Nelson Gold halts operations

Mining and milling operations at the Jilau mine in Tajikistan have been halted for the second time this year, pending resolution of an impasse between operator Nelson Gold (NLG-T) and the Tajikistani government.

The mine is owned by Zeravshan Gold, which itself is owned by Nelson, with a 49% interest (held through a subsidiary), and the Tajikistani government, with 51%.

According to Nelson Gold’s vice-president, Andrew King, the ownership agreement has not been ratified by the Tajikistani parliament, and therefore the company’s interests are not protected.

“Our understanding is that these things have to be ratified through parliament, because we’re doing things that aren’t actually defined under Tajikistani law,” King said.

The agreement calls for Zeravshan’s profits to be taxed at a rate of 16% from 1996 to 2000, increasing to 25% by 2006. The profits would also be subject to a 3.5% royalty, which will jump to 6% in 2006. Proceeds of gold sales would be held in a bank outside Tajikistan.

Nelson Gold insists that it be given control over Zerevshan Gold’s offshore accounts, but the Tajikistani government has not convinced Nelson that it is in agreement.

Zerevshan Gold was also obligated to negotiate a refining agreement with the Vostokredmet refinery and negotiate some changes to the original joint-venture agreement. While these last two matters were soon settled, the Tajikistani government did not follow through on its promise to implement the legislative aspects of the protocol expeditiously.

As a result, Nelson Gold shut down its Zerevshan operations in September, then restarted them several weeks later, after the Tajikistani government gave repeated assurances that the protocol would be implemented. However, inaction forced Nelson Gold to cease operations as of Oct. 31.

Zerevshan Gold has produced 25,000 oz. gold but has sold none. As a result, nearly US$9.5 million worth of gold is sitting at the mine because Nelson Gold will not sell it until the Tajikistani government determines how much tax it is required to pay.

“We don’t want to sell gold unless we know exactly what sort of taxation regime we fall under . . . and it would be irresponsible of us to carry on putting shareholders’ money into that operation until we can actually sell the gold and have the proceeds cover our operating costs,” said King.

He added that many Tajikistani officials are suspicious of Western business practices.

“The problem is that the government there is essentially quite naive. They’ve had 70 years of communism, and so they don’t quite understand where the money comes from.

“There are no real differences between us. Everything has been agreed on in the protocol, but there are some people in the government that may be opposed to it, so they’re holding it up. And maybe there’s also a bit of seller’s remorse.”

Despite the current impasse, King remains hopeful and insists that Nelson Gold is not about to give up on its investment in the mine.

“Nelson has gone through an enormous amount of pain

[to reach this stage]. We raised our initial money at a share price of $3.25, and now we’re sitting at 58 cents.”

He expects the shutdown is placing pressure on the Tajikistani government to bring about a quick resolution of the outstanding issues and that the mine and mill will be up and running in 2-3 months.

The Jilau deposit has measured and indicated reserves of 49.7 million tonnes grading 1.28 grams gold, plus inferred resources of a further 57 million tonnes at 0.86 gram. Zerevshan Gold also has an interest in the Taror deposit, which contains measured and indicated reserves of 18.5 million tonnes grading 4.38 grams, plus an inferred resource of 3.8 million tonnes grading 3.91 grams.

International Finance Corp. has agreed to take a 5% equity share in Zerevshan Gold.