Identifier
Created
Classification
Origin
09BISHKEK491
2009-05-20 09:47:00
UNCLASSIFIED//FOR OFFICIAL USE ONLY
Embassy Bishkek
Cable title:  

KYRGYZSTAN STRIKES PAYDIRT WITH NEW MINE AGREEMENT

Tags:  ECON EINV EMIN KG 
pdf how-to read a cable
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UNCLAS BISHKEK 000491 

SENSITIVE
SIPDIS

DEPARTMENT FOR SCA/CEN

E.O. 12958: N/A
TAGS: ECON EINV EMIN KG

SUBJECT: KYRGYZSTAN STRIKES PAYDIRT WITH NEW MINE AGREEMENT

REF: 08 BISHKEK 1190

UNCLAS BISHKEK 000491

SENSITIVE
SIPDIS

DEPARTMENT FOR SCA/CEN

E.O. 12958: N/A
TAGS: ECON EINV EMIN KG

SUBJECT: KYRGYZSTAN STRIKES PAYDIRT WITH NEW MINE AGREEMENT

REF: 08 BISHKEK 1190


1. (U) Summary: The Kyrgyz government and Centerra Gold, the
Canadian parent company of the Kumtor gold mine project, reached
agreement April 24 on terms for Kumtor's future operations. The
Kyrgyz Parliament, which previously threatened nationalization of
the project during the protracted negotiations, quickly ratified the
deal, which President Bakiyev subsequently signed. The new
agreement purports to resolve all outstanding claims, expands the
Kumtor concession, introduces a simplified tax regime, and grants
the Kyrgyz government additional shares currently worth $257.3
million. Centerra will also make an immediate $22.4 million tax
payment. End Summary.


2. (SBU) After nearly two years of negotiations, the Kyrgyz
government and Centerra Gold reached a new agreement April 24 that
governs Centerra Gold's Kumtor gold mine project. (Note: The deal
also involves Cameco Corporation, which is the largest shareholder
in Centerra. End Note.) The Kyrgyz Parliament, which previously
entertained suggestions of nationalizing the Kumtor project, moved
quickly to ratify the agreement April 30. Kyrgyz President
Kurmanbek Bakiyev subsequently signed the agreement, effectively
concluding a process that had long damaged Kyrgyzstan's reputation
among potential international investors. Officials from the
Canadian-run Kumtor project told Embassy May 13 that they were
satisfied with the new agreement, and were moving forward with their
operational plans.

Sifting through the Details
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3. (SBU) The new agreement settles all outstanding claims, expands
the Kumtor concession area, and establishes a new, simplified tax
regime. Under the new tax regime, which is backdated to January 1,
2008, up to 18% of gross revenue can be taxed, but allowances for
capital and exploration expenditures could decrease the rate to 14%.
Virtually all other taxes and customs duties are eliminated. The
Kyrgyz government is eligible to receive up to 43.5 million
additional shares in Centerra, which have a current market value of
$257.3 million. Issuance of the shares to the Kyrgyz government is
conditional, and Embassy has been advised that there is additional
language governing how and when the Kyrgyz government can liquidate
their new shareholdings. (Comment: Under former President Akayev's
government, Kyrgyz officials sold a large stake in Centerra.
Officials in the current government have claimed that Kyrgyzstan
unfairly lost out in that transaction. It is likely that the new
conditions seek to avoid any future recriminations about share
sales. End Comment.) The additional shares could boost
Kyrgyzstan's ownership to roughly one-third of Centerra outstanding
shares.


4. (SBU) The agreement also requires Centerra to pay the Kyrgyz
government $22.4 million for recalculated taxes, outstanding claims
and advance tax assessments. Prime Minister Chudinov announced that
the agreement may generate up to $3.4 billion for Kyrgyzstan.
Kumtor officials informed Embassy that they do not know how Chudinov
calculated this figure, and Chudinov's explanation lacked detail.

Comment
--------------


5. (SBU) The rapid approval of this agreement in Parliament
suggests that Parliament's previous delays and initiatives by
Parliamentarians to protest the Kumtor project in the courts could
have been tactics to pressure Centerra into making concessions
during the negotiations. The $22.4 million tax payment could be
very influential, especially if received prior to the July 23
Presidential election in which incumbent President Bakiyev is
seeking re-election. However, we will also need to watch
developments relating to Prime Minister Chudinov's April 29
announcement about a criminal investigation into the previous Kumtor
agreement.