Squeezing Profits From Stones — Mining in Kyrgyzstan

Kumtor Gold Mine by Mike Karavanov

by Nathan Hamm on 3/29/2012

Toronto-based Centerra Gold has slashed its forecast for output from its Kumtor mine in Kyrgyzstan’s Issyk-Kul Province from about 600,000 ounces to about 400,000 ounces. The company said that the drop is caused by increased ice movement blocking access to high grade ore, exacerbated by a 10 day strike last month over payroll deductions for Kyrgyzstan’s social fund. The collective bargaining agreement with the workers expires this year, and the company warns that additional labor stoppages will further decrease production.

While few may shed a tear for the troubles of a large mining company, the shortfall has major implications for Kyrgyzstan’s budget. Kumtor accounts for 90% of Kyrgyzstan’s gold output, 12% of GDP, and over half of exports. The state owns a large stake in the mine and receives significant revenues from the mine.

“This will mean a major decline in industrial production, GDP and tax revenues,” said Orozbek Duisheyev, president of the Kyrgyz Association of Miners and Geologists. “We’re talking enormous losses, in the region of $200 million to $250 million.”

Centerra and other foreign mining companies face significant political and social risks in Kyrgyzstan, especially following Kurmanbek Bakiev’s overthrow in April 2010. Last spring, the facilities of a South African mining company operating in Talas were attacked by young men on horseback. Officials in Bishkek, meanwhile, seemed to be trying to stoke public anger toward Kumtor in order to shake down Centerra last year, a worrisome set of moves in light of several high-profile nationalizations following Bakiev’s ouster.

Mining companies and other large investors in Kyrgyzstan must navigate thickets of local and national politics. Apparent expressions of public anger may instead be shakedowns by local elites and criminals or connected to political competition, all of which seemed to be the case in Talas, or efforts by national elites to seize control of assets at the behest of the public. The government is potentially adding additional complexity for investors, particularly in the mining sector, by proposing (ru) projects be approved based on the determination of a public commission partially consisting of local residents and the quality of a social investment package the investor plans to provide.

Responding to these hurdles and guarding against these risks is costly and difficult. It may seem glib to say that Kyrgyzstan is unique, but the socio-political environment does pose unique challenges. Linkages between elites, criminals, and public constituencies are common but obscured. Public opinion, even in very small areas, is nowhere near as monolithic as some protests may make it seem, and ongoing disputes about development of mineral deposits (ru) show there clearly is division within communities about how and whether to proceed with projects.

Kyrgyzstan’s government could smooth the path for investors by sheltering them from local politics by mediating relationships, but it seems uninterested in doing so. In fact, it’s responses to the troubles of the mining sector seemingly amount to telling investors to play politics themselves. Difficult and costly though it may be, investors need partners to help them find and invest in their own local constituencies who may be willing to go to bat for them if they want returns on their investments in Kyrgyzstan.

Photo: Kumtor Gold Mine by Mike Karavanov.

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– author of 2991 posts on 17_PersonNotFound.

Nathan is the founder and Principal Analyst for Registan, which he launched in 2003. He was a Peace Corps Volunteer in Uzbekistan 2000-2001 and received his MA in Central Asian Studies from the University of Washington in 2007. Since 2007, he has worked full-time as an analyst, consulting with private and government clients on Central Asian affairs, specializing in how socio-cultural and political factors shape risks and opportunities and how organizations can adjust their strategic and operational plans to account for these variables. More information on Registan's services can be found here, and Nathan can be contacted via Twitter or email.

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