Kyrgyzstan to temporarily take over Centerra’s Kumtor mine

Lawmakers in Kyrgyzstan, home to major gold and copper mines, have passed a law allowing the state to temporarily seize Centerra Gold’s (TSX: CG) Kumtor mine, the largest gold operation in the Central Asian nation.

The bill, passed late on May 6, allows the government to run Kumtor for up to three months. It is based on the belief the operation may pose danger to locals and the environment.

Canada’s Centerra said in a statement that Kumtor, which accounts for a fifth of the former Soviet country’s total industrial output, adheres to international environmental standards.

It also said it “believes strongly” the claims against it are without merit.

The mine has produced more than 13.2 million ounces of gold between 1997 and the end of 2020. Last year’s output was slightly over 556,000 ounces.

In February, the country formed a commission in charge of reviewing the operation as the state Tax Service revived previously-dismissed claims against Centerra.

The revenue agency alleges the Toronto-based miner owes more than US$170 million, which could made it subject to penalties or sanctions.

Centerra has said the 2009 restated project agreements which govern the Kumtor mine contained a specific tax and fiscal regime. This states that no taxes are payable by its local unit Kumtor Gold Company (KGC) on intercompany transactions with Centerra, including dividends.

The company is also facing a civil suit against the operation, requesting that its past practice of placing waste rock on glaciers be determined to be illegal. The claimants are demanding over $3 billion in environmental damages in favour of Kyrgyzstan, Centerra said.

The gold miner noted it was committed to continue working with Kyrgyz authorities to resolve any outstanding issues in accordance with existing contracts.

Kumtor has been the focus of a number of disputes between the company and the Kyrgyz government.

President Sadyr Japarov, who seized power after violent riots last October, once campaigned for the nationalization of the mine. After assuming the post, however, he said he no longer considered it necessary.

Kyrgyzstan has a history of popular uprisings and political turmoil, ever since gaining its independence after the end of the Soviet Union in 1991. Protesters had ousted two prior PMs in revolutions in 2005 and 2010.

Dalton Baretto of Canaccord Genuity has lowered his rating on Centerra from a ‘speculative buy’ to a ‘hold’ and cut his target price on the stock from $14.50 per share to $11.50 per share.

“We are not surprised — we have been anticipating something like this since President Japarov took power on January 10; however, the speed and breadth of these reforms has caught us off-guard,” he commented in a research note following the latest news.

“We believe this opens the door to what is likely going to be a multi-year degradation of the relationship with the Kyrgyz State, and while CG will leverage all available avenues of international trade disputes, we believe these are unlikely to be effective in the long term. Mr. Japarov has made no secret of wanting to align himself with Russia and China at the expense of Western relationships, and we believe there is a reasonably high probability that Kumtor could be a casualty of this geopolitical paradigm shift. Nonetheless, we do not believe this is imminent, but rather will likely take years to play out if it happens.”