The gold mine has been through four stages of development since it was founded and a fifth development phase is currently underway
The Muruntau gold mine, located in the Qizilqum (aka Kyzyl-Kum) desert in Uzbekistan, is the world’s biggest open-cast gold mine. Discovered in 1958, surface mining started in 1967 and dug the giant kilometres-wide hole that the mine is today. Owned and operated by Uzbekistan’s state Navoi Mining & Metallurgy Kombinat (NMMC), it is also going to be put up for privatisation and is the biggest asset the country has to offer for sale.
“We are the biggest company in the country and the number one contributor of taxes to the government. About 20% of the total tax take is combined money!” said Nikolai Snitka, the jolly chief engineer of Navoi Gold who has worked at the mine for almost four decades.
In Soviet days the city was closed to visitors and populated with a big contingent of Russians and especially Ukrainians (Snitka is Ukrainian), as those countries have strong mining communities. But today the nearby city of Navoi is flourishing, as both the city and the economy have been thrown open.
The gold mine has been through four stages of development since it was founded and a fifth development phase is currently underway, due to finish in 2026.
The first goal has been to produce more gold. The mine got a new lease of life in 2016 when Uzbek President Shavkat Mirziyoyev took over and began a $3bn investment programme.
“The plan is to increase production by 30% by 2026. We are not there yet but we hope to reach the 30% target earlier – in 2024,” says Snitka.
The equipment has been upgraded and consultants brought in to improve efficiency. Muruntau churns out 80 tonnes per year (tpy) of gold and this year it is on track to produce 82 tonnes from reserves of an estimated 101mn ounces, worth at today’s prices some $190bn. The preliminary valuation of the business is $10bn, but Snitka says that he thinks it is worth more.
The Central Bank of Uzbekistan (CBU) has the right to buy the gold produced and half the country’s hard currency reserves are of the yellow metal, but after that under the new liberalised rules the company is free to sell gold as it likes on the international markets.
A large part of the mining operation is simply processing the tailings left over from decades of production during the Soviet period. Originally the US firm Newmont mining came into a joint venture to work the tailings as the Soviet technology was inefficient and the tails retained a significant amount of ore. But Snitka says the main mine is also being expanded and deepened.
“There is 3mn tonnes of tailings still to process but there is also 50 years of opening mining at Muruntau left to do. Now we are modernising the pit and the processing plants to expand the operations,” says Snitka.
In parallel with the modernisation of operations are the preparations for privatisation. The company has already been reorganised into a joint stock company and a board of directors appointed. The international consultants McKinsey have also been hired to advise and are now currently valuing the company’s assets.
The business has been rationalised. Part of the problem is to separate out all the parts of the business, as in addition to gold the mine also produces uranium, as well as a few other minerals and metals. Uranium complicates things, as its production and sale is an internationally regulated business, which makes it problematic to sell, so the uranium business will remain in state hands, while the gold part will be sold.
“100%!” says Snitka enthusiastically. “We are ready to go. All the work is nearly done. We need to be completely transparent. The mine could be sold on January 1 if we wanted, although it’s not decided when to actually sell it.”
Snitka stresses that the international consultants and the revamp of the production have brought everything up to international standards from the financial IFRS accounting through to the daily health and safety work practices.
Snitka seems to be enjoying the changes. He has worked at the mine for 42 years, but boasts that some of his expert colleagues that are putting the changes into place are only 35 years old.
“For 20 years we were a closed company but today it’s all changed. We are not that kind of company any more,” says Snitka. “Privatisation is the right idea. It is inevitable.”
The final decision on how and when to privatise the mine has not been taken. One option is to do a dual listing on the Tashkent Stock Exchange (TSE) and an international exchange such as the London Stock Exchange. Another would be to sell to a strategic share or at least partner with one of the world’s leading mining companies. And the consensus seems to be that the state would like to sell NMMC within the next two years as part of a general drive to get the state out of the economy.
In general the state is intending to throw the entire mining sector open to investment. On October 6 the Uzbek presidential administration announced that for the first time, beginning in January next year, licences for geological exploration and production of hydrocarbons, non-ferrous metals and ores will be put up for auction. The new measures also include tax incentives for land and subsoil use and lower customs duties to attract investment.
Russia to provide 712 million Euro loan for construction of copper processing plant in Uzbekistan
Russia’s State Development Corporation VEB.RF will finance supply of Russian equipment for the largest copper processing plant in Uzbekistan.
A 712 million Euro loan agreement was signed between VEB.RF and Almalyk mining and metallurgical complex ahead of visit of President of Uzbekistan Shavkat Mirziyoyev to Russia.
The loan will be spent for construction of the copper processing plant in Almalyk.
The project will support development of Yoshlik mine and its prospective consolidation with Kalmakyr mine. The united mine will become one of the world’s biggest copper mines. The loan funds will be used for procurement Russian equipment and services under the project, financing of a part of project expenditures.
Almalyk mining and metallurgical complex (AMMC) intends to increase copper processing up to 160 million tons a year. This would allow to achieve production of copper cathodes up to 400,000 tons a year by 2028.
AMMC intends to produce around 270 tons of silver and 50 tons of gold a year by 2028.
Construction of the plant will require $2 billion. Gazprom Bank and Export Insurance Agency of Russia will be involved in financing of the project.
VEB.RF earlier provided loans to AMMC for purchase of quarry trucks and mining equipment.
Uzbekistan’s Navoi increased net profit in 2020
Uzbekistan’s state-owned mining company Navoi is currently preparing its gold business for the privatization. The company reported that the company’s net profit from gold operations in 2020 of $716.6 million was 209% higher compared to 2019 ($231.6 million). The company’s revenue from gold sales amounted to $4,558 million in 2020.
According to the publicly released documents, Navoi produced approximately 2.6 million ounces of gold in 2020, which makes Navoi the fifth largest gold mining company globally. Moreover, with all-in sustaining costs of $803.7/oz of gold reported for 2020, the company is also one of the lowest cost gold producers worldwide. Navoi owns Muruntau, the world’s largest gold mine by production and estimated reserves.
