UZBEKS OFFER NEWMONT MINING VERY LITTLE, VERY LATE

C O N F I D E N T I A L TASHKENT 000800

SIPDIS

SIPDIS

DEPT FOR SCA/CEN AND EEB

E.O. 12958: DECL: 04/18/2017
TAGS: ECON EINV PREL PGOV UZ
SUBJECT: UZBEKS OFFER NEWMONT MINING VERY LITTLE, VERY LATE

REF: 06 TASHKENT 2255

Classified By: AMB. JON R. PURNELL, FOR REASONS 1.4 (B, D)


1. (C) Summary: At the request of Uzbek authorities, Newmont
Mining visited Tashkent April 14-16 to discuss a possible
out-of-court settlement in connection with their forced
departure from Uzbekistan last year. The Uzbeks offered USD
30 million in compensation, far short of what Newmont views
as fair value for its lost assets. The Newmont
representatives believe the Uzbeks are trying to lay the
foundation for an uncontested sale of the Newmont joint
venture's assets. The fourth attempt to auction Newmont's
assets will occur on May 2. Meanwhile, Newmont has started
arbitration proceedings with two international organizations;
the Stockholm Chamber of Commerce will hold the first hearing
on May 26. End summary.

NEWMONT TALKS WITH THE GOU
--------------


2. (C) Two weeks after Newmont Mining filed for arbitration
in Stockholm, the GOU asked Newmont to Tashkent to discuss an
out-of court resolution. To attract Newmont, the Uzbeks sent
a letter offering a large monetary resolution. However, upon
arrival, Newmont's representatives were offered much less:
USD 30 million (approximately 10 percent of the joint
venture's net worth).


3. (C) In defending the paltry amount, GOU officials spouted
pseudo-economic justifications, including high costs for
restarting the already-existing business, and "asset
depreciation" of USD 57 million. The Newmont representatives
posited the GOU wants to remove the stigma of Newmont's
"expropriation" as it might be "cooking up a deal" to unload
the remaining assets for a low price. No legitimate buyer
likely will consider bidding unless the dispute is resolved.
GOU officials told Newmont that it should accept the 30
million because after the auction it would only get 20
million. The next asset auction is on May 2 and the starting
bid remains at USD 140 million. The GOU likely feels
pressure to resolve the problems as soon as possible,
especially after three earlier auctions failed to attract any
bidders. Newmont filed for arbitration with two
organizations: the World Bank's International Center for
Settlement of Investment Disputes and the Stockholm Chamber
of Commerce Court. The first hearing with the Stockholm
court is scheduled for May 26. Nixon said Uzbekistan has
retained a top-ranking New York law firm.

POTENTIAL BUYERS?
--------------


5. (C) Auction regulations state that only companies with
current mining licenses may bid. There are three such
companies in Uzbekistan, two are state-owned and the third is
British-owned Oxus, which last November agreed to sell 16
percent of its company to Swiss-registered Zeromax (reftel).
On April 16, Oxus Director Alexander Polikashin told poloff
Zeromax finally bought all 16 percent on April 13. Asked
about Zeromax's interest in bidding on Newmont's assets,
Polikahsin said Zeromax has not expressed interest, adding
that there is a strong rivalry between Zeromax and the Navoi
Metallurgical Combine, a comment heard by poloff from other
local businessmen. (Note: Another local contact said she was
recently asked to form a job relocation center for Navoi
workers, who are "packed and ready to leave." End note.)


6. (C) Comment: With two international arbitration cases on
the horizon and only three possible buyers, the government
may have backed itself into a corner. If it can settle with
Newmont for a sum much lower than 140 million, it will come
out ahead: not only will it avoid international arbitration
and the resulting stigma, but it will gain complete legal
control over the former joint venture. There appears to be
little incentive, however, for Newmont to agree to such a
deal. The Uzbeks are offering no sweeteners, such as a new
contract that would allow Newmont to resume some form of
operation here. Under the circumstances, we expect to see
arbitration proceed apace, raising the stakes and the
pressure on the Uzbek government.

PURNELL