The Uzbek taxman cometh (August 14, 2006)

The government of Uzbekistan has seized some gold and banned further shipments of the yellow metal from Newmont Mining’s (NMC-T, NEM-N) 50%-owned Zarafshan heap-leach operation in the Kyzylkum desert, 402 km west of the Uzbek capital of Tashkent. Authorities have also seized some of the joint venture’s other assets.

The move comes after an economic court ruled in June that the joint venture owed some US$48 million in back taxes. The Zarafshan partners failed in their appeal of the tax authority’s claim for taxes of US$37 million for 2002 to 2004; they intend to appeal the court ruling for around US$11 million for 2005.

The partners argue that they have a government decree protecting the operation from changes in the country’s tax laws over its lifetime, and that the decree could only have been repealed after government action that scrapped tax privileges for foreign-linked operations as of June 1, 2006. The tax authorities counter that the decree became ineffective and taxes and penalties are owed.

In addition, the European Bank for Reconstruction and Development has frozen the joint venture’s account in London. The partners have an outstanding debt of around US$20 million with the bank; the account currently has a balance of around US$14 million.

Newmont plans to pursue all available legal remedies, including international arbitration. The company says it may be forced to shut down the operation in the second half of the year, and is considering selling its stake in the asset, which it values at US$94 million.

The Zarafshan joint venture sold 122,700 oz. gold in 2005. During the recent second quarter, Newmont’s sales from the operation slipped by 8% from a year earlier to 27,300 oz. The decrease is owing to the timing of flows from the leach pads; ore grade increased 23%. Costs were relatively static.

Zarafshan produces gold from low-grade oxide ore stockpiles generated by the massive Muruntau open-pit gold mine, which has been in operation since the 1960s. Zarafshan is expected to run through mid-2011.

Newmont’s partners at Zarafshan are the State Committee for Geology and Mineral Resources (Goskomgeologia) and the Navoi Mining and Metallurgical Combine.