Mines Seized, Miner Kicked OUT!Uzbeks and Kyrgyz want Oxus Gold out
By: Charles Carlisle in London & John Helmer in Moscow
Posted: '26-OCT-06 09:00' GMT © Mineweb 1997-2006
LONDON & MOSCOW(Mineweb.com) --Reports from the FSU and Moscow suggest that Oxus Gold, the London-listed junior, appears to be facing a concerted campaign by the Government of Uzbekistan to force it out of the country altogether, while in neighbouring Kyrgyzstan the company appears to have lost control of its Jerooy gold mining operation. Oxus directors were unavailable for comment as they were travelling. However a spokesperson told Mineweb that "The information reported is incorrect, and the picture is as the company reported in its prelims".
In August Oxus found that Marakand Minerals, in which Oxus holds an 87% stake, had suffered the revocation of its joint venture license for the development of the Khandiza polymetallic sulphide deposit in southeastern Uzbekistan. Its partner, the Uzbek government, opted to transfer the licence to a state-owned mining company, Almalyk Mining and Metallurgical Combine. Acording to a report from Oxus issued on October 10, "Marakand is presently seeking to clarify the nature of its continued role in the project with the Uzbek Government." Russian sources told Mineweb they believe the government has decided to develop Khandiza without Oxus.
The government has now gone further, issuing decrees that cancel the tax relief scheme under which Oxus has been mining gold at Amantaytau, in the central Uzbekistan. The measures impose retroactive tax claims against a number of foreign miners that are so large, the mining ventures may be be forced into bankruptcy, or compelled to give up their mining projects and withdraw, rather than pay.
In August, the Uzbek joint venture of U.S. gold miner Newmont Mining Corp. at the Zarafshan property, near Amantaytau, was declared bankrupt by a local court after it was hit with a $48 million back-tax claim. After months of negotiations, Newmont and the Uzbekis had been unable to agree on a modification of the tax claim in order to allow Newmont to continue.
Oxus issued a statement in August, following the loss of the Khandiza licence, assuring shareholders that there had been "no adverse change" to its Amntaytau goldmine operation, "which continues to operate normally. The feasibility study for the underground sulphides project is still being evaluated and approved by the relevant Uzbek State authorities and this process is expected to complete within the next three months. The Company is aware that the Uzbek Government is proposing to cancel certain tax privileges granted to various foreign investments. Under Uzbek law, AGF enjoys a 10 year protection against adverse tax changes, which is not scheduled to expire until 2010, and the Company has been advised by its counsel that the proposed cancellation of privileges will not apply to AGF. The Company is sympathetic to the desire of the Uzbek Government to realise more revenue from the mining sector at a time of high metal prices and has indicated its willingness to discuss appropriate and equitable means of achieving this. The Company notes the recent developments at the Zarafshan-Newmont joint venture and confirms that these developments are specific to that particular joint venture and are not expected to impact on AGF's operations. AGF continues to ship gold into the spot market on a regular basis."
The lawyers' advice on which Oxus said it was relying appears to have been incorrect – at least as far as the Uzbek interpretation is concerned. The Uzbek government has since announced that it would impose a tax claim on Amantaytau Goldfields (AGF), a 50/50 joint venture with the government.
AGF started production in 2003. In the financial year to June 30, 2006, AGF says it produced 146,937 troy ounces. This represented a 12% decline on volume of production of 166,318 ounces mined in the previous financial year. In the six months to June 30, this year, AGF said this month, gold produced totaled 62,818 ounces; this was down 25% year on year, despite growth in tonnage of ore mined and processed.
In its results statement, issued on October 10, Oxus explained the falling output of gold as owing "to the combined effect of lower grades and lower metallurgical recoveries. The former was related to a combination of dilution and lower grade ore mined. The latter was related to the increase of sulphidic and carbonaceous ore in the deeper parts of the pits."
Oxus management also disclosed the significant change in the political climate in Uzbekistan's capital, Tashkent. Referring to the new tax decrees, AGD "as a result is currently operating under the regular Uzbek tax regime....AGF has applied to the relevant authorities, based on the 10-year legal protection, to have these privileges confirmed or reinstated as applicable."
Not exactly hopeful on that score, Oxus added: "whatever the final outcome, AGF understands that it will be given reasonable time to pay any amounts due, and is cooperating with the Uzbek authorities to ensure the minimum adverse effects on AGF's ongoing operations and plans." Industry observers believe the Uzbekis have no intention of going along with this plan.
