Lucidity of Mind is As Good As Gold

published: 15 November 2011

The global crisis has undermined popular trust in financial institutions seriously and for a long time. Exchange rates of the most stable world currencies have collapsed thus spurring demand for gold and leading to a massive spike in gold prices. To protect their assets, investors have started buying not only gold bars but also shares in gold producing companies worldwide. This situation would seem cause for celebration in Kyrgyzstan, a country which has dozens of gold deposits. The present rush for precious metals would seem the right time to launch a few if not dozens of mining enterprises, create thousands of new jobs and thus fill coffers with hefty revenues. The mining sector, even though announced a top priority in Kyrgyzstan, is, in fact, represented by only two operations. We have discussed the situation in the sector with Valentin Bogdetsky, Board Member of the Association of Mining Companies and aide to the Kyrgyz President.

– Valentin Nikolayevitch, they say we are walking on gold and yet need foreign assistance. A strange situation, isn’t it?

– To begin with, it would be a great exaggeration to say that we are very rich in mineral resources and that the entire periodic table is to be found in Kyrgyzstan. Various natural resources are indeed available here but it’s not chemical elements what really matters in the mining sector but, rather, their accumulations called deposits that can be commercially developed.

– Aren’t gold deposits ready for development and production, too, quite numerous in Kyrgyzstan?

– These deposits were well known back in Soviet days but they were not considered as paying. The rise in gold prices has made them promising for investment but once gold sinks in price many of our mines will cease to exist as economic units.
The gold price in the world markets has a fluctuation period of approximately fifteen years, which means a period of consistent growth is followed by a fall. Gold is now trading on top, being in great demand, and gold prices are steadily growing. That’s why it is so important for us to jump at this opportunity.

– How would you describe the current situation in the mining sector?

– Mining is now indisputably the leading sector of the Kyrgyz economy which can give a boost to the other sectors. If you analyze mining departmentally, there can be no denying that it is primarily gold production that has caught the eye of the investor in the recent years. It should be noted, on the other hand, that the mercury price has grown twelvefold whereas gold prices have shown a five- or sixfold rise. Yet, mercury production has its own restrictions as it has been recognized as a global environmental pollutant and its production will be banned in coming years. Therefore, it is precisely gold production that might be termed as the backbone of the whole sector but we have implemented only one large project since independence.

– Why haven’t there sprung up other projects, apart from Kumtor, since independence?

– Kumtor is indeed a large gold deposit when measured by international, not merely Kyrgyz, standards. Hence, it is the most significant project. However, it is not the only gold mine in Kyrgyzstan. Kyrgyzaltyn, a state-run enterprise, produces gold at the Makmal and Tereksai mines, and carries out operations at Solton-Sary. Gold production has also started at the Zhamgyr deposit.

– I felt in your words some regret that only one great project, Kumtor, has been implemented in this country. What other projects do you think we could launch in Kyrgyzstan?

– The potential of Kyrgyzstan makes it possible to implement several projects of the Kumtor type. In that event, the economy would receive a powerful impulse for significant upturn. A number of promising deposits are situated, for example, in Talas that collectively could produce as much gold as Kumtor does with the similar results. The same is true of the Chatkal district.

– Cases have become frequent of late where local residents prevent mining companies from carrying out operations. What, in your view, are the reasons for misunderstanding between the companies and communities?

– This is a serious and multifarious problem that requires a thorough and consistent approach for healthy relationships to be built with the communities. What is needed here is collective participation of the government, education, regional authorities and the companies themselves. But in no way should this problem be dismissed as national mentality, which actually has no such traditions.
Local resistance is not typical of Kyrgyzstan alone. Such frictions are common in many countries of the world where mining companies operate. But such conflicts are normally settled strictly within the law.
True, our legal acts are not perfect, we have to admit it. They do not always consider the interests of the local communities. The companies, in their turn, failed to give due consideration to this component. Now, we are forced to look for solution.
We should not encourage or allow that conflicts be solved by so radical means as those used at Talas.
Many companies, including Kumtor, have faced similar problems. But these showed clearly that solutions and mutual understanding could be found if a company displayed its openness and readiness to build a dialogue with a local community.

– Many experts see Kumtor as the most successful project ever implemented in this country. Do you share this opinion?

– It is undoubtedly a most successful project with a contribution accounting for 10% of Kyrgyzstan GDP. Otherwise, it could not be described as successful.

– Budget revenues are perhaps not the only advantage of it. What are Kumtor’s other benefits?

