Kazakhs Allow Region's First Mine Privatization

ALMATY, Kazakhstan -- Kazakhstan became the first former Soviet republic to fully privatize a large gold mine to foreign investors in December, selling the 60-percent state share of the giant Bakyrchik deposit.


Bakyrchik Gold, a company listed on the London Stock Exchange, announced it would raise its stake in the Bakyrchik mine from 40 percent to 85 percent, with Singapore-based Indochina Goldfields, the company's biggest shareholder, taking the remaining 15 percent.


Bakyrchik, in northeast Kazakhstan, is considered one of the largest undeveloped deposits in the world, but its ore has proven hard to process and the existing venture ran out of funds after its pilot plant failed to extract gold at sufficient purity.


Bakyrchik Gold paid a $5 million bonus to the Kazakh government when the deal was signed in December, and together with Indochina pledged to pay $60 million in four installments over the following 16 months. The two pledged to invest at least $150 million over the next 10 years.


Bakyrchik, estimated to hold 10.5 million troy ounces of gold and run by the joint venture between Bakyrchik Gold and the Kazakh government since 1993, is the first major gold mine in the former Soviet Union to come under full control of foreign investors.


"It's a very important step for the country to contemplate a 100 percent privatization of a gold mine," said Robert Friedland, director of Bakyrchik and chairman of Indochina Goldfields. "This puts the country ahead of Russia and other neighboring countries."


"The existing joint venture has run out of funds and its [processing] technology does not work," one Kazakh official said. "It needs new investments, but we can't afford to put up our share. Robert Friedland has promised to get the money."


The deal is sure to be controversial in a region where governments are routinely accused of selling off their people's wealth to foreigners, all the more since the government only opted for a sale after the venture failed to deliver on its pledges.


"What do we gain from just selling some and keeping some?" the Kazakh official said. "The enterprise will stay in Kazakhstan either way, it will pay taxes, royalties and salaries. That's our priority."


Friedland said he and the other investors had already spent more than $50 million before they decided to shut down the existing plant this summer, stockpile ore and lay off one-third of its 1,300 workers. The $60 million in payments will precede production at a second, all new plant at the mine, which will start in 1999 at the earliest.


Indochina has pledged a $20 million loan for work capital at the mine, in addition to its $20 million contribution to the purchase price. In addition to its 15 percent share in the Bakyrchik mine, Indochina Gold also owns 26.3 percent of Bakyrchik Gold, making it the company's largest single shareholder.


The outlook looks worse for the foreign suitors of the country's second-largest mine, the Vasilkovskoye open pit in nothern Kazakhstan. Canada's Teck mining and U.S.-based First Dynasty has long sought a deal for 80 percent of the mine, which has proven and probable reserves of 6.5 million troy ounces. Kazakh Prime Minister Akezhan Kazhegeldin has yet to endorse the deal, and the Kazakh Tender Commission just made a negative recommendation against the sale.


Curtis Coward, adviser to the government for the U.S. law firm McGuire, Woods, Battle & Boothe, said the two companies had pledged to invest $360 million, hand over a staged $92.5 million sum to the government and pay variable royalties depending on the gold price and the mine's yield.


A source close to the government said negotiations had dragged on partly because Teck's samples of the ore indicated a lower grade than the 3.5 to 4 grams a ton that had been officially reported. The prime minister had been considering canceling the tender and waiting for gold prices to rise so that the mine could raise a higher price.


"They're always sensitive about giving away the crown jewels at throw-away prices," he said. "The good news about Vasilkovskoye is that it's huge. The bad news is that at current gold prices, it's not particularly attractive in terms of processing costs."