(PDF version: http://graphics.thomsonreuters.com/specials/Kyrgyzstan.pdf)
By Robin Paxton
BISHKEK, Jun 28 (Reuters) - The bus loaded with supporters of a planned ${esc.dollar}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.
"The last two governments didn't encourage any great confidence in their ability to create a level playing field. There's a hope that things might get better under the new government, but it's very much 'wait and see'," says Nick Chalmers, mining analyst at Mirabaud Securities in London.
"There have been instances in the past of companies coming unstuck when trying to move from exploration to production, and finding that the goalposts have been moved. Until ... this transition is tested under the new administration, scepticism will remain."
'BATTLE AGAINST CORRUPTION'
Kyrgyzstan's coalition government says it is committed to ditching the cronyism of previous regimes. Prime Minister Almazbek Atambayev says the Kyrgyz stake in the country's main mine was "plundered" by former regimes, and calls his main task "the battle against corruption". He has pledged transparent tenders for future projects so they won't "fall into the hands of swindlers".
With around 100 sizeable gold fields mapped -- but never tapped -- by Soviet geologists, the country is ripe for a mining boom. Gold has doubled in value since 2007 and prices around ${esc.dollar}1,500 an ounce could help resuscitate an economy that contracted 1.4 percent last year after the revolution and ethnic violence that killed hundreds.
"From now on, all of Kyrgyzstan's riches should not be used to line the pockets of certain families or leaders, but for the people of Kyrgyzstan," Atambayev told Reuters in a wood-pannelled office deep inside the parliament building in the Kyrgyz capital, Bishkek.
The government plans to overhaul mining legislation and expects to make its recommendations in months.
Change won't be easy. Anti-corruption watchdog Transparency International ranked Kyrgyzstan joint 164th of 178 countries in its Corruption Perceptions Index for 2010, level with the Democratic Republic of Congo. That survey predates the current government, but unwinding years of graft is already proving tough. Members of parliament continue to argue over controversial jet fuel contracts for the U.S. military air base in the country that serves the NATO-led war in Afghanistan.
Then there's local opposition to new projects. Some of that is genuine -- in Talas province, residents fear their valleys will become polluted and people will stop buying their vegetables, disrupting their traditional way of life.
But some seems to be whipped up by local elites backed by politicians in Bishkek with the goal of extracting a bigger share of future proceeds. As one international mining industry financier, who declined to be named because of his work in the country, said: "You need to have powerful sponsors."
Kentor Gold's McKinnon is convinced that's what happened with his mine. Before the horsemen stopped the bus, officials at the Australian company were sure most residents of Kupuro-Bazar village were supportive of plans to mine the Andash deposit just over 2 km (1 mile) away.
Three quarters of the 846 households in the village had signed documents in support of a development that also had the backing of central government, says McKinnon, who chairs the International Business Council in Bishkek.
But within two weeks of Kentor opening an office in the village this January, parliament sent two deputies on what they called a fact-finding mission. "We got to the edge of town and there's a crowd waiting for us," said McKinnon. "This member of parliament got up, and said: 'Right! Let's go down and close the Kentor office.'"
Another firm, Talas Copper and Gold -- a joint venture between South Africa's Gold Fields Ltd and Britain's Orsu Metals Corp. -- met a similar fate in March when a mob on horseback looted its geologists' camp and set buildings ablaze.
"The elite is very skilled in using the group mentality. They close ranks in the face of outsiders," McKinnon says. "They can draw it up as 'us versus them,' 'There's a bunch of foreigners coming in here to steal our gold'."
Dastanbek Jumabekov disagrees. A native of Talas province, he was the member of parliament who stood up and called for Kentor's office to be closed. "I want the people in our country to live as they do in Germany or Switzerland. Where will we get the money for this? From our resources," he told Reuters by telephone. "But if an investor mines gold here, they should not harm the people of Kyrgyzstan and a fair proportion of the profits must stay within the state."
He says Kentor's plans for a tailings dam, where waste from the mine would be stored, would endanger the local population while blasting at the pit would disturb residents. "If your child is sleeping, who can guarantee they won't go deaf?" he says. "There are places in the mountains where you can mine and build your tailings dams."
'THE ONLY STABLE ENTERPRISE'
Over in Issyk-Kul province near the border with China, Kumtor is the crown jewel in Kyrgyzstan's economy. Owned by Toronto-listed Centerra Gold Inc, the mine accounted for 9.4 percent of gross domestic product last year and almost half of industrial output. From its launch in May 1997 to the end of 2010, it yielded 7.8 million ounces, or 243 tonnes, of gold -- more than Belgium's entire bullion reserves.
Centerra moved in early. The company is an offshoot of Canadian miner Cameco Corp, which was looking for uranium after the Soviet Union collapsed. Instead, it was offered a stake in a prospective gold deposit hidden high in the Tien Shan mountains.
Mine owners plan to raise annual output from the existing open pit to 620,000 ounces over the next six years, nearly 10 percent more than it produced last year. An underground mine will add to this total from 2013.
Some in Kyrgyzstan want more from their prize resource. A commission of members of parliament and local interest groups was created last year to re-examine a 2009 deal that gave the state a 33 percent stake in Centerra. Samat Aliyev, one of the commission's coordinators, says the current agreement -- signed when Bakiyev was still in power -- could have done more to share the profits from Kumtor and protect the environment and workers' rights.
"Nobody is talking about nationalisation of the mine. We are just saying: 'Guys -- let's play by the rules of honest business,'" said Aliyev.
It hurts that per capita GDP in Kyrgyzstan, population 5.3 million, is less than one-tenth of the level in Kazakhstan, its oil-rich neighbour to the north. "Kazakhstan is booming because you have a strong president who is committed to foreign business. There have been many bad examples in Kyrgyzstan
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