06/27/2012 09:20 EDT | Updated 08/27/2012 05:12 EDT

Kyrgyzstan Parliament approves revision of major gold mine operating license

BISHKEK, Kyrgyzstan - Kyrgyzstan's parliament backed a motion Wednesday to review the operating licence of a Canadian mining company developing a major gold mine that accounts for 12 per cent of the Central Asian country's economy.

The decree, approved by 67 votes to 11, calls for an increase in the government's current 33 per cent stake in Toronto-based Centerra Gold (TSX:CG), which is developing Kumtor mine.

A state commission is to be set up to assess the environmental damage that deputies say served as a leading motivation for reviewing the licensing agreement.

This decision will come as a blow to Centerra and will likely serve to further depress investor confidence in the former Soviet republic.

On Toronto Stock Exchange, Centerra shares were down 26 cents, or 2.59 per cent, at $9.79 in early afternoon trading.

Centerra's president and CEO Ian Atkinson said in a statement that the company has had "a long history of constructive dialogue with the government" and looks forward to continuing that dialogue to "resolve any outstanding concerns."

However, Atkinson said that any discussions had to take into account "existing legal obligations and binding commitments" under agreements approved by all relevant Kyrgyz governmental authorities, including the country's parliament and Constitutional Court.

"These agreements form a solid foundation for the successful operation of the project and enabled Centerra to make significant new investments in Kumtor," he said.

"Centerra has confidence in the continuing validity of the . . . agreements, which provide as well for disputes concerning the project to be resolved by international arbitration, if necessary."

Deputies who back the licence revision question the legality of the operating agreement sealed in 2009 and say that it deprives Kyrgyzstan of deserved revenue.

Centerra says the Kumtor project, which has been operating since 1997, is in full compliance with Kyrgyz laws and meets or exceeds Kyrgyz and international environmental, safety and health standards.

The company also says the project has generated $1.9 billion in benefits for Kyrgyzstan, including $620 million in taxes.

Deputies rejected a more extreme proposal also voted on Wednesday to nationalize Kumtor outright.

"This is the right decision for the civilized settlement of the issue," said Ravshan Jeyenbekov, a deputy with the Ata-Meken party, which is a member of the governing coalition.

"Some aspects of the operating agreement will be cancelled, but they will not strategically affect Kumtor's work."

Centerra is 33 per cent owned by Kyrgyz state gold company Kyrgyzaltyn.

The open-pit gold mine run by Centerra's Kumtor Operating Company subsidiary, or KOC, has been the source of a string of toxic spills in past years, including a cyanide spill into a river.

Deputies have voted to compel KOC to increase the contributions it makes toward protecting the environment and reclaiming agricultural land near the mine.

The government has until Nov. 1 to report back to parliament on how the decree has been implemented.

Political analyst Tatyana Vygovskaya said foreign investors who contemplate entering Kyrgyzstan would think twice about doing so after Wednesday's vote.

"This will lead to renewed pressure for investors, who had until now doubted that this country has a normal investment climate," she said.

Kumtor has already been assailed by industrial disputes. Centerra has said that a 10-day work stoppage by striking workers in February exacerbated the buildup of ice and waste at Kumtor, preventing access to higher grade ore.

It said that as a result gold output in 2012 could drop to a low of 390,000 ounces, down from an earlier upper forecast of 625,000 ounces.

Kyrgyzstan, a country of five million people on China's mountainous western border, has come to prominence in recent years because it hosts a U.S. air base used to support military operations in nearby Afghanistan.

Years of political instability and rampant corruption have left the country of five million people in dire economic straits, forcing hundreds of thousands to leave the country for work in Russia.

— With files from The Canadian Press