Wednesday, June 29, 2011

Mining Shares and Sovereign Risk: Kyrgyz Republic

Those of you who read the blog regularly would be aware that I am largely out of precious metal equities (with only modest positions in two companies after having held up to 15 early in the year). I have kept a close eye on my watch list though and noted with interest that three ASX listed companies with Gold related assets in the Kyrgyz Republic were all sharply red today when most others (precious metal related with projects elsewhere) were stable or green.

Kentor Gold (KGL) closed down 11%
White Cliff Nickel (WCN) closed down 16%
Manas Resources (MSR) closed down 16%

I have written about WCN and MSR previously on this blog (see these links: WCN, MSR).

Only a week ago I briefly posted about Sovereign risk, saying:
An investor needs to weigh up the many risks associated with mining companies; one of those is the risk that future government policy will reduce the value of an investment (sovereign risk). While mining costs can be significantly cheaper in less developed countries there is also risk of nationalisation of mines and mineral resources (something discussed recently in Bolivia and South Africa) as well as other changes that could be a detriment to the investor. That is why I prefer to direct most of my capital into Australian based miners. BB.
In the post I wrote on WCN (linked above) I said this regarding the situation in Kyrgyzstan (written September 2010):
There has been political unrest in Kyrgyzstan after the country's President, Kurmanbek Bakiev was ousted in April this year, however in June a referendum was held supporting a constitutional change that would make Kyrgyzstan a parliamentary democracy. The election is to be held October 10th and the expectation is that it will add stability to the region.
While the elections went ahead (with greater than 50 percent turnout) the environment is far from perfect for foreign mining interests with the following being reported on mineweb yesterday:
Mining companies, who had hoped democracy would lead to a better investment climate in the resource-rich country, are finding the going tougher than expected.

The bus loaded with supporters of a planned $100 million mine had just left its remote Kyrgyz village when a mob on horseback blocked the road. What happened next was a warning to foreign mining companies who had hoped democracy in Kyrgyzstan would improve the investment climate in the Central Asian republic.

"The supporters were dragged out of the bus and warned in no uncertain terms they should not show any support for the project," said Hugh McKinnon, country manager for Kentor Gold, the Australian miner that holds the licence for the deposit.

"This group of horsemen went round every household which has shown support for the project and threatened physical violence unless people agreed to back off."

Four months on, Kentor Gold still hasn't started work on the copper and gold mine it says could transform a corner of Talas province, cradle of the April 2010 revolution that ended nearly two decades of authoritarian rule in Kyrgyzstan.

The country has promised much since electing a new parliament last October, the first in ex-Soviet Central Asia not beholden to a presidential strongman. But early hopes that Kyrgyzstan could become a model for a different way to do business in the region are fading. Mineweb
Further to this Kentor Gold provided an update on their Andash Project this morning:
Kentor Gold Limited (Kentor) advises that a resolution appears to have been adopted in the Kyrgyz Parliament relating to the Andash Project. Although it is believed that the Kyrgyz Government will reject the Parliament’s resolution, it does call for the suspension of all activities related to the development of the Andash gold‐copper project, revocation of all permits and cancellation of the land use permit.

The Department of Natural Resources has written to Kentor today stating that at present it “...has no information on and sees no causes for early cancellation of the license.” Mining licences and land use permits are the responsibility of the Executive Government through the Department of Natural Resources.
While it seems likely the parliament resolution won't stick it will probably delay KGL's development of the project.

Here is a very brief overview I've written for the three companies listed at the top of this post:


Kentor Gold (KGL): With the share price at 8.1c (close price on 29/06) KGL's current market cap is approximately $86m. As of the March quarterly report they had $68m in cash. They are fully funded for $96m CAPEX at Andash with the remainder to be funded by a $50m debt facility provided by Macquarie Group.

Apart from the Andash Gold-Copper Project KGL also recently took control of Jinka Minerals (purchased for $12.75m equivalent) which holds several advanced resource projects in Australia.

When taking into consideration their cash position, little value (around $18m) is being provided for their 80% stake in the Andash project which is expected to produce 70,000 ounces of Gold for 6 years (with potential to extend) at a cash cost of US$29 (net Copper credits).


White Cliff Nickel (WCN): The share price closed at 9.2c, providing a market cap of around $6.2m. They had $2.44m cash at the end of the March quarterly and have raised another $730,000 in April meaning they have around $3.17m cash minus the last 3 months spend. This company runs a very tight ship and this capital has the potential to last them 12 months or more depending on the level of exploration carried out (net operating cash flow in 9 months leading up to last quarterly was around $1.5m).

They own or hold interest in several projects, the most exciting of which is the Chanach Gold Copper Project (located in the Kyrgyz Republic) in which they have a 45% interest.

WCN is the least developed of the three companies with no resource yet defined at any of their tenements.


Manas Resources (MSR): With a share price of 18c MSR has a market cap of $32m. They have a significant number of options which expire September this year and have a strike price of 20c. With the recent share price movement they are now out of the money. The cash position at the end of the last quarterly was $11m.

They have a Gold resource of 1.13m ounces. They have the largest land holding in the Kyrgyz Republic with 4400km2. The Shambesai site has 645k ounces of Gold and a CAPEX of only $16.3m is expected with a life of mine cash cost of US$250 projected.


Although many precious metal stocks have taken a beating recently, it's pretty obvious that this bunch has copped some of the worst falls. All three are heavily discounted based on the turmoil in the Kyrgyz Republic.

While I'm not currently looking to buy equities right now (for reasons explained in previous posts) I will certainly be keeping an eye on how the political situation develops. I've held positions in WCN and MSR in the past and all three companies look promising, I will be potentially be on the lookout to add these companies to my portfolio in the not too distant future (a smaller percentage than the companies I own and will buy with Australian based projects).



  1. I don't follow news in Kyrgyzstan on a regular basis though do take an interest in the country; I visited about five years ago and loved it there. Miners like Centerra have always faced sovereign risk and it is just something you will have to accept if you invest in Kyrgyzstan. It is a relatively poor country, highly corrupt, and the political scene is shaped by clan loyalties. If the miners have cyanide spills like Centerra did it will only put off the locals even more. I'd suggest that if you are looking to invest in Kyrgyz mines that you have some local knowledge and not rely on press releases from mining companies.

  2. Thanks for the info Mr Medved. I wouldn't say that I "invest" in Krygyz mines, but they form a small speculative portion of my capital at times. That said I would be interested in any ideas you have about keeping an eye on local happenings if you have any suggestions? I am aware of the high level of corruption.

    Came across this article over the weekend as well which contained a short summary of the situation: