With summer at its dog-day stage, the time nears for a final new deal between Canada’s Centerra and the Kyrgyz authorities over the Kumtor gold mine – originally due for June but postponed until the weather gets a bit cooler. Located 4 000 m above sea level, Kumtor is the largest gold mine in Central Asia operated by a Western company. It is the industrial backbone of the Kyrgyz economy, alone contributing 12% of gross domestic product. It has been in production since 1997 and has produced more than 9.5-million ounces of gold to the end of June. But its peak output is expected before the end of the current decade, and this also calls for replacement – apart from its unhealthy dominance over Kyrgyzstan’s national income which keeps the door open for abuses. The most serious one among these is the allegation that over the years 2012 and 2013 dividend, duly paid by Kumtor which is a 100 per cent Centerra subsidiary, has not resulted in Centerra paying dividend to its shareholders, the largest among which is the Kyrgyz state. And even though in an apparent move to preserve calm Centerra has promised to pay dividend over the first quarter of this year, reported net losses over the second quarter raise some questions that cannot possibly be overlooked.

 

photograph by Kumtor Gold

photograph by Kumtor Gold

“Centerra Gold Inc. (TSX:CG) reports it had a US$31.7-million net loss in the second quarter, citing a number of factors including lower gold prices and a US$14.1-million inventory charge at its Kumtor operation in Kyrgyz Republic,” Canada Press [http://www.castanet.net/news/Business/120035/Centerra-Gold-posts-US-31-7-million-loss-including-inventory-writedown-at-Kumtor] reported. “The loss, reported in U.S. currency, amounted to 13 cents per share and compared with a year-earlier profit of one cent per share or US$1.6 million. Revenue was down seven per cent to US$119.5 million, from US$128.2 million in the second quarter of 2013. The average price that Centerra got for its gold during the quarter was also down seven per cent, falling to US$1,285 per ounce from US$1,376 per ounce. The Toronto-based company said Tuesday after markets closed that the inventory writedown at Kumtor, its biggest operation, reflected the difference between the cost of its stockpiles and the amount that it Centerra believes it could realize after further processing and sale of the gold.
However, trends regarding the “price that Centerra got for its gold” go against those in market prices for gold. Driven by a faltering US dollar due to the US-pushed “sanctions” against Russian companies and financial institutions are driving not just the Russian Federation but virtually all non-US economies in the world to replace the greenbacks by other, more tangible assets to keep up their  national reserves instead – and gold is on top of the list. Gold on the London Bullion market closed for the year 2013 at $1,196.80 per troy ounce, to rise to $1,294 as of end-March and to $1,315.66 as of end-June 2014, and according to most analysts it is likely to cross the threshold of $1,500 per ounce before the end of this year.

 

It therefore looks very much as though Centerra has to blame its own lack of productivity and increased production costs rather than the London Bullion Market for the trouble it ran into in the second quarter. “Centerra produced 92,124 ounces of gold in the quarter, including 77,860 ounces at Kumtor and 14,265 ounces at its Boroo operation, compared to 99,426 ounces in the same period in 2013,” the press release continues. “All-in costs per ounce sold, which excludes revenue-based tax in the Kyrgyz Republic and income taxes, was $1,722 for the quarter compared with $1,708 for the second quarter of 2013. Centerra’s corporate administration costs also increased, rising to $11.8 million from $7.2 million a year earlier, due to higher share-based compensation. The share-based compensation in the latest quarter was $5.3 million, up from $200,000 in the same period of 2013.”

 

Amidst controversy over non-payment of dividends over the years 2012 and 2013, which has caused the detention pending criminal charges of the – now former – head of the state gold mining company Kyrgyzaltyn, which acts as the largest shareholder in Centerra since the controversial 2009 swap deal against Centerra’s property rights of Kumtor, Centerra has promised to pay dividend over the first quarter. A fresh press release reads: “Centerra Gold Inc. (TSX:CG) announced today its Board of Directors has authorized a dividend of Cdn$0.04 per common share (total dividend approximately US$8.7 million at the current exchange rate). The dividend of Cdn$0.04 per common share is payable on August 28, 2014 to shareholders of record on August 14, 2014. The ex-dividend date will be August 12, 2014.”

 

With a rival miner, also from Canada, named Stans maintaining a claim for KyrgyzAltyn’s stock in Centerra over a dispute with Kyrgyzstan of its own, both Centerra and the Kyrgyz government, however, look like doomed to work on a solution concerning ownership – this time within Kyrgyz jurisdiction which keeps Centerra stock aloof from the risk of being seized. “Canadian gold producer Centerra Gold is confident that the right to own and operate its flagship Kumtor gold mine, in the Kyrgyz Republic, is secured by acts of law, as the company forges ahead in ironing-out issues in 18-month-long negotiations regarding the government’s ownership and participation in the mine,” a recent article on the issue in Mining Weekly  read. “We are comfortable that we have very transparent and solid agreements with the Kyrgyz government safeguarding our ownership and [operation] of the Kumtor mine. At no point during the ongoing negotiations with the government was changing this on the table,” the periodical quoted Centerra president and CEO Ian Atkinson as declaring – adding: “He noted that to ensure its rights were adequately protected, Centerra had followed a two-year process to formulate the current standing agreements, which were first reviewed by the five political parties in Parliament, before the company submitted them to Parliament for voting. After that, the agreement governing Centerra’s ownership of Kumtor was signed into law by the Kyrgyz president. As a double measure, Centerra sought to test the legality of the operating agreement through several avenues, including a Ministerial review and an opinion from the Constitutional Court. […] Atkinson stressed that any agreement to resolve matters must be fair to all its shareholders and follow due processes both in the Kyrgyz Republic and in Canada. He said government negotiations were expected to continue regarding a potential restructuring transaction to resolve all outstanding concerns relating to Kumtor. He revealed that Centerra was in the process of drafting a total of about 14 agreements that would formalise and implement the provisions [of the existing provisional agreement], which the company would submit to government by August.”