Centerra drops as Kyrgyz gov’t reviews Kumtor

Centerra Gold (CG-T) plunged more than 30% on June 22, as the Kyrgyzstan parliament debated the fate of the company’s Kumtor gold project in the country while investors worried about the possibility of Centerra losing its mining licence.

After tumbling $4.12 to a two-and-a-half-year low of $7.66 per share, the stock moved up slightly to close at $8.71.  

Centerra says the country’s lawmakers are discussing a report prepared by a commission headed by opposition deputy Sadyr Zhaparov, which makes several accusations against Centerra subsidiary Kumtor, which runs the open-pit mine, including causing irreparable environmental damage.

Centerra’s president and CEO Ian Atkinson says in a statement that the company has yet to complete a detailed review of the more than 300-page report.

“Judging from its summary conclusions,” Atkinson continues, “Centerra believes that the report’s findings are without merit.”  

BMO Capital Markets analyst Andrew Breichmanas writes in a brief note that allegations brought against Kumtor as reported by local media include environmental harm, international fraud and threatened national security, while suggestions such as jailing the company’s management, nationalizing the mine and seeking payments for damages have been made.

“[The] Kumtor project is just an international fraud and its board must be arrested,” a local news agency quotes Zhaparov saying.

The company said at the time that it wouldn’t comment on the likely outcome of the deliberations, but denies any wrongdoing. Deputies passed a non-binding resolution on June 27 for a new commission to further study the report.

The Kumtor open-pit mine, which has been operating since 1997, is 33% held by the government through state-owned gold company Kyrgyzaltyn.

The mine has generated US$1.9 billion for the impoverished country’s economy since coming online, including US$620 million in taxes.

Last year Kumtor accounted for 12% of the country’s gross domestic product, 26% of industrial output and 51% of national exports, Breichmanas says.

But some of the deputies opposing Kumtor’s licence argue the state should seek greater benefits from the mine, which between 1997 and the end of 2011 produced more than 8.4 million oz. gold.

It has been reported that it’s unlikely the government will nationalize Kumtor. Under the 2009 agreement signed between Centerra and Kumtor, it would have to buy the stake that it doesn’t already own at current market prices.

Some analysts note that the government doesn’t have the technical expertise or capital to operate Kumtor, which is technically demanding and requires additional investments to churn out profits.

This year, Centerra plans to spend US$370 million to expand the open pit and develop underground operations at Kumtor, which sits nearly 4,000 metres above sea level.

The company’s prized asset is 350 km southeast from the capital of Bishkek, and 60 km north of China’s border.

“Based only on news of the report and parliament deliberations, the value of the country’s 77.4-million share equity investment has already been reduced by approximately US$300 million,” Breichmanas notes.

In March, Centerra predicted Kumtor would produce 390,000 to 410,000 oz. this year, which is down from 575,000 to 625,000 oz. due to greater ice movement in the pit.