Kyrgyz court ruling roughs up Centerra

Centerra Gold’s (CG-T, CAGDF-O) share price was hammered recently, after a court ruling against it coincided with the departure of two key members of its management.

And while Centerra’s director of investor relations, John Pearson, insists the two events are not connected, the company’s shares fell hard on the news, dropping 27% or $1.72 to $4.77 on roughly 1.7 million shares traded.

Shares had recovered somewhat to $5.25 apiece by presstime, but that’s still a long ways off from the $10-range they had traded in as recently as May 20.

The key driver to the fall is clearly the Kyrgyz lower court ruling, which deemed three of Centerra’s licences at the Kumtor gold project, in Kyrgystan, to have been issued improperly.

While the suspension of all activity on the licences is to take effect in 30 days, the ruling does not affect the entire project.

“Where production comes from at Kumtor, we continue to operate and to produce gold as we were before,” Pearson says.

That, however, could change, as the ruling handed down represents only half of the matter. The court is expected to rule on Centerra’s concession agreement for the main Kumtor orebody by July 2nd.

Pearson says the company will not speculate as to what a second ruling against the company would entail. But Centerra isn’t accepting the unfavourable first ruling without a fight.

It has already met with international arbiters over the suspensions, while the country’s state agency of geology and mineral resources is taking up the fight within Kyrgyzstan by appealing the courts ruling.

As for the worry that Kyrgyzstan could potentially ignore any international edict against its own courts, Pearson says the country has commitments that would impel it to do so.

“The Kyrgyz Republic is part of the World Trade Organization,” Pearson says. “It has full membership and has signed on to a number of international treaties regarding the honouring of decisions that come out of international courts.”

Of the three licences that are to be suspended, Sarytor is the most important. The licence has a proven and probable reserve of 300,000 oz. gold.

A second, the southwest licence, has already been mined out and the third licence is an exploration target.

The court said its decision against Centerra came because the licences had been issued illegally. The government that had originally granted the licences was replaced in a December 2007 election.

Centerra looked to be heading towards calmer waters when it reached a deal with the former government last summer that would have doubled the government’s stake in Centerra to about 30% in exchange for a fixed tax rate and a larger licence area.

The increase was to come from a decline in majority shareholder Cameco’s (CCO-T, CCJ-N) stake to 41% from 53%.

But the deadline for ratifying the agreement came and went earlier this month, after the new government took control, leaving the company’s status in the country up in the air.

The court ruling would appear to come down on the side of a parliamentary committee that is known to be pushing for an even larger stake in Centerra and higher taxes.

Resigning chief executive Len Homeniuk and chief financial officer David Petroff have both been with Centerra since its initial public offering in 2004. Homeniuk will be replaced by Stephen Lang while Jeffrey Parr, the former vice-president of finance, will take Petroff’s place.

The two inherit a company that could well be looking to define a new corporate strategy. While Centerra also operates the Boroo gold mine in Mongolia, Kumtor was its flagship property.

Kumtor represents 4% of Kyrgyzstan’s gross domestic product and is slated to produce between 580,000 and 620,000 oz. gold this year.

The mine’s stature in the country as well as technical difficulties have made it a challenging project for Centerra over the years. It suffered production losses due to a pit wall failure two years ago and has had to deal with labour issues that have hampered production in the past.