Kyrgyzstan: Does Mine Restructuring Signal More Stable Times for Investors?

A restructuring stands to significantly enhance the Kyrgyz government's stake in the company operating the Kumtor gold mine. Officials assert the changes can foster a greater degree of stability in mining operations, and promote greater confidence among foreign investors. But analysts continue to wonder whether a prolonged era of investor uncertainty in Kyrgyzstan is coming to an end.

The Canadian corporation Cameco and the Kyrgyz government announced the Kumtor restructuring in late August. The deal would nearly double the government's holdings in Centerra, Cameco's gold-mining subsidiary, and would go partway towards meeting long-standing Kyrgyz demands for a greater control over one of the Central Asian nation's most lucrative assets.

Kyrgyz officials said the restructuring promises to restore substantial local ownership of the mine, rectifying an injustice committed when former president Askar Akayev's administration traded away much of its stake. [For background information see the Eurasia Insight archive]. But several analysts said that only time will tell whether government claims that the mining operation was entering a new period of stability would prove accurate.

Although Centerra is also mining a deposit in Mongolia and exploring in Nevada, Kumtor is its main asset, pouring 304,000 ounces of gold in 2006. The mine is equally critical to the Kyrgyz government's coffers, accounting for as much as 10 percent of the country's Gross Domestic Product (GDP) in recent years.

As of September 18, Centerra's share price on the Toronto stock exchange had risen 27 percent since the announcement of the deal.

In an interview with EurasiaNet, Kyrgyz Finance Minister Akylbek Japarov predicted that the government's holdings in Centerra would soon be worth more than $1 billion, noting that this was a substantial sum when compared to Kyrgyzstan's current estimated GDP of $3.5 billion.

"We will have an economic cushion – a reserve – for the implementation of economic reforms with no looking back," Japarov said. "We don't intend to sell [the stake] right away like the previous government," he added, but would instead use it as collateral to attract financing from other investors.

Pending the approval of Kyrgyzstan's parliament, the deal would give Kyrgyz state gold company Kyrgyzaltyn 32.3 million more shares in Centerra, two-thirds from Cameco and the remainder from new shares issued by Centerra itself. The government's stake in Centerra would rise from 16 to 29 percent, while Cameco's would drop from 53 to 41 percent. (The remaining 30 percent of Centerra shares are publicly traded and owned by a variety of investors.)

In return for the share transfer, Cameco and Centerra would receive rights to mine more than 25,000 additional hectares adjacent to the Kumtor site. The area is thought to contain substantial secondary ore deposits that could extend the mining operation beyond the estimated end date of 2011. The deal also offers a less complicated tax structure: profits will be taxed at 11 percent in 2008, rising gradually to 13 percent from 2010 onward.

Japarov said the agreement "is a signal to investors that the rules of the game will be sufficiently simple and clear," in contrast to the deals made during the Akayev era. "We are turning over a new leaf, where the interests of our investors and of our republic are accounted for. Business is good when it is good for everyone," he added.

Kyrgyz authorities had been pushing for a new agreement since late 2006. Azamat Akeleev, chair of the MBA program at the American University of Central Asia, said the government was motivated in part by a growing public feeling that Kyrgyzstan was getting a raw deal. World gold prices have risen substantially since the last agreement between the two sides, in 2004.

"It has been really high-profile, and [the] government needed to show to the people that they were changing the situation," Akeleev said.

Ken Arne, senior associate with Behre Dolbear, a mining consultancy, said it was "a common move" for host governments to renegotiate when prices rise. "Companies that are politically sophisticated understand that going in and they are prepared to be flexible," he said. "Centerra gave up some shares on one side, but on the other hand they got additional exploration ground, they got a more favorable tax regime, [and] they got a few other benefits," he said.

"Both sides can walk from this thing with a pretty reasonable smile on their face," Arne added.

Two critical variables in ensuring whether the smiles remain are the price of gold and the lifespan of the mine, analysts said.

Arne explained that Centerra had a number of options for seeking additional gold, including extending the current open-pit operation below ground, mining the satellite deposits that surround the current site, or even trucking in gold from nearby areas to be processed at Kumtor. "It's conceivable that this could go on for much, much longer, provided that there's economic incentive, i.e., the price of gold is high enough to support and justify a fairly aggressive, continuing exploration effort," Arne said.

The length of Cameco's commitment to its Kumtor investment is another unknown. As the world's largest uranium producer, the company has indicated that it is looking to divest itself of its gold assets and focus on its core business.

Japarov said that the new deal contained provisions designed to discourage either side from dumping shares precipitously, although he eventually expected Cameco to sell its stake. "We will welcome those companies that have major gold-extracting business [to] buy Cameco's shares, and will be their partners," he said.

According to Akeleev, Kyrgyzstan's next task would be to prove to its investors that the volatility that has plagued the country – sudden changes of government, mining road closures by protesters, growing populism – had come to an end. "A lot depends on how well they will be able to keep to their agreements, because in the past there have been cases when it didn't happen," Akeleev said. "The attractiveness of [the] overall investment climate depends on how well the government will be able to sustain stability and sustain these contracts that they signed."