Centerra threatens to shut down Kumtor

Centerra Gold (TSX: CG) said that it would start shutting down its Kumtor gold operation in Kyrgyzstan if it doesn’t receive approval for its 2014 mine plan and related operating permits by June 13.

The Toronto-based firm says its subsidiary, Kumtor Gold Company, has been working with the relevant government agencies since late 2013 to secure the necessary approval and permits with no avail.

“The continuing absence of such approvals and permits creates significant uncertainty and risks for Centerra and its employees,” it said in a June 2 statement.

Kumtor, the biggest gold mine in the country, has roughly 2,700 permanent employees. Most of that staff will be temporarily dismissed if operations are halted, John Pearson, the company’s vice president of investor relations, says.

In previous years, the state agencies for environmental protection and for geology and mineral resources have approved the annual mine plans for the Kumtor project in the first quarter of each year, the company noted in its latest management discussion and analysis, dated May 6.  

Centerra revealed in that document that government representatives, including from the state inspectorate office for environmental and technical safety (SIETS), have expressed concerns regarding the project’s status of permits, the mining of ice and the building of a buttress. SIETS also hinted that the mine could be suspended, but issued no formal notice, Centerra said.

Pearson explains in February, the company built a buttress at the bottom of the advancing Davydov glacier, located at the southernmost portion of the Kumtor central pit, to reduce the rate of movement. He notes government officials asked for more details regarding the buttress, which the company provided, among other clarifications, but still received no permits.

In late April, the Kyrgyz parliament passed the Glacier Law, banning activities that damage glaciers. Pearson says that law still requires the country’s president to sign it before it can take effect, adding other laws protecting glaciers already exist.

Reuters recently reported that environmental officials are worried that Kumtor’s 2014 mine plan could further damage the Davydov glacier, suggesting this could be a key reason behind the delays. Some analysts speculate the ongoing talks about the mine’s ownership structure could also be part of the holdup. 

Last December, the Kyrgyz government entered a non-binding heads of agreement to exchange its 32.7% equity interest in Centerra for a 50% interest in the Kumtor mine.

In February 2014, the parliament reviewed that agreement and made several recommendations, including Centerra to pay for the alleged environmental and economic damages from Kumtor. Centerra faces over US$470 million in potential fines, which it denies.

Pearson, calling those claims “exaggerated”  and “unsubstantiated,” says they should be resolved with the signing of the new mine ownership agreement. If they are not, he notes the company can seek international arbitration. 

“Publicly threatening to shutdown Kumtor operations represents a more aggressive stance towards dealing with a dysfunctional operating environment in the Kyrgyz Republic than Centerra has employed in the past,” BMO analyst Andrew Breichmanas said in a note. This approach puts the “onus on the government to deliver a resolution,” he adds.

Breichmanas points out that the Kumtor mine contributed 7.7% of Kyrgyzstan’s GDP last year and will account for 90% of the company’s 2014 production guidance, noting a quick agreement will be in the best interest of both parties.

If the shutdown occurs, Centerra plans to keep enough employees on site for environmental and safety monitoring, security and equipment maintenance. It has also started an impact assessment and will provide more details if the closure happens.

The company notes Kumtor has “significant geo-technical and other challenges” including pit-wall instability and an inflow of water and ice movement from the Davydov glacier, adding an extended shutdown, without managing such conditions, would likely have a material adverse impact on the operation, and its earnings, among other things.  

The Kumtor pit, which has been in operation since 1997, is scheduled to produce 550,000–600,000 oz. gold in 2014. Last year it turned out 600,402 oz.

Centerra closed June 3 up 6.5% at $3.94, after losing nearly 20% a day earlier on the potential shutdown news.

BMO’s Breichmanas has reduced his $8.50 price target to $5, to reflect “greater uncertainty surrounding Kumtor’s future.”