In a statement, Navoi pointed out that the implementation of its 52 investment projects worth more than $628 million is continuing at a rapid pace. Going forward, the realization of these projects will enable Navoi to create more than 30,000 jobs and boost gold production by 30%, the company noted.
Navoi said that the company’s reorganization and the creation of a joint-stock company was initiated as of March 6, 2020. The company added that it is currently continuing its efforts to attract financing, including from foreign banks, to help realize the company’s ambitious investment projects. Navoi is planning to place a debut Eurobond in 2021.
The company added that measures it has been implementing are laying the necessary foundation to prepare Navoi for an initial and secondary public offering on national and international stock exchanges. The IPO is scheduled for 2023.
Roadmap for Uzbekistan’s privatization of mining assets
Uzbekistan’s government sees the path to achieve economic growth by attracting more private funding to the economy, hence the government needs to sell mining assets. To obtain better prices for the assets, they would like to transform the largest state-owned enterprises (SOEs) in the country and improve their efficiency.
In May 2021, Uzbekistan’s State Asset Management Agency (UzSAMA) and the World Bank arranged a high-level international forum to lay out the roadmap for Uzbekistan’s privatisation of some of its most valuable companies.
The quality of the audience was a sign of the government’s commitment to making privatisation a success. Amongst the attendees from the Uzbek government were: Jamshid Kuchkarov, Deputy Prime Minister and Minister of Economy and Poverty Reduction; Timur Ishmetov, the Minister of Finance, Omonulla Nasretdinhojaev, first deputy minister of finance, Adham Ikramov, the chairman of chamber of commerce, and industryand the Chairman of UzSAMA, Akmalhon Ortikov. High-level international participants were also well represented, including the World Bank’s Central Asian vice-president Anna Bjerde, the EBRD’s managing director for Central Asia Zsuzhanna Hargitai, and Sir Suma Chakrabarti, ex-chairman of EBRD who is now working as an advisor to the President of the Republic of Uzbekistan on Economic Development, among many others.
The keynote speaker of the event was HE Deputy Prime Minister Jamshid Kuchkarov, who set the tone to the forum by declaring the goal of the government in the mid-term: the government wants to increase GDP per capita from the current $1,700 to $2,500 in 2025 and $4,200 in 2030 and this would require GDP growth of 6 to 7% per annum.
As bne IntelliNews reported in the feature “The Growers,” in 2020 Uzbekistan was one of a handful of countries in the world not to go into recession despite COVID pandemic, due to economic reforms that were launched prior to the pandemic and timely funding from International Financial Institutions (IFIs) to soften the economic blow of the pandemic.
This work has been spearheaded by the Ministry of Finance jointly with UzSAMA and this forum was more of a status check on the progress of this work.
The event was co-arranged with the World Bank to show the commitment of the IFI community’s active involvement in the process and their support of the Uzbek government campaign.
IMF Head of Mission pointed out that Uzbekistan is running a current account deficit and it is currently being financed from international borrowings and this should be replaced or complimented by equity investments. In the case of Uzbekistan where most important sectors are state dominated, transformation of SOEs and privatization of these assets seem to be the most natural next steps to alleviate debt burden. But despite the upbeat talks and serious attitude of the delegates, the proof of the pudding will be in the eating. The Big Four consultants and investment banks, such as Rothschild’s, which is particularly active, are already deeply involved in the transformation, valuation and sell side advisory.
The Minister of Finance Timur Ishmetov during his speech noted that one large bank will be sold by the end of this year, the regional flagship Coca Cola bottler based in Tashkent is in the process of sale and Navoi Mining (one of the largest gold and uranium producers in the world and brings in 30% of the budget of Uzbekistan) is undergoing corporate governance actions and transformation as well.
Ishmetov pointed out that the government was a bit hesitant when they had decided to bring in independent directors to fully state-owned banks, but now they see the positive results and are considering appointing another 100 senior managers to state owned companies. The plan is to sell some 550 state-owned companies by the end of this year and several auctions for large real estate assets have already started.
Ortikov, the Chairman of UzSAMA showed a list of top 10 most profitable companies and bottom 10 largest loss-making companies in the country. The solution to the issue seems to be further reforms of the sectors, attracting private sector as better managers of these assets and increasing profitability, at the same time dealing with social issues related to large layoffs.
The issue of transparency and public accountability came up during the event several times, raised by both by Uzbek government and the international community participants. UzSAMA is committed to transparency with the open declaration of potential buyers and their history, and where the privatization proceeds will go to. The IFIs involved in the process, working with the Uzbek Government and UzSAMA, should help to address these issues.
Another key issue raised during the forum was underdeveloped legislation. The privatization law was adopted in 1991, and this year the government is working on new law that should be adopted by the end of the year.
The question of fair valuation was also raised, where the local valuation standard tends to value assets higher than the market value. The government has already nixed a mandatory requirement of adopting the local valuation as the auction minimum starting bid to throw the process open to greater competition. But that means local standards will have to be brought up to the international levels and it will take time.
Overall, the event was phenomenally successful due to large attendance and very senior government officials present from the beginning till the end of the event. That allowed them to listen to all sides of the issue. This was a good case of a dialogue and cooperation with international community. The biggest challenge facing the Uzbek government seems to be to maintain the balance between going fast to maintain the momentum of the reforms to show successful privatizations are possible, and taking enough time to prepare the privatisations properly. To take a concrete example, the privatization of a chemical company is difficult until natural gas prices, distribution network regulation and electricity market de-regulation have all taken place. The question of if the government go fast and perhaps sell at a lower price to leave the transformation to the strategic investor that acquires the asset or take all the measures (legislative, transformation, corporate governance, transparent reporting) first in order to command a higher asking price remains open. As the event showed, the IFI are on board with the government to help find the right balance in this tricky question.
Multi-metal mining opportunities of Central Asia
Since the collapse of the Soviet Union, only a few dozen mines continue to be developed in Central Asia (Kazakhstan, Tajikistan, Uzbekistan, Kyrgyzstan, etc). These countries may provide good opportunities for growth for global mining companies in years to come, due to their rich minerals base and the liberalization of national legislation for mining that have been initiated by local governments in recent years. With a population of about 72 million, the region stretches from the Caspian Sea in the west to China and Mongolia in the east and is characterized by large subsoil resources.
