MSN: Was the IMF in any way involved in the drafting of the investment agreement, by providing advice, analyzing the project or by taking part in the negotiations?

 

TS: This question deals with extraction of mineral resources, and therefore it falls in the terms of reference of the World Bank, not the IMF. But since it may affect the balance of payment and the budget of this country, and consequently successful performance under the program currently being implemented here with support from the IMF, we could not pretend that we are not concerned with or interested in this issue. Therefore, the representative office of our organization, I personally as the mission head, received information about the developments and were aware of the situation, although we were not formally involved in the process. All negotiations were conducted between the two parties – the country and the investor. We do not want to interfere in their relations.

 

Obviously, the new company will be publicly traded and the shares owned by Kyrgyzstan (represented in this case by Kyrgyzaltyn) will also be quoted on the exchange. This holds certain implications for the balance of payments, and specifically for the fiscal program. This is one thing. Secondly, as one provision of the agreement abolishes tax concessions for the investor, in the medium term this may mean higher revenues for the budget as compared to the previous arrangements.

 

True, the actual amount of fiscal revenues will depend on the international gold prices, and on the prices at which the new company’s shares will be sold on the exchange. But subsequently, I believe, this agreement will strengthen the budget somewhat. Another important issue arising in connection with this document is the quality of governance in the mining industry. Since our program is largely focused on improving the quality of governance in the country, we hope that the new understandings between the government, Kyrgyzaltyn, Cameco and the authorities regulating the mining industry in your country will be fully transparent.

 

MSN: But it was our government that concealed this agreement from the public, which caused indignation and suspicion. The transparency you are talking about has not been there from the very outset.

 

TS: Excuse me, but I read about it in newspapers.

 

MSN: The thing is that the public learnt about this whole affair from the foreign mass media, international news agencies and Cameco’s web-site.

 

TS: I know that the issue was discussed in December. Actually, the first restructuring proposal was received in September 2002. Everybody knows about that. Discussion of Kumtor restructuring options continued but the decision was every time postponed. But if I am not mistaken the government approved the main agreement only in January.

 

I believe that if information was available on the web-site and distributed through the Internet, it was sufficiently accessible to the public. However, there are details, which are confidential and constitute a commercial secret. This agreement is yet to be discussed in the parliament, and the deputies will have an opportunity to ask their questions.

 

I did not have the impression that there had been an intention to conceal information. It is difficult to conceal something from the people. In addition, Centerra shares will be listed at the exchange in Toronto, consequently, the process of establishing the company must be open. Access to international stock markets and obtaining a listing require that transparency and disclosure rules be complied with.

 

Of course, the quality of governance is still an open issue. For instance, we still do not know what disclosure rules the new company will be guided by. But this work is in progress and the necessary documents are being prepared.

 

MSN: When the existing General Agreement was signed, the government also argued that it was very profitable, but today all of the parties to this process, may be with the exception of the Canadians, admit that it was “a gravest mistake” to grant tax concessions to the investor in exchange for the controlling interest. Suppose, a few years later the new investment agreement will be recognized as a wrong step for our economy. Will we then have problems with debt restructuring through the Paris Club?

 

TS: It is hard to predict such things. The original agreement was assuming a gold price that was wrong. I should note that the profitability of the project depends on world prices for gold and is not determined by the ownership of the Kumtor deposit. The rate of return for the gold mining project would be the same, whether it is owned by the government or is a joint venture.

 

I see the current situation as favorable. Gold prices are at US$ 400 per ounce, when just a few years ago they were around US$ 300 and even less.

 

One of the things that worry the World Bank is that the government participates in the volatile gold market at all. Events may go either way – both in favor of the Kyrgyz economy, like today, and against it.

 

Should the government sell its block of shares at the stock exchange, it will collect cash that will need to be deposited in a special account to be spent by the budget over several years.

 

 

TS: I don’t think that will happen because the value of the deposits will be reflected in the price of the shares. Let’s assume there’s some gold in the ground. It will be mined and sold during the life of the mine, which I expect to be longer than under the original contract, because the new contract allows for development of outlying and underground deposits as well.

 

The most important factor is the NPV of gold deposits still in the ground. Once the shares hit the market the NPV will be priced in. If the company paper is sold by the shareholders at once, the receipts will be equivalent to the proceeds from the extraction and sale of gold over a period of several years.

 

One should not forget that the same company is mining gold in Mongolia and the US, which will also have a positive impact on the price of the shares. It will reflect not only Kumtor deposits, but overall gold deposits.

 

MSN: The leaders of the country are focusing on foreign investments and many believe that the new project implies Kyrgyz investments into Cameco. Given our poverty, is that appropriate?

 

TS: No, you are not investing abroad, because the gold deposits are here. I will need to reiterate that the value of the gold will be priced in and the money will return to you. Besides, gold mining will create jobs at Issyk-Kul, boost fiscal revenue, and pay wages to workers.

 

MSN: But we have a third of stock in Centerra and no casting vote. If the shareholders decide to invest all their profits into mining gold in Mongolia, what will Kyrgyzstan get in return?

 

TS: Centerra operates several gold mines and will spend money on all of them, but that does not imply that money will leave the country. The value of the gold will be priced in and once the shares are sold the country will collect the cash.

 

I don’t think the company will pay dividends, because it needs to spend heavily to explore and develop the deposits. The company has made some E&D commitments for 2004-05, but it will likely need to spend more.

 

The company must have accepted this conditions imposed by the Kyrgyz, but I don’t think they economically sound. One never knows beforehand how much you will have to spend on exploration. Companies will spend as much as they need. In any case, they will do all the capital spending they need.

 

Overall I think the contract is fine. Nowadays PSA are widely used all over the world. The one we are discussing is not a classical PSA, but very close to it.

 

There is another important thing Kyrgyzstan should not forget – the US$ 100 million of debt to Cameco under the original agreement. Once the new contract is signed it will need to be amortized in the next few years. Which means the country’s total foreign debt will be reduced more quickly. However, a lot will depend on gold prices remaining high at around US$ 400 per ounce.

 

Before, Kyrgyzstan’s debt for Kumtor had never been raised at the Paris Club, although that had been the original idea. It turned out later that the debt has no government guarantee; nevertheless it is included in the debt to GDP ratio calculations. I hope that with sustained high gold prices this debt will be amortized by 2006.

 

To summarize, my opinion is that the investment agreement will have a positive impact on the balance of payments. Your debt to output-GDP ratios are improving. And that is very important for the economy.