Crossroads Asia | Economy | Central Asia

Centerra Seeks Arbitration Over Kyrgyz Gold Mine

After “meritless” tax and environmental claims and a new law threatening the ownership of the mine, the Canadian investor has escalated the dispute. 

Centerra Seeks Arbitration Over Kyrgyz Gold Mine
Credit: Pixabay

A new law, rushed through the Kyrgyz parliament, could pose new threats to the business activity of the country’s largest gold mine operator, the latest of an endless series of disputes around Kyrgyzstan’s most profitable enterprise. Now, the company is seeking arbitration to resolve the ongoing dispute.

Under the guidance of the new bill, approved by parliament on May 8, the government could take over operations at the Kumtor gold mine for a period of three months in case of documented threats to the environment or human health. 

While the law, signed by President Sadyr Japarov on May 14, does not explicitly target the Kumtor gold mine, it is directed toward companies that operate under concession agreements in Kyrgyzstan.

The Kumtor gold mine is the only project in the country operating under a concession agreement, which the government signed in 2009 with Centerra Gold.

Centerra Gold, a Toronto-based miner, operates in Kyrgyzstan, Canada, and Turkey, but its Kyrgyz assets are the most valuable and form the bulk of its annual production. State-owned Kyrgyzaltyn owns around 26 percent of Centerra’s shares. Through its subsidiary, Kumtor Gold Company (KGC), Centerra controls operations at the Kumtor gold mine.

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Globally, Kumtor is a mid-sized operation. For Kyrgyzstan, however, it represents about 10 percent of its GDP. In 2020, Centerra paid around $160 million in taxes, making it Kyrgyzstan’s largest taxpayer.

In March, Kyrgyzstan’s Tax Service said the company owed around $146 million in back taxes, a claim that Centerra deemed “exaggerated or without merit.” In addition, a civil lawsuit demanding $3 billion in compensation for environmental damage seemed to be linked to the political pressure on the company, rather than the real and varied pollution issues linked to the Kumtor mining operation.

On May 16, after parliament hastily passed the new bill and the president signed it into law, Centerra initiated an arbitration proceeding against the Kyrgyz government. Should the parties agree to escalate the dispute, the case will be heard at the Arbitration Institute of the Stockholm Chamber of Commerce under the rules of the United Nations Commission on International Trade Law. 

A cash-cow for both Canadian investors and the Kyrgyz budget, Kumtor has historically been at the center of harsh disputes, as the government tried to garner increasing control over the enterprise and often threatened nationalization.

Financially, the company’s stock price has swung up and down according to the level of tension with the government. After years of unclear futures, in 2017 Centerra and the government reached an agreement to maintain the Canadian company’s ownership over the mine in exchange for a $50 million one-off payment to a newly-created environmental agency.

Since then, benefiting from a more stable regulatory environment, Centerra’s share price in Toronto had more than doubled to 18 Canadian dollars in August 2020. With the downfall of the Social Democratic Party (SDPK) leadership in October 2020 and the installment of Japarov as the new leader, Centerra’s financial performance worsened until a 30 percent collapse on May 7, the day that the new bill was approved by parliament. 

Contextually, Kyrgyzaltyn said it would divest, selling around one-fifth of its holdings in Centerra, raising further doubts about its mid-term stability.

It is important to note that Japarov cannot be considered a neutral party in the enduring tug-of-war between the government and foreign investors.

In 2013, he led a protest at the mine demanding its nationalization and was ultimately jailed because the protest turned violent and a local governor was kidnapped. In October 2020, he was freed from prison by a mob of protesters that quickly crowned him the leader of post-SDPK Kyrgyzstan.

In recent public statements, however, Japarov has reassured that the nationalization of Kumtor is no longer among his priorities. 

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Centerra wants clearer answers from the Kyrgyz government, which seems to be flexing its muscles to gain further payments or concessions from the Canadian company. Should the parties fail to reach an amicable agreement by mid-June, the Stockholm court will take up the case.