So far, the interest of Western mining companies in this region has been relatively low, which resulted in the almost complete dominance of the Chinese. Since the collapse of the USSR, the Chinese government, together with some of the country’s largest state-affiliated mining companies, have established good relations with the governments of almost every country in the region, providing them relatively cheap loans in exchange of an access to local mineral reserves. Still, the beginning of the pandemic and stagnation of the Chinese economy has led to a significant decline in Chinese investments in the Central Asia mining sector, forcing the regional authorities to consider some alternative investment options.
For example, the government of Kazakhstan, the most economically developed state, is ready to attract investors to participate in the development of the country’s rich uranium fields. At present, Kazakhstan already has a status of one of the world’s leading uranium producers, with the annual volume of production of 18,000-20,000 tonnes per year. As part of the plans of Kazakh government, the attraction of additional investments will allow to start more active development of some of the country’s major uranium fields, particularly the Central Mynkuduk and Zhalpak in the Turkestan region of the country. Kazakhstan holds vast mineral reserves which are largely undeveloped. The country has 30% of the world’s chrome ore reserves, 2% of manganese ore, 10% of iron ore, 5.5% of copper, 10% of lead and 13% of zinc, according to official estimates.
Uranium One Inc., an indirect subsidiary of the Russian state-owned nuclear corporation Rosatom, is directly owned by the Amsterdam-based Uranium One Holding N.V. (89.07%) and Moscow-based Uranium One Group 10.93%. Uranium One is a joint venture partner with JSC NAC Kazatomprom, the Kazakhstan state-owned atomic energy company, in six major producing uranium mines in Kazakhstan – Akdala, South Inkai, Karatau, Akbastau, Zarechnoye and Kharasan.
In the meantime, in Uzbekistan, another major country in the region, the biggest hopes of its government are placed on further development of its gold mining sector. In recent years, Uzbek gold mining has faced an acute shortage of investment, which has resulted in stagnation of the entire gold mining sector of the country. In terms of gold reserves, Uzbekistan currently ranks as the world’s fourth in output with annual production of about 90 tonnes of gold. Most Uzbek mining analysts believe the country has big gold mining potential; however, much will depend on the ability of the state to attract investments in the industry. As in the past, the Muruntau mine – one of the largest gold mines in Uzbekistan and the world, with estimated reserves of 71.4 million oz of gold – will probably remain the most attractive gold mining asset of Uzbekistan for years to come.
In the meantime, in neighboring Tajikistan, the biggest hopes of the local state are related with the development of Bolshoi Konimansur, one of the world’s largest silver deposits, located in the Sughd region of the country (Northern Tajikistan). Total silver reserves at the Bolshoi Konimansur exceed 70,000 tons. According to preliminary estimates, investment in its development is estimated at US$3 billion.
Finally, in Kyrgyzstan, the fourth largest country of the region, most analysts consider the country as one of the potentially largest producers of rare earth elements in the entire region. As Omurkul Kabaev, a former Director of the Institute of Mineral Resources of the Kyrgyz Republic said in an interview with the Kyrgyz Azattyk business paper that the country’s mineral reserves contain over 20 different REEs and rare metals. According to him, most of these metals are located at the Kuttesaya mine. In the meantime, in addition to REEs, the mineral base of the country consists of some other strategically important metals, among which are antimony, tungsten, molybdenum, copper and some others. Overall, according to estimates of Kabaev, there are more than 16,000 mines and deposits in Kyrgyzstan, which makes the country one of the most geologically promising mining destinations in the entire Asian region. However, the situation in Kyrgyzstan has dramatically changed recently. On Friday January 29, 2021, Kyrgyzstan banned foreign companies from developing large mining projects; however, existing licenses are unaffected. This was the first major order by new Kyrgyz President Sadyr Japarov. He was inaugurated on Thursday and the next day signed the order which only allows the development of “subsoil areas of national importance” by a state-owned company. Kyrgyzstan relies heavily on gold mining,
Uzbekistan plans on becoming one of the largest gold producers
At present, the annual volume of gold production in Uzbekistan is estimated at 100 tonnes (in 2017 – 89.9 tonnes; in 2019 – 88.5 tonnes) and will significantly increase in years to come. According to latest data, published by the Uzbek State Committee for Geology, the country currently has 63 large-scale gold mining fields, which have total reserves of more than 2,500 tonnes of gold, and probable reserves (in categories C1 and C2) of 5,990 tonnes. Of these, at least nine are currently in the developmental stage and there is a possibility the number of such fields will increase already shortly.
Uzbekistan aims to become one of the world’s largest gold producers within the next several years that will be achieved through more development of its domestic gold regions. Implementation of these plans will be also part of the last year’s order, which was given by the Uzbek President Shavkat Mirzeev to the national government and which involves an increase of domestic gold and silver production by almost two times by 2021-2022. In fact, the development of the Uzbekistan gold mining industry began at the end of 1960s, when the Soviet government gave a green light for the development of Muruntau, a gold mine that has one of the world’s largest reserves.
After the collapse of the USSR, most of these projects stalled and resumed only in recent years, when the Uzbek government announced its plans to invest up to US$750 million in the development of Muruntau. Most of the funds for the project will be allocated from state sources. Located in the mountains in the southwest of the Kyzyl Kum desert of the Navoi region, the mine was discovered in 1958 and commercial development began in July, 1969. The world’s largest gold-mining open pit was then established with a length of 3.5 km, a width of 2.7 km and a depth of 600 metres. Most of gold will be produced at plants operated by the Navoi Mining and Metallurgical Combine (NMMC) which already accounts 70% of gold production in Uzbekistan. As part of the plans of the Uzbek government, the beginning of more active development of Muruntau will ensure replenishment of gold reserves utilizing the almost complete utilization of NMMC.
The NMMC is comprised of four hydrometallurgical plants, one heap leaching mine and one gold processing mill. Since 1991, ore processing at NMMC has almost tripled, while the volume of gold production has increased by almost 40%. As planned, development of Muruntau and other local gold mining fields will involve the participation of foreign investors. As part of the plans of the Uzbek government, particular attention will be paid to attract investors from Canada.
