Where Mining Gold Is the Easy Part

By Russell Working

When Canadian mining giant Cameco Corp. opened the Kumtor mine in the former Soviet republic of Kyrgyzstan in 1996, the greatest obstacle appeared to be the logistics of running a mine at 4,000 meters in the remote Tian Shan Mountains. Twenty-seven heavy trucks lumber up a switchbacked gravel road from Lake Issyk-Kul to the mine every day, hauling explosives and steel grinding balls past nomad camps, alpine glaciers, and the ruined foundations of a medieval inn on the Silk Road. Workers have been known to faint from lack of oxygen, and Kumtor had to install a $1 million oxygen chamber.

But Kumtor Operating Co., a Cameco subsidiary that runs the mine, soon learned that Kyrgyzstan itself would prove the greatest challenge. Although the mine provides 10% of the nation's gross national product and 40% of its export income, it has become entangled in a post-communist bureaucracy and has found itself besieged by demands for handouts. "Everybody wants a piece of the action," says Kumtor's senior vice-president for operations, John Kazakoff, a 52-year-old Canadian who bounds around the rutted roads of Kyrgyzstan in a Ford Excursion with a 90-kilogram Great Dane named Ostop in the back. "But the pie is only so big, and if enough pieces are taken away, there's nothing left."

Kumtor is an open-pit mine where blasting and bulldozers extract ore from the spectacular landscape. Opened at a cost of $452 million, Kumtor extracts an average of 19 tons of gold a year. In a nation with a population of just 4.7 million, it employs 1,500 people, 93% of them Kyrgyzstani citizens, and accounts for an additional 5,000 jobs through subcontractors and purchases from local business. The mine's output is worth $200 million a year, but it takes home profits of only $4 million, because of high overhead and production-sharing deals with the state.

RED TAPE. The mine illustrates the difficulties foreign companies face in Central Asia, a landlocked region largely forgotten in the past decade but suddenly thrust into the spotlight amid the new war on terrorism. In the West, remote and impoverished communities are often grateful just for the jobs and taxes a big company provides. In this former communist nation, even businesses supported at the highest levels of government, as Kumtor is, can get tied up in red tape. "Kumtor is obviously a special case, because they're so big," says Clemens Grafe, a London economist with the European Bank for Reconstruction & Development who specializes in Central Asia. "They get a lot more intervention than a smaller operation would. If there are problems with the trade balance, officials call up Kumtor and say: `Can you help us?"'

Kyrgyzstan is a republic headed by President Askar Akayev, a former physicist. His record is far from unblemished. Journalists, human-rights activists, and opposition politicians have been arrested on trumped-up charges. Still, Akayev is considered the most liberal leader in the region, and there are frequent political demonstrations in the capital, Bishkek.

For Kumtor, the problem lies not with politics but bureaucracy. The mine's staff squanders time filling out multiple permits for ministries ranging from Finance to National Emergencies. "Twenty permits are required for the transport of hazardous materials, and 19 to allow the mine to do work that is classified as dangerous," Kazakoff says.

Kumtor found it especially difficult to explain to Soviet-educated planners and geologists that the amount of recoverable ore depends on the price of gold on the world market. When the price fell by $103 an ounce in 1998, to $272, Kumtor's reserve estimates dropped from the original 6.8 million ounces. That's standard in the industry: Ore that is harder to get at isn't worth the expense when the price falls. But Kyrgyz planners, trained to think of gold as a national treasure not subject to the laws of the marketplace, couldn't understand the fluctuating reserve, Kazakoff says. Bureaucrats flooded the mine to take core samples and argue over the costs of mining, milling, and administration. This summer, Kumtor found new reserves, so it now figures it will be able to mine 7.8 million ounces despite a price of $290 an ounce.

Then there are the handouts. The problem is not traditional corporate charities, although the mine imports hospital equipment and paid $1 million to support educational programs set up by President Akayev. It's the other demands that are tricky. Agencies have requested that the mine provide cars and office space, Kazakoff says, adding that the state electrical utility sometimes asks the mine to pay its bills weeks early. Djety-Oguzsky County, where the mine is located, has asked for and received trucks, scrap metal, diesel fuel, tires, and shoes, says Orozbek Bekturov, head of county administration. Authorities are also insisting that the company pave the gravel road to the mine even though Kumtor pays up to $2 million a year in road taxes. Kazakoff says the county even asked for seed to plant wheat, then asked the mine to buy the crop when villagers couldn't find a market. The mine declined.

Djety-Oguzsky descends from glacier-covered mountains down to 1,609-meter-high Lake Issyk-Kul, where the stony hills are decorated with cemeteries made of mud-brick homes for the spirits of departed loved ones. Kumtor employs 900 local residents, flooding the community with their wages. But the county finds many ways to milk the cash cow. "Every year the mine covers the costs of harvest of fruit, melons, vegetables, and wheat, and pays for the locals' medical care and the cost of funerals," says Bekturov. Kumtor drew the line, however, at a request to build a cannery and fruit-drying facility so villagers could send their products to Siberia. Locals were looking past the planned closure of the mine in 2007 and its milling operation in 2009. "Over the past two years, they have never said no to our requests, except that they refused to finance the big projects," Bekturov reports. "We tell them: `Look, in a few years, Kumtor will be gone, but we'll stay. We've become like drug addicts, we're so used to your help. Give us the equipment, and our people will keep working.' But they say they are not a bank, and they don't give a single kopek."

"SOVIET MENTALITY." Kumtor has hardly been a perfect neighbor. In 1998, a truck hauling 1,744 kilos of cyanide up the mountain overturned and spilled its load into the Barskaun River. The mine didn't notify villagers for hours. But the damage was not lasting, a state scientific commission later concluded: Diluted by water, the cyanide temporarily damaged river life but was nonlethal to humans. Still, the region panicked, and the government evacuated thousands of people. The mine was fined $8 million.

Kumtor looks to better relations with the state over the long term. There's less red tape now than a few years back, says Kazakoff: "We're coping with a system in the process of changing from a Soviet mentality to a free-market one." And the government recognizes the problem. Ilias Bekbolotov, press secretary to President Akayev, says the administration in July formed an Investment Coordinating Committee that is drawing up recommendations for how to improve the business climate. Akayev chairs the group, and a Kumtor executive holds a seat. "The goal is to make Kyrgyzstan attractive," says Bekbolotov.

Of course, with the rise of global terrorism, the mine faces other dangers. In recent years, Islamic militants with ties to the Taliban have attacked army posts and kidnapped locals and foreigners in southern Kyrgyzstan. Bekbolotov says there have been no incursions this year after the government beefed up border patrols. So for now, investors thinking about doing business in Kyrgyzstan should be more worried about bureaucrats toting briefcases than about angry fundamentalists toting Kalashnikovs.

Working is a freelance reporter based in Vladivostok.

Edited by Harry Maurer

    Before it's here, it's on the Bloomberg Terminal.