No light at end of tunnel yet for Centerra, Kyrgyz
Toronto gold miner delays settlement with officials over legal, green disputes
Centerra Gold Inc.’s conflicts with political leaders in the Kyrgyz Republic, a mountainous former Soviet state where its flagship gold mine is located, continue to rear their head.
Last September, the Torontobased gold company said it had reached a settlement to resolve environmental, legal and other disputes with Kyrgyz authorities, but it has twice extended its deadline to finalize the deal, with a target date now set for June 22.
On Tuesday, a Kyrgyz news station reported that the country’s prime minister, who took over in April, is studying the settlement anew and also wants a parliamentary review.
The predicament comes at a time when Centerra is battling a U.K.listed exploration company’s efforts to purchase the flagship mine, known as Kumtor, through a campaign that plays to populist sentiment by promising to re-invest cash from the mine back into the Kyrgyz Republic.
By contrast, Centerra chief executive Scott Perry has stressed that his company is using its cash flows — Kumtor produced 563,000 ounces of gold in 2017, about 70 per cent of the company’s total — to build mines outside of the Kyrgyz Republic in British Columbia and Turkey.
“That’s really our thesis and our touchstone,” Perry told shareholders in May. “As we create more diversity, as we have more sources of probable production, we think that’s going to result in a very favourable recalibration of our geopolitical risk profile, which in turn should really resonate in the company’s valuation multiples.”
John Pearson, a spokesman for Centerra Gold, said Wednesday that finalization of the settlement has been delayed because the company is waiting for the Kyrgyz government to close an unspecified criminal investigation and for a few land use permits to be granted.
“We continue to work to close the agreement,” he said.
Perry travelled to the Kyrgyz Republic to meet the new prime minister and discuss the comprehensive settlement, according to Pearson.
Under the agreement announced last September, Centerra did not admit any wrongdoing but agreed to make a one-time $50-million payment plus ongoing payments of $2.7 million to a nature fund and to pay for a $7-million cancer care fund.
Meanwhile, the Kyrgyz government agreed to drop all environmental claims against the company and to terminate a court order that restricted the Centerra subsidiary that operates the mine from transferring cash to the parent company.
The former prime minister Sapar Isakov, who brokered the settlement with Centerra, was ousted in April and has subsequently been arrested and detained on corruption charges.
According to a news report on Tuesday from Radio Azattak, translated from Cyrillic, some members of parliament resented that they had not been consulted on the settlement and believed they had lost in the dispute to Centerra.
In April, Centerra announced that it had rejected an offer from the London-listed Chaarat Gold Holdings Ltd. to purchase Kumtor mine.
According to the proposed terms of the offer, Chaarat would pay $400 million in cash to Centerra, although it hasn’t disclosed the source of its financing yet.
Meanwhile, shares of Centerra held by the Kyrgyz Republic, estimated to be worth around $400 million, would revert to Centerra, and be exchanged for preferable shares in Chaarat, which entitle it to receive 50 per cent of the mine’s free cash flows.
“We really want this to be a transparent transaction and fully supported on the Kyrgyz side,” Artem Volynets, a Chaarat director, said in an interview with the Financial Post in April.
Volynets, who served between 2010 and 2013 as chief executive of En+, the holding company of Russian billionaire Oleg Deripaska, said the mining market has been stratified between companies that own assets in jurisdictions that are safe and those that are risky. Because Centerra holds both it never trades at a value equal to its peers, he said.
On this point, Perry may agree. In an interview with Financial Post in March, he said, “In terms of Kumtor in Kyrgyzstan, it is not deemed to be a top-tier jurisdiction. The market just never ascribes full value to those assets.”
Centerra was trading down 2.3 per cent on the Toronto stock market Wednesday.
Volynets also said he’s convinced that a public debate will ensue and the takeover of Kumtor will happen.
Financial analysts that cover Centerra have been less positive about the Chaarat deal. Last week, Canadian Imperial Bank of Commerce analysts wrote that the offer was not good enough even though it would reduce Centerra’s geopolitical risk profile.
“The sale of Kumtor is forecast to significantly reduce Centerra’s (free cash flows), which is required to support the new development projects,” the CIBC analysts wrote. Financial Post gfriedman@nationalpost.com Twitter.com/ GabeFriedz