operations.

Legislators maintain that the Kyrgyz government did not receive fair value for the state's share in Kumtor under the Centerra reorganization. The government's behavior in the deal has prompted some government critics to make allegations of possible corrupt practices. "Why did Tanayev sign the decree?" asked MP Orozbek Duisheev. "It [the motive] is unknown, but the possibility of corruption cannot be excluded."

Despite the fact Centerra's IPO has already occurred, some legislators indicate they are exploring ways to have the government's Kumtor reorganization agreement overturned in court. In addition, MPs are calling for a comprehensive audit of Kyrgyzaltyn, the state-controlled stakeholder in Centerra. According to media reports, the government intends to use the proceeds from the sale of its 7.5 million Centerra shares to plug holes in the state budget, as well as enhance the country's emergency cash reserve fund. Opposition MPs want to make sure the funds are used for their intended purposes.

Kumtor is one of the largest gold mines in the world, with estimated deposits of about 700 metric tons. Opposition deputies have long complained about a lack of transparency surrounding Kumtor's operations. The government, for example, resisted several attempts supported by local environmental groups for the conduct of an independent safety survey. Calls for such a study came in response to a series of hazardous spills at the mine, including an incident in May 1998, when a truck accident caused an estimated 2 tons of cyanide to spill into the Barskoon River.

The consequences of that spill remain a matter of dispute. According to some estimates, it prompted the hospitalization of roughly 1,000 local residents. However, the government vigorously denied reports that the mishap resulted in up to four deaths, according to a statement released by the environmental group CEE Bankwatch. A World Health Organization study of the incident was inconclusive concerning the question of fatalities, although government critics contend that Kyrgyz officials limited access to medical records. In addition to the Barskoon incident, Kumtor has been the site of at least two other substantial hazardous spills – one in July 1998 and another in January 2000.

On July 16, Kyrgyz President Askar Akayev, speaking at a conference, expressed a desire to establish a state agency to for promoting foreign investment. "Transparency is oxygen for investments," the KyrgyzInfo news agency quoted Akayev as saying. Kumtor's reorganization may likely prove to a way to gauge the government's commitment to transparency.