Last year, B2Gold Corp. announced their intention to conduct geological exploration of three promising gold deposits in the Navoi region. At that time, the company had not ruled out the possibility of beginning active gold mining within Uzbekistan, which may become the next stage after the completion of exploration. In the meantime, the Uzbek government hopes that attracting foreign investors will create conditions for the transfer of some Western gold mining technologies to domestic producers, which may provide a further impetus for the development of the country’s gold mining sector in the future. In addition, it is hoped that foreign investors and gold mining specialists will provide an opportunity to better assess the geological reserves of the republic in accordance with international standards. In general, the Uzbek government hopes successful implementation of these plans will allow the increase gold reserves up to 474 tonnes worth US$18.75 billion within the next five years.
According to the Central Bank of Uzbekistan, current gold reserves are estimated at US$13.1 billion. At present, gold remains one of the major export items for Uzbekistan, most of which is exported to Switzerland. Implementation of these plans will be part of the ambitious state plan for Uzbekistan to join the world’s top five gold-producing nations.
Uzbekistan, the gold helps country’s financial support
Gold is an important commodity that the government uses to decrease the current account deficit, and as global trade slows, with increasing competition for a shrinking global economic pie, Uzbekistan has a guaranteed way to make sure its current account deficit, expected to move into surplus in the mid-2020s on the back of rising exports and a decrease in machinery imports, does not get out of hand; if it so wished it could sell enough gold today to move the country into a trade surplus. This puts Uzbekistan in a very unique and favorable position, providing strong support to the country’s finances for what will be a long road ahead on the way back to normality in the global economy.
As many Asian central banks grasp the value of gold and continue to increase their holdings, western central banks have largely done the opposite and have sold large chunks of theirs in recent years. While gold is regarded by some economists and business people as an archaic relic, Uzbekistan is an important case study for why gold is so valuable for emerging economies.
The first half of 2020, like in many countries, was a challenge for Uzbekistan in relation to exports, which fell 7% y/y. Meanwhile, imports rose 3.6% due to the continued re-industrialization of the country and strong demand for animal protein. When excluding the country’s $2.12bn in gold sales, the current account deficit stood at $6.52bn. Accounting for the gold sold during the period, the current account deficit narrowed by 32.6% to $4.4bn. At the end of this year’s first half, Uzbekistan’s foreign exchange reserves stood at $32.32bn, of which $19.60bn was gold, equivalent to 11mn ounces (the Central Bank of Uzbekistan continually replenishes its gold reserves through purchases of physical gold in local currency from state-owned mines). As of July 31, these 11 mln ounces of gold were valued at $21.73bn or 41.77% of GDP.
As part of its initiative to boost its status as a major global gold producer, the government is making an aggressive push to increase gold exploration and production. With 63 gold districts and proven & probable reserves at 8,500 tonnes, investing in Uzbekistan doubles as a synthetic play on gold. Annual gold production is roughly 100 tonnes and the government has plans by the mid 2020s to increase combined gold and silver production to 270 tonnes. This will largely be contributed by increased production from the country’s largest mining companies—Navoi Mining and Metallurgical Combine (NMMC) and Almalyk Mining and Metallurgical Complex (Almalyk MMC), the former of which is being restructured for an expected international IPO in the coming few years.
Private investors are, however, also playing in the sector, mainly on the exploration side of things. Dual-listed B2Gold has already been awarded exploration licences where it is investing in early stage exploration and several other private outfits from Canada, the UK, Russia and other countries are all looking to get increasingly involved, especially once current mining legislation is further streamlined, making it easier to apply for exploration licences across the country.
With global gold production expected to fall during FY 2020 relative to historic 1-2% annual growth and amid an environment of rising demand, Uzbekistan is well positioned to benefit from the bullish gold backdrop amid the uncertain global economic outlook.
Almalyk MMC to increase gold output in Uzbekistan
Almalyk MMC, Almalyk Mining and Metallurgical Combine, is going to build more output facilities in order to triple its precious metals production and raise its yearly outputs of gold, silver and copper to 50 tons, 270 tons and 400,000 tons respectively.
The press service of the president in Uzbekistan said that the President of the country, Shavkat Mirziyoyev, has signed a deal to raise the gold, silver and copper output of the second biggest mining company in the country.
Almalyk MMC makes up about 20 percent of the total gold output in Uzbekistan and 90 percent of the total silver output.
The country has issued plans in order to modernize its biggest mining company earlier in the year, which is Navoi Mining and Metallurgical Plant, by raising its gold output capacity to 94 by 2026.
Gold mining giant in Uzbekistan to be modernized in the next five years
The Government of Uzbekistan said that, in the next five years, it will modernize the country’s first mining company, Navoi Mining and Metallurgical Plant.
President of Uzbekistan Shavkat Mirziyoyev has asked the government to implement a development program under which the company’s gold production capacity will be raised to 94 tons by 2026, the president’s press office said.
This will require the implementation of 40 projects worth 4 billion U.S. dollars, including the development of a new field with an estimated value of 525 million dollars, according to the report.
With more than 54,000 employees, the gold mining company is among the biggest in the world, accounting for 10 percent of all industrial production in Uzbekistan and 18 percent of state budget revenues.
Mining Arbitration in Central Asia
Kazakhstan has attracted a significant amount of foreign investment in the oil and gas, mining, telecommunications and construction sectors.
The extractive sector alone has attracted over 75 per cent of Kazakhstan’s total inward foreign investment. While most of those investments were made in the hydrocarbon sector, investments in the mining and quarrying sectors still accounted for 19 per cent of the inward foreign investment.
As regards mining and quarrying activities, Kazakhstan is the world’s largest uranium producer with over 40 per cent of global uranium production, the second-largest producer of chromite (13 per cent), the fourth-largest producer of titanium sponge (6 per cent) and magnesium metal (3 per cent), as well as the fifth-largest producer of rhenium (5 per cent). Other significant minerals produced include aluminium, copper, iron, manganese, ore, precious metals, slag and ash, and zinc.
