Kyrgyzstan to temporarily take over Centerra’s Kumtor mine

The Kumtor gold mine is the largest non-state employer and taxpayer in Kyrgyzstan. (Image courtesy of Centerra Gold.)

Lawmakers in Kyrgyzstan, home to major gold and copper mines, have passed a bill allowing the state to temporarily seize Centerra Gold’s (TSX: CG) Kumtor mine, the largest gold operation in the Central Asian nation.

The legislation, passed late on Thursday, allows the government to run Kumtor for up to three months. It is based on the belief the operation may pose danger to locals and the environment.

Canada’s Centerra said in a media statement that Kumtor, which accounts for a fifth of the ex-Soviet country’s total industrial output, adheres to international environmental standards.

It also said it “believes strongly” the claims against it are without merit.

Kumtor, the largest gold mine in the Central Asian nation, produced over 556,000 ounces in 2020

The mine has produced more than 13.2 million ounces of gold between 1997 and the end of 2020. Last year’s output was slightly over 556,000 ounces.

In February, the country formed a commission in charge of reviewing the operation as the state Tax Service revived previously-dismissed claims against Centerra.

The revenue agency alleges the Toronto-based miner owes more than $170 million, which could made it subject to penalties or sanctions.

Centerra has said the 2009 restated project agreements which govern the Kumtor mine contained a specific tax and fiscal regime. This states that no taxes are payable by its local unit Kumtor Gold Company (KGC) on intercompany transactions with Centerra, including dividends.

Mounting issues

The company is also facing a civil suit against the operation, requesting that its past practice of placing waste rock on glaciers be determined illegal. The claimants are demanding over $3 billion in environmental damages in favour of Kyrgyzstan, Centerra said.

The gold miner noted it was committed to continue working with Kyrgyz authorities to resolve any outstanding issues in accordance with existing contracts.

Dalton Baretto of Canaccord Genuity said he wasn’t surprised by Kyrgyzstan’s move. “We have been anticipating something like this since President Japarov took power on January 10; however, the speed and breadth of these reforms has caught us off-guard,” he commented in a research note following the news.

The analyst added he believed the government has opened the door to what is likely going to be a multi-year degradation of the relationship between Centerra and the Kyrgyz State.

“The government has opened the door to what is likely going to be a multi-year degradation of the relationship between Centerra and the Kyrgyz State”

Dalton Baretto, Canaccord Genuity

“While Centerra Gold will leverage all available avenues of international trade disputes, we believe these are unlikely to be effective in the long term,” Baretto said.

“[President Sadyr] Japarov has made no secret of wanting to align himself with Russia and China at the expense of Western relationships, and we believe there is a reasonably high probability that Kumtor could be a casualty of this geopolitical paradigm shift. Nonetheless, we do not believe this is imminent, but rather will likely take years to play out if it happens.” 

Kumtor has been the focus of a number of disputes between the company and the Kyrgyz government.

Japarov, who seized power after violent riots last October, once campaigned for the nationalization of the mine. After assuming the post, however, he said he no longer considered it necessary.

Kyrgyzstan has a history of popular uprisings and political turmoil, ever since gaining its independence after the collapse of the Soviet Union in 1991. Protesters had ousted two prior PMs in revolutions in 2005 and 2010.