Kyrgyz Government and Centerra Tussle Over Kumtor Operating Pact

Centerra Gold reported on March 26, 2007, that the parliament of the Kyrgyz Republic had voted to accept a draft bill for further deliberation with respect to Centerra’s 100%-owned Kumtor gold mine and other mineral deposits. The bill challenged the legal validity of existing Kumtor agreements, proposed recovery of additional taxes and other amounts relating to past activities, and suggested a consolidation of all the nation’s gold deposits, including Kumtor, into one state mining company.

“We expect the draft bill to be the subject of extensive discussion and parliamentary procedure before being considered for further approval, if at all. It has no legislative effect at this time,” the Centerra statement noted.

Centerra also said it had been negotiating with the government for several weeks with respect to operating agreements. Hopes were that these negotiations would lead to a mutually agreeable outcome; however, if that does not prove to be the case, “the risks to Centerra will increase,” Centerra warned its shareholders. “We believe the parliamentary action is meant to put additional pressure on the negotiation process. The parliamentarian who sponsored the proposed bill was reported in the Kyrgyz press to state, ‘We are not going to nationalize the Kumtor mine. We are aware that an extreme measure like nationalization would entail litigation and penalties. Therefore, the company developing the Kumtor deposit may continue its operation, but a new contract must be signed.’”

“We have been working in the Kyrgyz Republic for the past 15 years and are continually engaged in discussions with the government,” Centerra President and CEO Len Homeniuk said. “We have always enjoyed a cooperative and mutually supportive relationship with the Kyrgyz Republic, and any differences that have come up in the past have always been resolved through good faith dialogue.”

Centerra is dealing with a relatively new government in the Kyrgyz Republic. The previous government resigned on Dec. 19, 2006, and a new prime minister, A. Isabekov, was appointed on Feb. 1, 2007. In December 2006, at the direct request of the government, Centerra paid disputed amounts relating to land tax and a high-altitude premium payable to its Kumtor mine employees. The company then initiated proceedings for international arbitration to recover the disputed amount. The total amount in dispute for 2006 was about $7 million.

The Kumtor mine is located about 60 km north of the Kyrgyz-China border. It is the largest gold mine operated in central Asia by a Western company, having produced more than 5.5 million oz of gold between 1997 and the end of 2005.

In 2006, Kumtor produced 303,000 oz of gold, down from 497,000 oz during the previous year. The lower production resulted from lower ore grades and recoveries at the mill, reflecting mill feed that was primarily sourced from low-grade stock piles and the mine’s southwest pit. These changes resulted from a change in the mine plan made necessary by movement in the mine’s northeast pit wall in July 2006.