The main producers of non-fuel minerals in Kazakhstan includes the state-owned companies Tau-Ken Samruk (copper, gold, iron ore), Kazatomprom (uranium and rare metals) and the partly state-owned company Eurasian Resources Group (ferroalloys, iron ore, aluminium, copper, cobalt, coal). Other important producers include AcerlorMittal (iron ore, coal) and three Kazakh companies: Kazakhmys (copper), Kaz Minerals (copper) and Kazzinc (zinc and lead).
The Code on subsoil and subsoil use (the SSU Code) was adopted on 27 December 2017 and came into force on 29 June 2018, replacing the Law on subsoil and subsoil use of 24 June 2010.
The SSU Code establishes a distinct legal regime for ‘solid minerals’, uranium and hydrocarbons. With regard to solid minerals, the new Code reflects Kazakhstan’s efforts towards aligning its mining policy framework with international models, and introduces a number of general changes designed to create a more streamlined and predictable legal environment for foreign investors. In that respect, as noted by the OECD, ‘[a] number of jurisdictions including Australia, Finland, Germany, and the UK, have acknowledged the improvements made to the new legal and regulatory framework of Kazakhstan’s mining sector.’
While mining rights under the 2010 subsoil law were granted under contracts following a competitive application process, mining rights (except for uranium) under the SSU Code are granted under licences, which are issued on a first come, first served basis.
The SSU Code contains provisions outlining the relevance of environmental and water quality assessments as part of the licensing process, as well as Kazakhstan’s commitment to transparency reporting in accordance with the international standards of the Extractive Industries Transparency Initiative.
The SSU Code generally refers to the principle of stability of subsoil use conditions.
Under the SSU Code, licences are governed by Kazakh law and disputes in connection with mining licences are submitted to Kazakh courts, notwithstanding the application of an international treaty (e.g., a bilateral investment treaty) ratified by Kazakhstan providing for the settlement of disputes before other forums, such as an international arbitral tribunal.
Taxation of mining activities remains handled separately as part of the Tax Code, which was substantially amended in January 2018. In particular, the Tax Code no longer requires subsoil users to pay excess profit tax, reimburse historical costs or pay a commercial discovery bonus.
Kazakhstan is a party to:
-the 1994 Energy Charter Treaty (ECT), as well as several multilateral investment agreements such as the 1997 Moscow Convention on the Protection of Investor Rights (the Moscow Convention), the 2008 Agreement on Promotion and Reciprocal Protection of Investments in the Member States of the Eurasian Economic Community (the Eurasian Investment Agreement), the 1981 Agreement on Promotion, Protection and Guarantee of Investments among the Member States of the Organization of the Islamic Conference (the OIC Investment Agreement), or the 2004 US–Central Asia TIFA;
-the 1966 Convention on the Settlement of Investment Disputes between States and Nationals of Other States (the ICSID Convention); and
-the 1958 New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards (the New York Convention).
Kazakhstan has also enacted an investment law containing protections similar to those available to foreign investors in modern investment protection treaties. Under the Kazakh investment law:
-Investments can only be nationalised or requisitioned in exceptional circumstances, in which case compensation must be paid in full.
-Investors’ rights and interests are fully protected.
-The stability of contracts concluded between investors and Kazakhstan is guaranteed.
-Foreign investors have an express right to compensation in case of losses resulting, inter alia, from the adoption of unlawful acts by Kazakh officials.
-Investment disputes can be resolved through negotiations or in accordance with the dispute resolution mechanisms agreed upon between the parties. If disputes cannot be resolved through those means, they shall be resolved in accordance with international treaties and laws of the Republic of Kazakhstan by Kazakh courts or by an international arbitral tribunal.
Kazakhstan has faced an increasing number of investment arbitration claims in the past two decades. There are currently three pending investment arbitrations against Kazakhstan involving mining companies.
This arbitration arose out of claims based on rights held by the claimants’ local subsidiary, Joint Venture Saga Creek Gold Company LLP, under two mining licences related to the Uzoby gold belt in Northern Kazakhstan. On 5 April 2016, the claimants initiated an ICSID arbitration against Kazakhstan based on the Netherlands–Kazakhstan BIT, alleging that various actions of the government, including the assessment of taxes and the refusal to grant mining and financing approvals have resulted in the bankruptcy of their wholly owned subsidiary Saga Creek in 2015. A hearing on the merits was held in February 2019. The proceedings remain pending.
World Wide Minerals Ltd (WWM), a Canadian company, entered into several agreements with the government of Kazakhstan for the reconstruction and management of the Kazakh uranium facilities in 1996 and 1997. In 2013, WWM initiated an UNCITRAL arbitration against Kazakhstan based on the 1989 Canadian–USSR BIT, concluded two years before Kazakhstan became independent. The Canadian company alleges that the government has failed to observe its obligations under a contract for the operation of one of Kazakhstan’s largest uranium-processing facilities. It also claims that the government’s alleged failure to grant an export licence to market Kazakh uranium internationally would have led it to suspend its operations at its Kazakh facility and resulted in the bankruptcy, confiscation and forced sale of its local assets. In October 2015, in an unpublished decision on jurisdiction, the tribunal upheld its jurisdiction over the company’s claims, holding that Kazakhstan was bound by the 1989 Canada–USSR BIT. This case is known to be the first one in which a state other than Russia has been held to be a legal successor to the international investment treaty obligations of the USSR. The proceedings remain pending and no further public information has been released to date.
Gold Pool, a Canadian junior mining company, initiated a UNCITRAL arbitration against Kazakhstan also pursuant to the 1989 Canadian-USSR BIT. The company alleged that its rights under a management contract to operate gold mines in Kazakhstan were wrongfully terminated after it had given notice of its intention to exercise purchase rights to the mines. The proceedings remain pending.
Uzbekistan is among the world’s largest producers of gold and uranium, ranked as the eleventh- and seventh-largest producer respectively. Uzbekistan also produces copper, silver, coal, phosphate, molybdenum, potassium, tungsten, lead, zinc and other minerals.
