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Russian, Ontario litigation could thwart Centerra’s Kyrgyz restructuring talks

Russian, Ontario litigation could thwart Centerra’s Kyrgyz restructuring talks

Photo by Centerra Gold

31st October 2014

By: Henry Lazenby

Creamer Media Deputy Editor: North America

  

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TORONTO (miningweekly.com) – The outcomes of two ongoing court cases in Russia and Ontario could potentially have a significant impact on the restructuring negotiations between Canadian miner Centerra Gold and the Kyrgyz Republic government over the ownership of the Kumtor gold mine.

Centerra’s president and CEO Ian Atkinson this week said despite ongoing negotiations towards a definitive agreement, based on the heads of agreement (HoA) signed on January 18, the outcomes of the litigation could in both cases result in awards being satisfied against State-owned miner Kyrgyzaltyn JSC’s 32.7% equity interest in Centerra.

According to the HoA, a potential restructuring transaction would hinge on Kyrgyzaltyn exchanging its equity interest in Centerra for a 50% interest in a joint venture (JV) company that would own and operate the Kumtor mine.

However, should the Kyrgyz Republic fail to overturn a recent Ontario award and Kyrgyzaltyn fail to successfully challenge a determination that the Kyrgyz Republic beneficially owned Centerra shares held by Kyrgyzaltyn, the Kyrgyz State miner would not have adequate equity in Centerra to make a fair exchange for a 50% stake in Kumtor.

“In such circumstances, the restructuring of the Kumtor project, according to the HoA, would be impossible,” Atkinson told Mining Weekly Online in an interview.

Early this month, Centerra was served with an order from the Ontario Superior Court of Justice in favour of Stans Energy Corp, which prohibited Kyrgyzaltyn from, among other things, selling, disposing or exchanging 47-million shares of the 77.4-million shares it held in Centerra.

Stans also served Centerra with a notice of application to the Ontario Superior Court that sought to enforce a June 30 arbitral award for about $118-million, which was obtained by Stans against the Kyrgyz Republic from the arbitration tribunal of the Moscow Chamber of Commerce.

The Stans application sought, among other things, an order declaring that the Kyrgyz Republic had a beneficial interest in all the shares in Centerra held by Kyrgyzaltyn and that monies, interest, dividends and other rights of Kyrgyzaltyn in the stock of Centerra may be seized to satisfy the Stans arbitration award.

Atkinson explained that the company understood that the Kyrgyz Republic was appealing the Stans arbitration award to the Russian courts in Moscow.

In a separate proceeding, Kyrgyzaltyn had appealed to the Ontario Court of Appeal to overturn the decision of the Ontario Superior Court in the Sistem Muhenkislik Insaat Sanayi Tiacaret SA matter, which found that the Kyrgyz Republic indeed did have a beneficial interest in the Centerra shares held by Kyrgyzaltyn.

Atkinson explained that should the Kyrgyz Republic not succeed in overturning the Stans arbitration award in the Russian courts and Kyrgyzaltyn was unsuccessful in the Sistem appeal, Centerra expected that Stans would likely succeed in enforcing the Stans arbitration award in Ontario and in seizing a sufficient number of the Centerra shares held by Kyrgyzaltyn to satisfy the Stans arbitration award.

“If Stans ultimately seizes such shares, Kyrgyzaltyn would no longer hold a sufficient number of Centerra shares to contribute to the HoA restructuring transaction such that it could receive 50% of a new Kumtor joint venture. In such circumstances, the company believes that the restructuring of the Kumtor project according to the HoA would be impossible,” he noted.

Centerra's Kumtor openpit mine had faced several setbacks since the project started in 1994, including threats of nationalisation, riots and since last year, a $300-million ecological damages lawsuit. The mine contributes about 10% of the Kyrgyz Republic's gross domestic product.

MONGOLIA MATTERS

Centerra reported that it was continuing discussions with the Mongolian government about the development of its Gatsuurt gold property, near the company’s active Boroo mine, in the country.

The Gatsuurt project remained under care and maintenance owing to continued delays in permitting resulting from the Water and Forest Law, which prohibits mining and exploration activities in water basin and forest areas.

Atkinson added that the government had realised the restrictive nature of the legislation on mine-licence holders and had initiated efforts to revise the legislation.

Gatsuurt had been included on a list of mineral deposits of ‘strategic importance’ for the Mongolian government to consider. Centerra was hopeful that Parliament would approve the list this year, opening the door for it to resume exploration on the property.

Parliament and/or any relevant committees of Parliament were expected to consider this matter further in the current quarter. Should the Mongolian Parliament ultimately approve this designation, it would have the effect of excluding the Gatsuurt deposit from the Mongolian Water and Forest Law and would allow the government to acquire up to a 34% interest in Gatsuurt.

Atkinson noted that the terms of any such participation were currently unclear and would be determined through negotiations with the Mongolian government.

The company noted that should the project not be designated as a project of strategic importance, or if the Water and Forest Law was not substantially changed or annulled, mineral reserves at Gatsuurt might have to be reclassified as mineral resources and the company might be required to write off about $37.5-million related to the investment in Gatsuurt and about $38.7-million of costs that remained capitalised for the Boroo mill and other surface structures.

These amounts represented the capitalised costs, as at September 30, associated with its investment in Gatsuurt and Boroo, where Gatsuurt ore was planned to be milled.

Toronto-based Centerra on Wednesday reported a wider third-quarter net loss of $3.2-million, or $0.01 a share, from $1.8-million, or $0.01 a common share, in the year-ago period.

Edited by Tracy Hancock
Creamer Media Contributing Editor

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