Oxus reported interim financial results for AGF early this month. Gross revenue from the joint venture was $10.16 million, 58% up on the previous financial year. Oxus also disclosed that a government audit was conducted of the operation in July and August. As a result, Oxus says it provided for $2.60 million in taxes and interest for the start-up period from January 1, 2003, to December 31, 2005. In addition, Oxus says that about $7 million in withholding taxes on subcontractor invoices and customs duties "is the subject of ongoing discussion with the relevant Uzbek authorities. The audit sought to impose various fines and penalties on AGF, and AGF is negotiating to have these amounts waived."
According to local reports, the government's tax claims amount to some $220 million. With a market capitalization at the moment of $85 million, prosecution of the claim would force Oxus into declaring local bankruptcy, and its Amantaytau licence would be lost.
Oxus has been hoping to reduce the tax claim to the $9.6 million figure reported in the October 10 financial statement.
But even the lower figure would be problematical if, as local and Russian mining sources believe, in reality that the government intends to replace Oxus in the joint venture.
The Oxus share price in London reflects this growing uncertainty. It was at a peak of 86 pence in April, and hit a low this week of 12 pence.
There seems little doubt that the moves by the Uzbek Government have been aimed, not only at Oxus, but also at other Western operators in the country, and are motivated by a combination of political and commercial factors. The Uzbek President, Islam Karimov, is reportedly furious at US and UK criticism of the regime's human rights record and is consequently taking aim at companies which come from these countries.
There seems little doubt that the punitive levels of back taxes apparently being imposed represent a deliberate attempt to drive the Western operators out, leaving mineral development to Uzbek joint ventures with, perhaps, companies from countries still seen as friendly towards the regime.
If Newmont felts it lacked the political resource, or the financial muscle and local support to stand and fight over Zarafshan, what hope has tiny Oxus Gold got over Amantaytau, but to cut its losses, walk away, and head for greener pastures to mine in Turkey?
A source in Moscow, who has been following the developments in Tashkent closely, told Mineweb: "State-owned [Uzbek] companies are contenders [for the project]. Other interested parties will have to deal with the Karimov administration. It's the same scenario as with the Newmont JV. The chances for Oxus to negotiate [the tax claim] down are low. The reason behind the high penalties is not to get more cash to the state budget. They want to force Oxus out."
Oxus is also not faring much better in Kyrgyzstan, to the east of Uzbekistan. Here the Oxus jv company, Talas Gold Mining Company, has had its Jerooy gold mining operations, where it was just about to complete construction on a $50 million extraction plant, taken over by the local military.
According to a Dow Jones newswire report, the head of the Kyrgyz state gold mining company, Kyrgyzaltyn, which had been Oxus' joint venture partner in Talas, has said that Oxus has no chance of having its license to operate the mine reinstated, because a new investor has already been awarded a new license to operate the mine. This new operating company, Jerooyaltyn, is a joint venture of an Austrian entity, Global Gold Holding GmbH, which is presumably acting on behalf of other partners who wish to remain anonymous at this stage, and Kyrgyzaltyn. Oxus claims it has spent $54.5 million on the project to date, not counting management fees and interest on bank loans.
Oxus is taking the confiscation of what it deems is its property to arbitration. But the head of Kyrgyzaltyn, Almazbek Jakypov, is reported as saying that Oxus's claim to be paid out for its investment was not valid as the company had invested in the operation without having the legal clearances to do so. This does seem a little disingenuous, given that Kyrgyzaltyn was Oxus's partner in the project and that the then Kyrgyz Prime Minister was present at the ceremony to celebrate the commencement of construction of the new gold plant.
The Kyrgyz claim for taking over the operation is said to be that Oxus had not met the original deadlines for gold production at Jerooy, and that the government had lost $145 million in revenues as a result. Furthermore, the new terms offered to the government by the new license owners are said to be more attractive to the government, but there is no indication that Oxus was given the chance to negotiate matching or better terms.
In short, Oxus's experience in Uzbekistan and Kyrgyzstan demonstrates how volatile the risk for a western mining company to count on tax shelter agreements and up-front concessions, originally offered by desperate mining administrations, when investment was scarce, and the gold price much less promising. The autocratic character of the governments involved also means that, should arbitration find in Oxus's favour in these two disputes, there is no guarantee that the governments concerned will take any heed of the rulings.
Although Oxus' official position on the reports is that the “information is incorrect” there does seem to be an unhealthy pattern developing here which does not favour continuing investment in these countries by western-based mining companies. These companies are particularly vulnerable to government mood swings, exacerbated by high metal prices which make their removal without compensation even more financially attractive to local politicians and businessmen.