Most of the subsoil deposits are being developed by two major state-owned mining companies, Navoi Mining Metallurgical Combine (NMMC) and Almalyk Mining Metallurgical Combine (AMMC), or by joint ventures with these companies.
The Uzbek mining industry is mainly governed by Law No. 444-II on Subsoil (new version) dated 13 December 2002, which provides the fundamental legal framework for the exploration and development of all subsoil resources, including minerals and oil and gas.
Under the Uzbek subsoil law, subsoil-use rights are granted on the basis of subsoil-use licences awarded to subsoil users through tenders or direct negotiations. The law also provides that mining rights may be suspended, restricted or prematurely terminated in specific circumstances specified by the subsoil law (e.g., failure to commence use of subsoil plot within one year from the date of subsoil plot allotment, repetitive failure to make subsoil use payments, breach of main terms and conditions of a licence or threats to the environment).
On 24 May 2017, the President of the Republic of Uzbekistan adopted the Resolution on Measures for Expediting Attraction of Foreign Investments for Geological Studies and Development of Strategically Important Types of Hard Minerals No. PP-3000 (Regulation PP-3000). Regulation PP-3000 provides investors with simplified procedures for discussing potential projects with the State Committee on Geology and accessing geological data, subsoil deposits and prospective areas.
More recently, in April 2018, the government announced the adoption of a new state policy aiming at simplifying licensing procedures and administrative approvals.
With respect to royalty and taxes, Uzbekistan’s Tax Code sets forth a special tax regime applicable to subsoil users, including mining companies, which imposes a sub-soil use tax as well as subscription and commercial discovery bonuses. The mining industry is further subject to a number of other laws and regulations, including the Land Code, the Labour Code and the Environment Protection Law.
Uzbekistan is a party to 49 BITs, out of which 45 are currently in force. Uzbekistan is also a party to the ECT, the OIC Investment Agreement, the US-Central Asia TIFA, the ICSID Convention and the New York Convention.
Additionally, Uzbekistan’s Law on Guarantees and Measures for Protection of Foreign Investors’ Rights dated 30 April 1998 (the Uzbek Foreign Investment Law) contains provisions similar to those contained in modern investment protection treaties. Under the Uzbek Foreign Investment Law:
-foreign investments cannot be subject to nationalisation, nor can they be subject to requisition except in the event of natural disasters, accidents, epidemics or epizootics, in which case compensation shall be paid;
-foreign investments are protected from any subsequent changes in the Uzbek laws that may worsen investment conditions, for a period of 10 years from the date of the investment;
-foreign investors have an express right to compensation for losses resulting from the adoption of adversarial normative acts or other unlawful interferences in their activities in Uzbekistan; and
-disputes arising out of foreign investment are subject to negotiation, failing which they may be settled either by an economic court of the Republic of Uzbekistan or by arbitration ‘in accordance with the rules and procedures of international agreements (conventions) on settlement of investment disputes, to which the Republic of Uzbekistan has been joined’.
Uzbekistan has faced a number of investor–state arbitration cases, three of which arose out from mining activities, including one based on the Uzbek Foreign Investment Law.
In 2002, US-based Newmont and its subsidiary Newmont Uzbekistan entered into a joint venture agreement with the State Committee for Geology of Uzbekistan, with a view to processing low-grade gold ore at the Murantau deposit. In 2006, the Uzbek government repealed tax terms guaranteed under the joint venture agreement, and requested that Newmont pay US$48 million in unpaid taxes. Newmont initiated an ICSID arbitration against Uzbekistan in April 2007 under the Uzbek Foreign Investment Law. The parties settled the dispute in June 2007 and the ICSID proceedings were discontinued at their request on 25 July 2007. It was reported that as part of the settlement, Newmont was to receive US$80 million and further agreed to drop a concurrent SCC arbitration.
In 2006, as a reaction to the position adopted by foreign investors, including Newmont, the Uzbek Cabinet of Ministers asked the Constitutional Court to proceed with an official interpretation of Article 10 of the Foreign Investment Law, on the basis of which foreign investors claimed that Uzbekistan had consented to settle its disputes with foreign investors under the ICSID Convention. The Court ruled that Article 10 does not purport to mean that either party has given its written consent for resolving disputes under the ICSID Convention.
Metal-Tech initiated an ICSID arbitration against Uzbekistan under the Israel–Uzbekistan BIT for the alleged expropriation of 50 per cent of its shares in a joint metal venture.
In 2000, Israeli Metal-Tech entered into a joint venture agreement with two Uzbek state-owned companies, UzKTJM and AGMK, for the creation of Uzmetal Technology, with a view to processing low-grade molybdenum concentrate, supplied by AGMK. Uzmetal’s facilities opened in October 2002, and by 2005, the venture was turning a profit. In 2008, Uzmetal was declared bankrupt by Uzbek courts after a series of actions were taken by Uzbek authorities, including the initiation of criminal proceedings against Uzmetal’s management for alleged abuse of authority and the suspension of Uzmetal’s exclusive right to purchase raw materials. In January 2010, Metal-Tech initiated the ICSID arbitration.
In an award dated 4 October 2013, the tribunal unanimously rejected Metal-Tech’s claim. The tribunal found that Metal-Tech’s investment was procured by means of illegal payments of approximately US$4 million to three Uzbek nationals, including the brother of the Uzbek Prime Minister. This case was the second case of an ICSID claim being dismissed on grounds of corruption, and the first one on jurisdiction.
The dispute arose out of UK company Oxus Gold’s mining operations in Uzbekistan, consisting of two projects: the Amantaytau Goldfields project in the Kyzylkum desert; and the Khandiza base metals project in the Surkhandarya region. Oxus Gold alleges that the Uzbek government prevented Oxus Gold’s subsidiary from completing the development of the Amantaytau site, including through the revocation of various tax exemptions, the refusal of licences as well as employee coercion; and refused administrative approval for Oxus Gold’s Khandiza project and illegally transferred Oxus Gold’s exploitation rights at Khandiza to a state-owned company.
In August 2011, Oxus Gold initiated an UNCITRAL arbitration against Uzbekistan, alleging contract breaches and violations of the expropriation, fair and equitable treatment and full protection and security provisions of the UK–Uzbekistan BIT, claiming damages of approximately US$400 million.
