June 27, 2012 / 4:08 PM / 5 years ago

Kyrgyzstan to review contract with Centerra Gold

BISHKEK (Reuters) - Kyrgyzstan wants to renegotiate a contract with Centerra Gold Inc (CG.TO) under which the Canadian company operates a gold mine that accounts for 60 percent of the Central Asian nation's industrial output, after a report that said the project has damaged the environment.

Stopping short of voting to nationalize the Kumtor mine, lawmakers instead directed the government to revise the contract, which gives Kyrgyzstan a 33 percent stake in the company while Centerra retains full ownership of the mine and its output.

Deputies also ordered an environment review of the operation, which lies in a harsh permafrost area 4,000 meters above sea level. Angry villagers have sporadically blocked the only road to the mine, demanding land and jobs.

"Those who understand the gist of the matter realize that it is impossible (to nationalize Kumtor)," said Deputy Ravshan Dzheyenbekov. "The legislature today demonstrated a well-balanced and mature approach."

The resolution, passed on Wednesday, calls on the government to revoke decrees and licenses in relation to the project, Centerra said in a statement on Wednesday. The company considers the resolution not legally binding.

The decision to review of the 2009 mining agreement follows a parliamentary report last week that said Centerra's operations in Kyrgyzstan were damaging the environment and the health of local villagers.

Centerra maintains that the report is without merit. It insists the Kumtor mine, which produced some 580,000 ounces of gold last year, is compliant with local and international environmental, health and safety standards.

The Toronto-based miner's stock were down 2.4 percent at C$9.81 on Wednesday on the Toronto Stock Exchange. Shares plunged last Friday to a 2-1/2 year low after calls from the Kyrgyz parliament to nationalize Kumtor. That resolution was rejected.

The company, which also produces gold in Mongolia, last year accounted for more than half of all Kyrgyz export revenues.

POPULISM WOES

Kyrgyzstan, a impoverished nation of 5.5 million, is a neighbor of China and hosts Russian and U.S. military air bases. Violent revolts have toppled two presidents since 2005. About 500 people were killed in ethnic clashes in June 2010.

Kumtor Operating Co, a subsidiary of Centerra Gold, said on Wednesday the opposition-backed parliamentary report contained a long list of undeserved accusations based mainly on doubtful facts and assumptions.

"These unfounded conclusions ... have dealt a blow to the business reputation of Kumtor Operating Co and of Centerra Gold," the company said. "This has led to a sharp fall in the price of Centerra's Toronto-listed securities and slashed by over $300 million the price of the package of shares owned by the Kyrgyz Republic."

A senior official in the office of Kyrgyz President Almazbek Atambayev said the resolution had cost Kyrgyzstan hundreds of millions of dollars.

"Kumtor is the most important project for Kyrgyzstan's economy ... and it must be mutually advantageous and serve as a good example of cooperation with big foreign investors," he told Reuters, on condition of anonymity.

"The irresponsible attitude to national interests shown by parliamentarians while debating the Kumtor issue ... will hardly encourage businessmen to invest in Kyrgyzstan's economy."

WHAT NEXT?

A special commission will come together by July 10, drawing members from the government, parliament, the presidential administration and independent consultants. It is due to work out a revised contract with Centerra by October 1.

The commission was also ordered "to conduct by October 1 an assessment of the ecological, industrial and social damage done by Kumtor Operating Co at the Kumtor deposit."

Ice movement in the high-altitude pit has cut Kumtor's output, depressing Kyrgyzstan's annual GDP growth to 1.8 percent from an original target of 7.5 percent.

In March Centerra forecast output of 390,000-410,000 ounces this year, down from a previous estimate of 575,000-625,000. Kumtor accounted for more than 90 percent of the company's gold production last year.

Additional reporting by Julie Gordon in Toronto and Mariya Gordeyeva in Almaty; Writing by Dmitry Solovyov and Julie Gordon; Editing by Jason Neely and David Holmes

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