Mining Sector Remains In The Doldrums


BMI View: Social unrest in Kyrgyzstan's mining sector shows no signs of abating as persistent calls to nationalise the country's largest gold mine was recently ruled out by the newly-elected Prime Minister. Whil e this marked a welcoming move for foreign investors, we do not expect investment to be forthcoming over the coming years. Given escalating tensions in the country, we believe the government will eventually adopt populist anti-mining measures rather than risk a return to violence.

We believe the outbreak of social unrest, coupled with laten t ethnic tensions in Kyrgyzstan, will continue to threaten the country's political and security risk profile while dampening the investment climate of the mining industry. R ecent events in Kyrgyzstan speak to the simmering tensions, which have the potential to rapidly escalate over the coming months.

More Turmoil Ahead For Miners

In line with a trend that we have witnessed around the world , the resource extractive industry in Kyrgyzstan has been hi t with a series of mining woes over the past few months . Lately , overwhelming popular calls to nationalise the Centerra -operated Kumtor gold mine was ruled out by the newly-elected Prime Minister Zhantoro Satybaldiyev , who has vowed not to implement any grow th-jeopardising policies to the mining sector. Elected by an overwhelming major ity in parliament on September, Zhantoro Satybaldiyev has pledged to combat corruption and restore economic growth to the impoverished but resource-rich country. While such a move may highlight the commitment of the government towards attracting foreign investment, we note that attempts to improve foreign appetite towards investment in Kyrgyzstan will continue to be overshadowed by a wave of protests targeting the mining industry.

Treading On Thin Ice
Kyrgyzstan - Real GDP Growth, % chg y-o-y

Kumtor - An Economic Growth Engine

Kumtor is the largest gold mine operating in Central Asia and is of paramount importance to Kyrgyzstan ' s shaky economy, responsible for approximately 12% of overall GDP in 2011. To highlight, the closure of the Kumtor mine back at the start of the year has proved catastrophic for the country ' s economy. In combination with the slowdown in external demand, the Nat ional Bank of Kyrgyzstan reported that economic growth contracted by 5.6% in real GDP terms over the first six months of 2012 . Gold production from Kumtor is expected to experience a significant drop from 583koz (thousand ounces) in 2011 to approximately 400koz this year. While threats for nationalisation has subsided for the time being, we expect production at the Kumtor mine will remain subdued in the months ahead as the mine is currently undergoing safety and environmental reviews ordered by the government.

Golden Opportunities
Kyrgyzstan - Metal Mines

Vitriolic Criticism Against Mining Investment

Although our expectations for gold prices to stay elevated by historical standards will incentivise production and encourage miners to embark on investment opportunities in Kyrgyzstan, we reiterate that investment are unlikely to be forthcoming at this juncture given the growing instability in the country ' s beleaguered mining sector. Mining in Kyrgyzstan is a major point of contention for the locals and many companies operating in Kyrgyzstan have experienced disruptions caused by civilian mobs seeking to share a slice of miners' profit margins. Kyrgyzstan ' s mining sector has been cloaked in uncertainty in recent months, with foreign investors grappling with the escalating threats of resource nationalism, rising local opposition and regulatory hurdles. In August, the operations of a mine owned by Asia Gold Enterprises - a Chinese-owned firm operating in the southern region of Chon-Alai, encountered growing backlash from the local community who threatened to burn down the mine due to concerns over the environmental impact of mining activities. Though the dispute was later resolved through monetary settlement with the villagers, we see scope for mining companies to encounter similar problems, posing fundamental challenges to the continuity of business operations.

On A Cliffhanger

Indeed, political shake-ups in a restive country are bad enough for investor confidence, and ongoing disruptions to the operating environment are unlikely to improve foreign appetite to invest in Kyrgyzstan. However, the government is caught between needing to attract foreign investment into the country to boost the economic outlook while not exacerbating domestic tensions in restive areas. Given brewing tensions in the region, we believe that ultimately the government is more likely to adopt populist anti-mining measures rather than risk a return to violence .

This article is tagged to:
Sector: Mining
Geography: China, Kyrgyzstan, China, Kyrgyzstan, Kyrgyzstan

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