The tribunal upheld jurisdiction over Oxus Gold’s claims in early 2012. However, in an award dated 21 December 2015, the tribunal dismissed most of Oxus Gold’s claims on the merits, save for a finding that Uzbekistan’s modifications, in 2006 and 2009, of the applicable taxation regime constituted a violation of the fair and equitable standard under the UK–Uzbekistan BIT. The tribunal awarded Oxus Gold damages in excess of US$10 million plus interest. The tribunal further found that it lacked jurisdiction over Uzbekistan’s counterclaims.
Oxus Gold filed an application for the partial annulment of the award before the Paris Court of Appeal. A hearing is scheduled for March 2019.
It is worth noting that to pursue its claim, Oxus Gold had entered into a funding agreement with Guernsey-registered Gretton Limited, an affiliate of third-party funder Calunius Capital. In 2012, Gretton was assigned all of the proceeds of the Oxus Gold arbitration, including the right to enforce the award and to collect from Uzbekistan all amounts owed thereunder. On 27 July 2018, Gretton applied to a US court to enforce the award against Uzbekistan in its capacity as Oxus Gold’s assignee. On 7 February 2009, the US court decided to stay the enforcement proceedings in the US pending the outcome of the annulment proceedings before French courts.
Since the end of the Soviet Union, the Kyrgyz oil and gas and mining sectors have attracted a significant amount of foreign investments.
Mining is a major contributor to the Kyrgyz economy. In 2014, the mining industry represented 8.4 per cent of Kyrgyz GDP and 53.9 per cent of its industrial output.
Mining in Kyrgyzstan is largely focused on coal and gold. There are also deposits of other mineral resources, such as silver, copper, iron, mercury, fluorite, tin, tungsten, bismuth, lead, zinc, stibium, arsenic, molybdenum and rare earth minerals.
The most important mining project is the Kumtor gold mine, managed by a subsidiary of the Canadian company Centerra Gold Inc. The state gold company, Kyrgyzaltyn JSC, holds around 33 per cent of Centerra’s shares.
This project is the biggest contributor to the Kyrgyz economy and currently accounts for a large part of the country’s GDP. In 2017, this project alone contributed to 9.7 per cent to GDP. However, the Kumtor gold mine is expected to stop production in 2026, after having provided a steady stream of revenue for the last 20 years.
In addition to the Kumtor gold mine, there are eight large- and medium-scale gold mines operating in Kyrgyzstan, involving foreign companies headquartered in Kazakhstan, China, Russia, Turkey and the British Virgin Islands.
The Kyrgyz mining sector is currently governed by a variety of laws and rules. The most important legal instruments include the 2012 Law on Subsoil, the 1999 Environment and the Environmental Review laws, the 2008 Tax Code, and the 2001 Land Code.
The 2012 Law on Subsoil and its implementing regulations are the primary sources that regulate the licensing system for mining in Kyrgyzstan. Under these instruments, licences may be issued on the basis of a tender process (i.e., if the significance or size of deposits or licence areas is considered to be of national importance or through auctions and direct negotiations; and foreign companies are under the obligation to establish a local wholly owned subsidiary to which the licence is issued.
Since 2012, the government of Kyrgyzstan has undertaken significant reforms in mineral resource governance, mainly with regard to licensing, taxation and revenue sharing to capture greater benefits for the country and mining-affected communities. As part of this process, the law on subsoil is currently being revised and updated.
Kyrgyzstan is a party to 34 BITs (of which, 23 are in force), the ECT, the Moscow Convention, the Eurasian and OIC Investment Agreements, and the New York Convention. While it has signed the ICSID Convention, Kyrgyzstan has never completed the formalities to ratify it.
Kyrgyzstan has enacted an investment law, which provides foreign investors protections similar to those available in modern investment treaties. Under this law:
-Foreign investments cannot be subject to expropriation, except if such expropriation is permitted by Kyrgyz law and done for a reason of public utility, on a non-discriminatory basis, in accordance with due process of law and accompanied by the payment of a compensation equivalent to the fair market value of the expropriated investment.
-Discrimination and public interference with investors’ activity, rights and legal interests are proscribed.
-Investment disputes shall be resolved in accordance with any applicable procedure agreed upon between the investor and the state. Otherwise, the dispute shall be resolved through consultation and by Kyrgyz courts, unless one of the parties ‘requests to consider the dispute in accordance with one of the following procedures: a. by applying to [ICSID]; or b. by applying to arbitrage or an international temporary arbitral tribunal [constituted in accordance with the UNCITRAL arbitration rules].’
The Kyrgyz Republic currently faces a number of investment claims amounting to an estimated amount of US$925 million, most of which arise out of the mining sector.
In this case, Kutisay Mining LLC, a Kyrgyz company indirectly owned by Canadian company Stans Energy Corp, held a licence for rare earth, bismuth, molybdenum and silver at the Kutisay II deposit. In 2015, the claimants initiated an UNCITRAL arbitration pursuant to the Moscow Convention, under the auspices of the Permanent Court of Arbitration, alleging that their investment had been indirectly expropriated through a series of measures that resulted in the impossibility of carrying out activities on the Kutisay II deposit. The proceedings remain pending.
Centerra Gold v. Kyrgyzstan I
Centerra brought a first UNCITRAL arbitration against Kyrgyzstan in 2006, under the auspices of the Permanent Court of Arbitration and pursuant to the Kyrgyz Law on Investments and an investment agreement concluded in 2003 between Kyrgyzstan, Centerra and Centerra’s subsidiaries. The dispute arose in relation to Centerra’s investment in the Kumtor gold mine, which Centerra owns and operates through two subsidiaries, Kumtor Gold Company (KGC) and Kumtor Operating Company (KOC). While there is little public information on this case, Centerra alleges in its financial reports that the dispute arose out of a domestic court decision ordering KGC to pay US$1.2 million of taxes on land and out of a proposed Kyrgyz law that would have challenged the legality of the investment agreement. In 2009, the parties reached a settlement agreement and concluded a new investment agreement.
