Centerra eyes international arbitration after Kyrgyzstan takes aim at mine

Centerra Gold Inc. is pursuing an international arbitration suit against Kyrgyzstan, after the former Soviet state indicated it was getting ready to nationalize a giant gold mine wholly owned by the Canadian company.

On Friday, Toronto-based Centerra said that, in the space of 24 hours, the landlocked country in Central Asia passed a new law through parliament that allows the government to seize external control of mining assets granted under concessions when there are safety concerns. Centerra’s Kumtor mine is the only asset in the country that qualifies under the criteria. In addition, Kyrgyzstan claimed that Centerra owes it in excess of US$170-million in back taxes, and the gold miner is facing a civil suit in the country, alleging environmental malpractice, with claimants demanding damages of US$3-billion.

After news of the government’s claims broke on Friday, Centerra’s shares sank by 30 per cent, the worst single-day performance in almost nine years.

Notifying investors of its intention to seek arbitration on Tuesday, Centerra said it believes the actions of the Kyrgyz Republic are a concerted effort to “coerce” it to cede ownership of Kumtor, or an attempt to “falsely justify” nationalizing the asset.

While Centerra defended its safety record on Tuesday, the company’s track record in Kyrgyzstan has not been pristine. In a three-month period between late 2019 and early 2020, three employees were killed in two separate accidents at Kumtor, the first involving a rock slide, the second an excavator driver tipping into a lake. “Overall performance in 2020 was overshadowed by the terrible news of the Petrov Lake excavator submersion fatality,” Centerra wrote in a recent filing. “This incident resulted in a score of zero for the company’s safety performance.” The company added that it is committed to a “significant step change improvement” around its safety practices.

The potential seizure of the Kumtor mine comes amid an intensification in “resource nationalism” overseas that is seeing more frontier market governments push back on Canadian companies that operate within their borders. They are also demanding better economic terms, especially as the price of gold bullion has surged. Alamos Gold Inc. last month said it was intending to launch a $1-billion arbitration suit against Turkey after its government failed to renew a key mining licence. Barrick Gold Corp. spent three years negotiating a new profit-sharing agreement with the East African country of Tanzania that temporarily levelled its operations in the country. And for more than a year, Barrick has also been entangled with Papua New Guinea in a similar dispute.

But the scale of the stock market damage inflicted at Centerra has dwarfed that done to Alamos and Barrick, in part because the Kumtor mine makes up such a significant portion of the company’s overall profits. Kumtor is the biggest by far of Centerra’s three gold mines, and in the previous quarter accounted for 56 per cent of its production.

In a conference call with Centerra executives on Tuesday, John Tumazos, mining analyst with Very Independent Research LLC, raised the possibility that events in Kyrgyzstan have caused “irreparable damage” to the company’s share price. He also suggested that Centerra should entertain selling the mine at a deep discount to a regional buyer, such as a mining company in Russia, China or Uzbekistan. “You could have a reasonable auction process to get a fraction of the value, say, half to some other country, that might have more understanding of the politics of Kyrgyzstan,” Mr. Tumazos said.

But Scott Perry, the chief executive officer of Centerra, dismissed that idea, saying it was unlikely someone would want to buy Kumtor amid so much uncertainty, and since the mine has historically been such a profitable asset, it makes sense to hold on to it. “We’ve got to stick at this and try and resolve this situation,” he said.

A few years ago, Centerra was the subject of a $2-billion takeover proposal by a tiny Kyrgyz company called Chaarat Gold Holdings Ltd. Centerra didn’t engage as the offer ostensibly made little financial sense. At the time, Chaarat’s market capitalization was $161-million, compared with Centerra’s $1.5-billion. Chaarat also had no operating mines, no revenue and negative cash flow.

CENTERRA GOLD (CG) CLOSE: $9.28, UP $1.03