UPDATE 3-Kyrgyzstan sets deadline to revise Centerra Gold deal

Thu Feb 21, 2013 7:47pm EST

* Government to cancel contract if no compromise

* Insists Centerra must pay for environmental damage

* Centerra says facing new government claim for $315 mln

* Centerra says 2009 deal "solid"; open to talks

By Olga Dzyubenko and Bhaswati Mukhopadhyay

Feb 21 (Reuters) - Kyrgyzstan has given Centerra Gold three months to redraw terms before ripping up an agreement to run its flagship mine in the Central Asian country, accusing the Canadian miner of "colossal" environmental damage and underpaying the state.

Centerra said it had received a new claim from the government for $315 million for alleged environmental destruction, almost tripling the damages claims that it faces.

Parliament ended two days of fierce debate by passing a resolution on Thursday demanding the government revise a deal struck in 2009, a year before then-president Kurmanbek Bakiyev was driven from power by a popular revolt.

"If within three months our negotiations yield no results, the government will unilaterally cancel the agreement," Economy Minister Temir Sariyev said during the debate on Wednesday.

Centerra, whose shares have halved since the Kyrgyz government said in June it would review the mine deal, said the 2009 agreement was "solid and transparent" and it had already started talking to the government.

The Kumtor mine, bisected by a glacier 4,000 meters (13,000 ft) above sea level, is the largest gold mine in Central Asia operated by a Western company. It is the industrial centerpiece of the fragile Kyrgyz economy, contributing 12 percent of GDP in 2011.

Kyrgyzstan's gross domestic product contracted by 0.9 percent last year after Centerra reduced output at the mine by 40 percent as a result of ice movement in the pit.

Sporadic protests, often fueled by the nationalist rhetoric of opposition politicians in the five-party parliament, have also disrupted operations at the mine over the last year.

Sariyev said there was no desire within parliament to nationalize the mine, repeating earlier statements by both the country's president and prime minister.

But a specially appointed state commission has determined that deals signed by Centerra between 1992 and 2009 were approved by previous political elites without public discussion and were not entirely in Kyrgyzstan's interests.

"We want to cancel it all and return to the legal framework," said Sariyev, who also heads the commission.

He accused Centerra of paying too little into Kyrgyz state coffers and said the company had inflicted "colossal damage" to the environment.

Centerra, which maintains it has broken no laws, said it would study the latest claim, but believed the allegations were "exaggerated or without merit".

"We think the environmental claims are unfounded," said Chief Executive Ian Atkinson, who visited Bishkek last week to meet Prime Minister Zhantoro Satybaldiyev.

Atkinson said he hoped Centerra, in Kyrgyzstan for 15 years, could resolve the issue without the need for arbitration.

"We managed to resolve this in the past through discussions. We hope to do it again this time," he told Reuters in an interview.

RECOVERING PRODUCTION

Under the 2009 agreement, the Kyrgyz state became a 33 percent shareholder in Toronto-listed Centerra Gold, giving it a foothold in the company's Mongolian operations and exploration projects in Turkey, Russia and China.

Asked whether its international assets offered Centerra bargaining power in talks with the government, Atkinson said: "If we are a two-mine company today and we become a four-mine company, it just gives you greater operating flexibility."

But Kumtor will continue to generate the bulk of production. As operations recover in 2013, Centerra forecasts consolidated gold output - including its Boroo mine in Mongolia - in a range of 605,000 to 660,000 ounces, versus 387,076 ounces in 2012.

"Once we get through this year, our production profile at Kumtor ... for the next 10 years is going to be back up to 650,000 ounces a year," Atkinson said.

The company must first reach accord with the government.

Official Kyrgyz data show that, if the current agreement were to be renegotiated, Centerra would pay about 5 billion soms ($105 million) more to the government every year.

"They would also have to pay (another) $10 million annually for ecological damage," Sariyev told parliamentary deputies.

The additional damages claim for $315 million relates to tailings, rock dumps, and other waste from the mine. This comes on top of the government's previous environmental damages claim worth 6.8 billion soms, or $142 million at current exchange rates.

The company on Wednesday reported a fourth-quarter loss of $68 million, or 29 cents per share, on a one-time accounting charge and said it expected to incur closure costs related to underground operations at Kumtor in the first quarter of 2013.

It made a profit of $79.4 million, or 34 cents per share, a year earlier.

Shares in Centerra, which has a market value of C$1.8 billion, edged up a cent to C$7.61 on Thursday, having fallen from C$16.19 last June.

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