– You are quite right, although budget revenues are indeed an important factor for our country. OK, let’s consider its benefits one after another.
The international business community has learned a country called Kyrgyzstan, where businesses can effectively operate and develop. It is a good example extremely helping us in our efforts to attract investment.
The Company takes care of its employees, retrains it thereby creating a constellation of highly skilled workers, true professionals, who form a great potential both for the nation and the mining sector in the long term.
Technologically and economically, Kumtor is a very advanced operation. Moreover, it is organized upon modern production principles, which you will not see elsewhere in this country. Management is efficient and works without delays. They are working literally like a clock contributing to the national budget in contrast to state-run operations, badly managed and needing government subventions.
Kumtor creates new jobs, pays high salaries to our citizens, who work both in the Company itself and in numerous firms doing contract work and supplying services and goods.
This is a far from complete list of the Company’s advantages, which enable us to state with reasonable confidence that Kumtor is the most successful of projects ever implemented in Kyrgyzstan.

– All you are saying sounds too positive. What about their mistakes and errors?

– Naturally, it is only those who do nothing that make no mistakes. They broke a lot of crockery with the local communities, what we have mentioned above. But what is really important is that they are able to learn from mistakes as they go along and are open to a dialogue, which is what makes them successful.

– Some time ago there were complaints with regard to the unfair distribution of revenues. How could you comment upon this?

– In their activities they adhere strictly to the agreement we signed. It may be that those complaints were connected with the fact that our revenues at the initial stage were lower than now but it’s we ourselves who is to blame. I was involved in the working out of the first agreement and openly admit that we did commit a number of mistakes at the time. Among other things, we failed to include the value of the deposit itself as our contribution to the joint venture. What we were taught at universities was predominantly Marxist economy and we sincerely believed that the capitalist would willingly sell his own mother in pursuit of profits. As it turned out, though, during their first years they were working for the development of the company, not for profit at all. But look, what a company they have raised! And our share in it opens up ample opportunities for our national economy. Therefore I don’t believe we have any right to reproach them. Moreover, it would be wrong to do so, I think. Now that the agreement has been revised, I believe it to be quite fair and mutually acceptable.

– Nationalization of Kumtor is the idea that has been put forward increasingly often of late. It has been voiced both by members of parliament and presidential candidates. What’s your own position in this field?

– It’s a downright nonsense. A company cannot be nationalized just like that: We have to act in agreement with the international law and the Kyrgyz constitution, which require that we should compensate for the economic entity thus nationalized. Considering the Company’s assets are estimated by the market to be approximately US $4-$4.5 billion, or minus our share, at least US $2.5 billion we will have to pay this sum. Where shall we get this money? Or perhaps those who originate such ideas know where we are to find it?

– But suppose Kyrgyzstan had that money, would nationalization be reasonable in that case?

– It would not be reasonable even in that case. What would be more reasonable to do, in my view, is to pay the foreign debt in order that foreign debt interest payments may not fall heavily upon our shoulders, or launch new mining projects.
On the other hand, the world’s investment and business community would never accept nationalization. All our efforts to build an investment-friendly climate in this country would be buried in that case.

– Why are passions still running high?
– I believe one of the reasons is the people’s unawareness. For it is not only ordinary citizens but even some senior officials who fail to realize the crux of the matter. You may have heard that the Kyrgyz mineral resources are estimated to be US $500 billion or even trillions. These figures are untrue, in fact.
Without going into mining peculiarities, I will cite you a plainer example of wheat. Suppose, you are planning to get a wheat yield of three tonnes and you wish to evaluate the future proceeds from sales. What kind of price would you take for evaluation? Most likely, you would take the wheat price rather than the price of baked goods that you could produce from the wheat. Clearly, the flour price would be higher than the wheat price while the price of baked goods would be still higher. Yet, what you are going to sell is not baked goods but wheat itself. Thus, our Solomons would take gold resources, or the amount of gold you have still to produce, and multiply it by the gold bars price set on the London Exchange.
Mineral resources have first to be extracted and processed, which task needs huge capital expenditures. Accordingly, the value of our subsoil resources is dozens of times as low. In addition, there are inescapable losses during processing. The net amount of gold produced to be sold on exchanges is substantially lower.
It is extremely important to provide authentic information for the citizens so that big figures do not mislead them. Doing otherwise would produce the sense of social injustice in them, which can backfire.

P.S.

Money prefers silence, as they say. Therefore, creating an investment-friendly environment is an imperative demand of the time which flies and we may not waste it. The rocketing gold prices are a thing that cannot last eternally and the process may reverse at any time.
It’s time for us to abandon shallow populist statements and address the problems impeding a stable growth of our national economy. Lucidity of mind seems to become as good as gold.

By Islam Zholdoshov
newspaper «Delovoi Sobesednik» №17, 17 november 2011