Centerra Gold v. Kyrgyzstan II
In 2016, Centerra initiated an UNCITRAL arbitration against Kyrgyzstan pursuant to the 2009 investment agreement between Centerra and Kyrgyzstan to challenge several environmental claims brought by Kyrgyz state agencies against KOC before the Bishkek courts. In one of those cases, the Bishkek Inter-District Court had ruled against KOC, condemning it to pay over US$98 million. Centerra also alleged that Kyrgyzstan had withheld environmental and operating permits necessary for the mine’s operations. In 2017, the parties reached an agreement on part of Centerra’s claims. In mid-2018, it was reported that the parties were still trying to reach a global settlement of the dispute.
Oxus Gold v. Kyrgyzstan
In 2006, Oxus Gold initiated an UNCITRAL arbitration under the auspices of the LCIA, pursuant to the 1994 UK–Kyrgyzstan BIT. The dispute arose out of rights held by Oxus Gold, a UK company, under a mining license for the development of a gold deposit in Kyrgyzstan known as the Jerooy gold project. Oxus Gold claimed damages in excess of US$600 million, alleging that the government had cancelled the project’s mining licence and provided support to the occupation of the premises owned by Talas Gold Mining Company, Oxus Gold’s joint venture company at Jerooy. The proceedings were discontinued in 2008 following the conclusion of a settlement agreement between the parties.
In 2013, Consolidated Exploration, a company incorporated in the Seychelles, and Kazakh and Danish individuals initiated an arbitration against Kyrgyzstan under the ICSID additional facility rules pursuant to the Kazakhstan–Kyrgyz BIT, the Moscow Convention and the Kyrgyz investment law. The dispute arose out of claimants’ investment consisting of a majority shareholding (60 per cent) in Jerooyaltin, a Kyrgyz company that had entered into a joint venture with a state-owned company to develop the Jerooy gold deposit. The claimants claimed US$500 million in damages, alleging that Kyrgyzstan had hindered the joint venture by, inter alia, revoking Jeroolyaltyn’s licence to develop the gold deposit in 2010 and ultimately terminating the joint venture agreement altogether in 2011. The tribunal rendered a consent award on 1 September 2015, recording the parties’ settlement agreement.
Tajikistan is a mineral-rich country with more than 600 deposits of over 70 minerals, many of which remain undeveloped to date. In particular, it has deposits of lead, zinc, mercury, antimony, rock salt and silver that are estimated to be the biggest of the Central Asian countries. It has one of the largest silver deposits in the world, the Bolshoi Konemansur deposit. In 2016, the mining sector’s share of Tajikistan’s GDP was 5.5 per cent. Between 2007 and 2015, more than US$700 million has been invested in the mining sector, with a Chinese mining company making the largest investment of over US$100 million to develop lead and zinc deposits. Chinese, French, Iranian, Russian, Swiss and UK companies are the main investors in the Tajik mining sector.
The exploration and production of minerals in Tajikistan are primarily regulated by the 1994 Subsoil Law. Such law sets the basic legal framework governing the exploration, development and production of subsoil resources, provides for state control, as well as for the granting and termination of mining rights. Under the 1994 Subsoil Law, mining rights can be granted under licences, which are awarded through a bidding process or direct negotiations. Mining activities may also be conducted under concession agreements or production-sharing agreements. In practice, mining rights are primarily granted under licences in Tajikistan. Finally, taxation of mining activities is mainly governed by the Tajik Tax Code and subsoil users are required to pay subscription and commercial discovery bonuses as well as royalties.
Tajikistan is a party to 36 BITs, out of which 23 are in force (including with China, France, Iran and Switzerland), the ECT, the Moscow Convention, the Eurasian and OIC Investment Agreements, the US-Central Asia TIFA and the New York Convention. It is not a party to the ICSID Convention. It has enacted a foreign investment law containing protections similar to those available to foreign investors in modern investment protection treaties. Based on publicly available information, Tajikistan has been a party to two investment arbitrations, which are unrelated to the mining sector.
While Turkmenistan is rich in sulphur, iodine, salt, potash and bromine, the Turkmen mining sector remains underdeveloped with limited foreign investments. The exploration and production of minerals in Turkmenistan is primarily regulated by the 2014 Subsoil Law.
Turkmenistan is a party to 27 BITs, of which, 19 are in force, the ECT, the OIC Investment Agreement, the US-Central Asia TIFA and the ICSID Convention. It is not a party to the New York Convention. It has enacted a foreign investment law containing protections similar to those available to foreign investors in modern investment protection treaties. Turkmenistan has been a party to 11 ICSID arbitrations, none of which related to the mining sector.
Central Asia is a mineral-rich region, with Kazakhstan being one of the world-leading producers of several mining commodities. The mining sector in the five Central Asian republics is principally governed by laws on subsoil, which were either recently revised or are currently being revised.
Kazakhstan, Uzbekistan and Kyrgyzstan have faced several investment arbitration claims arising out of the mining sector in recent years, a number of which were settled. Little information is available about them in English.
The majority of those disputes were initiated on the basis of BITs and the following were of particular interest:
-Metal-Tech v. Uzbekistan as the first ICSID case in which claims were dismissed for lack of jurisdiction on grounds of corruption;
-World Wide Minerals v. Kazakhstan as the first reported case in which a state other than Russia was held to be the legal successor to the international investment treaty obligations of the USSR;
-Newmont v. Uzbekistan, which gave rise to the interpretation by the Uzbek Constitutional Court that Article 10 of the Uzbek foreign investment law does not purport to mean that Uzbekistan has given its written consent for resolving disputes under the ICSID Convention; and
-Oxus Gold v. Uzbekistan, which resulted in a third-party funder seeking to enforce an UNCITRAL award over assets of Uzbekistan in the United States.
In light of the increasing number of mining foreign investments in Central Asia, it cannot be excluded that Central Asian republics will keep facing investment arbitrations related to the mining sector in the coming years. The significant reforms in mineral resource governance and regulations undertaken in the region should create a more streamlined and predictable legal environment for both foreign investors and state authorities and contribute to reduce the occurrence of mining disputes in the mid-term.