Centamin battles legal challenge from Egyptian court

Gold miner Centamin (CEE-T, CEY-L) has run into legal problems at its flagship Sukari operation near the Red Sea in southeastern Egypt. 

On Oct. 30, Centamin acknowledged that the Egyptian administrative court had annulled its concession agreement at the Sukari mine, though the company noted it had not been provided with details from the ruling that would communicate which parts of the concession might be affected.

Judge Said al-Qusair stated that the exploitation contract held by Centamin was invalid, and voided a previous decision allowing the company a 30-year extension on its licence. 

Roughly a year and a half after the Arab Spring upended Egyptian politics and toppled Hosni Mubarak’s regime — making way for a government led by Mohamed Morsi and backed by the Muslim Brotherhood — the country’s courts continue to review contracts and agreements ratified under previous administrations. 

Centamin’s agreement with the Egyptian government came into effect in 1995. The company has a unique agreement insomuch as it is immune to taxes over the first 15 years of operation, and maintains additional rights protecting its cash flows.

Under its contract, Centamin had been entitled to recover all current operating expenses incurred and paid after it achieved commercial production, as well as all exploration costs at a rate of 33.3% per annum.

The company was also allowed to recoup all exploitation capital costs related to mine development. In return, the Egyptian government had been receiving a 3% royalty on net sales revenue from gold and associated minerals produced at Sukari.

Centamin had been enjoying other benefits under the deal, including an exemption from custom taxes and duties paid on capital imports such as machinery and mining equipment. Following the reimbursement of expenses and payment of the 3% royalty, Centamin had been obligated to split profits equally between itself and the Egyptian government.

On Oct. 31, Centamin released an official response to the court ruling. The company reported it is working with its fifty-fifty partner, the state-owned Egyptian Mineral Resources Authority (EMRA), to take action and defend its rights to extract gold under the original terms of its mining concessions. Potential recourse includes the filing of a notice of “objection of enforcement,” which delays implementing any judicial decisions. 

A Centamin report indicated that it is running Sukari’s operations unhindered, and intends to legally challenge any ruling against its contractual rights.

“If through our due diligence process in the coming weeks we uncover any such threat, we will spare no effort in order to defend our position, which at all times has been in accordance with the terms of [our agreement],” Centamin’s chairman Josef El-Raghy says, noting the company has invested US$700 million in Egypt to date, and ­employs 1,200 people locally. “All of our mining and ­processing operators are now Egyptians, and mining represents a key means of bringing economic development into the region in which we operate.”

Centamin also received support from EMRA chairman Fekry Youssef, who indicated the authority’s full backing of the Sukar gold mine. Youssef described the relationship as “positive and constructive,” citing substantial cash flows and word-class development as benefits for the Egyptian people. He labelled the concession agreement as “reasonable and fair to all parties concerned.”

Egypt’s administrative court occupies the lowest rung on the country’s judiciary ladder, and Centamin’s case seems destined to be appealed at higher levels. Challenges of contracts signed under the Mubarak regime are becoming common, though the process can be long and arduous.

Centamin’s shares traded at $1.08 at press time down from a close of $1.55 per share on Oct. 29, just before the latest problems emerged.

Sukari’s 2012 production guidance falls in the 250,000 oz. gold range, and Centamin is carrying out a US$288-million capital upgrade program that would double output to 500,000 oz. gold within the next five years.