President of the Kumtor Gold Company Daniel Desjardins presented results for the first quarter of 2016 at a press conference on May 27 in Bishkek. Kumtor Gold Company (KGC) is developing Kyrgyzstan’s Kumtor gold mine in the Issuk-Kul province of Kyrgyzstan.

The Kumtor open pit mine is the largest gold mine in Central Asia operated by a Western-based producer. It has been operating since May 1997 and, as of March 31, 2016, has produced approximately 10.51 million ounces or 326.79 tons of gold. KGC is a wholly-owned subsidiary of a Canadian-based Centerra Gold Inc. and is the operator of the Kumtor project responsible for the entire production cycle.

According the National Statistical Committee of Kyrgyzstan, Kumtor’s share in the country's GDP was 6.8% in 2015; Kumtor’s share in the total volume of industrial production was 22.5%. In 2015 Kumtor produced more than 16 tons of gold.

Operating results

According to KGC President in the first three months of 2016, KGC produced 86,444 ounces or 2,688.7 kg of gold and contributed to Kyrgyzstan’s budget more than 1.6 billion soms in taxes and mandatory payments.

The company produced 86,444 ounces compared to 164,272 ounces of gold in the comparative period of 2015. The decrease resulted from the processing of lower grade ore. Gold sales in the first quarter of 2016 were 61,744 ounces, or 1.92 tons. Total revenues from gold sales in the first quarter were $73.2 million.

The Dore bars produced by Kumtor are purchased by Kyrgyzstan’s Kyrgyzaltyn gold company for processing at the Kara-Balta refinery.

Kumtor is currently constructing a heavy vehicle workshop and expects to complete this project during the second quarter of 2016, Desjardins said.

The Kumtor mine is expected to produce between 480,000 and 530,000 ounces, or 14.9 and 16.5 tons, of gold in 2016.

During the first three months of 2016, contributions to the national budget in taxes, deductions to the Social Fund and other mandatory payments have totaled 1.6 billion soms.

2016 total capital expenditures, excluding capitalized stripping, are forecast to be $110 million.

The Kumtor mine is expected to produce between 480,000 and 530,000 ounces, or 14.9 and 16.5 tons, of gold in 2016. This year, it is expected that gold production will be weighted more towards the second half of the year as the higher grade portion of the SB Zone will be accessed at the end of the second quarter.

Nothing to hide

Centerra is committed to continue working with the Kyrgyz Government and find mutually acceptable solutions. Kumtor Gold Company has nothing to hide, said Desjardins, commenting on the searches by Kyrgyz authorities in the Bishkek office of the company on April 28.

According to Desjardins, Centerra issued a document according to which the management and employees of the company have to fully cooperate with the investigation bodies, because there is nothing to hide in the company. The KGC hopes that the investigating authorities will act strictly within the law.

On April 28, the Kyrgyz General Prosecutor’s Office (GPO) and other law enforcement agencies conducted a search at the KGC Bishkek offices with the purpose to collect documents relating to a criminal case concerning alleged financial violations by KGC in connection with past inter-corporate transactions between KGC and Centerra. The GPO made a claim in relation to a $200 million inter-corporate dividend paid by Kumtor Gold Company to Centerra.

Reporters asked why two KGC Vice Presidents, Mark Burton and Leslie Louw, left Kyrgyzstan after the searches. Desjardins explained that they left the country for the planned holidays. Kumtor has been the subject of systemic audits and investigations over the years, and there was no reason to change their pre-planned vacation. Leslie Louw has already returned to Kyrgyzstan.

Ecology

Centerra and Kumtor Gold Company will also continue their cooperation with the Government of Kyrgyzstan and the State Agency for Geology and Mineral Resources (SAGMR) to resolve environmental issues, Desjardins said.

All works at the mine are maintained according to modern standards of environmental safety. However, on April 28, 2016 the company received a letter from the SAGMR saying that Kumtor had not fully complied with all the requirements of AMEC, an international company hired by Kyrgyzstan's Government.

According to Desjardins, the company has complied with all recommendations issued by AMEC during the past three years although the AMEC recommendations are not mandatory by law and the KGC has performed them voluntarily.

Environmental lawsuits

Centerra and Kumtor Operating Company will appeal against the decision of the Bishkek Inter-District Court in the higher courts, Desjardins said.

Total, four court decisions were made on the environmental claims. The Bishkek Inter-District Court ruled against Kumtor Gold Company on an environmental claim brought by the State Inspectorate for Environmental and Technical Safety of the Kyrgyz Republic (SIETS) and awarded damages of about 6.7 billion soms (approximately $98.4 million). SIETS claims that the placement of waste rock on Kumtor’s waste dumps is subject to tariffs that are normally applicable to industrial or domestic waste.

There is also a claim submitted to the Inter-District Court by the State Agency for Environment and Forestry Protection (SAEFP) which claims that KGC owes additional environmental pollution fees, with damages amounting to about $220 million.

Centerra strongly disputes the SIETS and SAEFP claims and considers them without merit, Desjardins said. The Kumtor Project has always been operated in accordance with the provisions of the 2009 project agreements governing the Kumtor Project, he added.

If Kumtor stops

The absence of permits and approvals of Kumtor’s 2016 annual mine plan would result in a shutdown of the Kumtor Project on July 1, 2016. The Kumtor project is of great importance for the economy of Kyrgyzstan and the closure of the mine even for a certain period of time could lead to serious economic consequences, said the KGC President.

The company has already informed the Government and the media that one week of the mine’s downtime will result in lost 15,400 ounces of gold. If the mine does not work 6 or 8 weeks, the company will not be able to produce gold until the second half of 2017, and if the mine’s downtime is longer, then it can be completely lost.

No assurances

“The Company has benefited from a close and constructive dialogue with Kyrgyz Republic authorities during Kumtor Project operations and remains committed to working with them to resolve all of the outstanding matters affecting the Kumtor Project, including among others: (i) the environmental claims made by SIETS and SAEFP; (ii) the claim made by the Kyrgyz Republic General Prosecutor’s Office (“GPO”) in relation to a U.S.$200 million inter-corporate dividend paid by Kumtor Gold Company (“KGC”) to Centerra and the related search of KGC’s Bishkek office on April 28, 2016; (iii) claims made by the GPO seeking to invalidate Kumtor’s land use certificate and to seize certain lands within the Kumtor concession area; and (iv) outstanding permits and approvals of Kumtor’s 2016 annual mine plan, the absence of which will result in a shutdown of the Kumtor Project on July 1, 2016.

“However, there are no assurances that the Company will be able to successfully resolve any or all the matters affecting the Kumtor Project. There are also no assurances that such matters will not result in the Kyrgyz Republic government and/or Parliament taking actions that are inconsistent with the Government’s obligations under the Kumtor Project Agreements, including adopting a law “denouncing” or purporting to cancel or invalidate the Kumtor Project Agreements or laws enacted in relation thereto. The inability to successfully resolve all such matters would have a material adverse impact on the Company’s future cash flows, earnings, results of operations and financial condition,” the Centerra press release issued on May 27 said.