Centerra files arbitration notice over mine dispute
An ugly feud between Centerra Gold Inc. and the government of Kyrgyzstan is poised to get uglier as the Toronto-based miner has launched an international arbitration case against the state.
It is the first time since 2008 that Centerra felt the need to go to arbitration, and it reflects how toxic the company ’s situation in Kyrgyzstan has become.
Last week, a local court fined the company US$98.4 million over its placement of waste rock from the Kumtor gold mine.
There was also a separate US$10,000 judgment against the company, and other environmental claims continue to work their way through the court.
Centerra has stated repeatedly that it has done nothing wrong, and is appealing the rulings to a higher court. But after the big fine, spokesman John Pearson said the company decided arbitration is the best option going forward.
“It’s the first time there has been a judgment like that in place,” he said in an interview.
When Centerra launched international arbitration in 2008, it encouraged the government to sit down at the bargaining table, and the two sides hammered out an investment agreement the following year. In a perfect world, that would happen again.
Centerra has faced a constant barrage of political opposition in Kyrgyzstan since it opened Kumtor in 1997. The gold miner is by far the largest foreign investor in a country that consistently ranks as one of the world’s worst mining jurisdictions in the Fraser Institute’s annual rankings.
Despite the noise, the Kumtor mine has run extremely well since it opened with almost no interruption. Yet it is clear that Centerra’s relations with the government have deteriorated in recent months.
Negotiations over the mine’s ownership broke off late last year. And in April, Kyrgyz authorities raided the company’s Bishkek office in search of documents related to a criminal case. At Centerra’s annual meeting in Toronto last month, director Bektur Sagynov (who is Kyrgyz) told investors that there is “urgent need” for change at the management and board level. The company’s current chairman and chief executive were both sitting a few feet away at the time.
Another concern is that Centerra is waiting for an environmental approval for its mine plan at Kumtor. If it doesn’t receive the approval by the June 30 deadline, it may have to halt production.
BMO Capital Markets analyst Andrew Breichmanas noted that Centerra shares underperformed during the previous arbitration process in 2008, and he said the same thing might happen again this time.
“The more aggressive stance taken by management greatly increases headline risk surrounding Kumtor and is likely to affect performance in the near term,” Breichmanas said as he downgraded Centerra shares to market perform (from outperform).