Centerra Gold reached settlement with Kyrgyz authorities

Andrey KozhokaruSeptember 12, 2017

11 September Centerra Gold announced conclusion of comprehensive agreement with the Government of Kyrgyzstan

11 September Centerra Gold announced comprehensive settlement with the Government of the Kyrgyz Republic. According to the press release, both sides will settle and complete all current litigations, decisions on which were already pronounced and those, which are still in process. Moreover, Centerra Gold and its subsidiaries Kumtor Gold Company (KGC) and Kumtor Operating Company (KOC) cannot be chased on the ecological suits that have the same matter as those currently pending. Agreement calls for cancellation of Kyrgyz court order, which restrains financial transactions of KGC. It is expected that excess cash accumulated on the balance of KGC will be transferred to Centerra’s accounts by 15 of September. In addition, there is acknowledgment that there will be no restrictions on transactions between parent Company and its subsidiary in the future. By the agreement of the parties, Centerra Gold does not admit any environmental wrongdoings, any violations of Kyrgyz law and of Kumtor Project Agreements. 2009 Kumtor Project Agreements stay in full force. No changes are necessary for the current or planned operations at Kumtor Project.     

The Company agreed to make lump sum payment of $57m, of which $50m will be directed to the new Nature Development Fund and $7m to the Cancer Care Support Fund, latter within 12 months additional $3m will be transferred to the Cancer Care Support Fund. Centerra Gold will pay $2.7m annually to the Nature Development Fund, conditional on the Kyrgyz side continue to comply with its obligations under the agreement. The Company agreed to pay $6m annually to the Kumtor’s Reclamation Trust Fund until funds balance reaches total cost of reclamation, subject to a minimum of $69m. Currently there is around $26.3m on Reclamation Trust Fund accounts.     

According to the agreement, there are number of initial conditions that must be satisfied before full acceptance of liabilities and proceeding of all payments will take place. In particular, Government approvals are expected for the Kumtor life-of-mine plan, official reserves report and the tailings dam expansion. Initial conditions require the compliance by the Government with its obligations under the Kumtor Project Agreements, continuation of Kumtor’s mine operations with all necessary permits, absence of any expropriatory actions by the Kyrgyz authorities. Furthermore, all ecological disputes, civil and criminal proceedings initiated by the Kyrgyz General Prosecutor’s Office should be ceased. The Company highlights that it will work closely with the Government of Kyrgyzstan for fulfillment of all initial conditions, which are expected to be completed in 4q2017.         

Centerra’s Board of Directors unanimously approved concluded agreement.

Among different factors of risk of concluded agreement, Company notes untimely fulfillment of initial conditions because the Government cannot bind the General Prosecutor’s Office or the Parliament. Another risk factor is failure by Kyrgyz authorities to comply with all conditions of concluded agreement and Kumtor Project Agreements and initiation of new litigations related to Company’s activities.

Our opinion:

Provisions of concluded agreement match the preliminary conditions published by the Company on 6 of September. We estimate the risk of breakdown of the agreement as low. According to the public comments made by the Government and Centerra’s management, concluded agreement set to be mutually beneficial. In particular, in Government’s statement Kyrgyz authorities among other things underscores the desire to create favorable climate for foreign investments in country’s economy. Centerra’s management highlights that concluded agreement is comprehensive and provides certainty for the Company’s business in Kyrgyz Republic.

As a result of a conflict, which was continuing for several years and has exacerbation phases, neither parties made any considerable concessions and got any benefits. We do not exclude some local disagreements between Centerra Gold and Kyrgyz authorities in the future, but we regard the possibility of new severe conflict, which would require total reconsideration of concluded agreement as unlikely. For Centerra Gold Kumtor mine remains the main asset of the Company, and for Kyrgyzstan Centerra plays significant part in country’s economy. We think that relying on the experience of no benefits in confrontation both sides will continue joint work and will be trying to settle all arising disputes through negotiations.       

According to the decrease of the risk of Kumtor Project, we put our recommendation and target price on review.