The Mine At the Top of the World

KUMTOR, Kyrgyzstan -- The Kumtor gold mine would be a standard operation if not for three things: Kumtor is one of the 10 largest deposits in the world, one of the most remote and one of the highest. The Kumtor site carves an edge in the Tien Shan mountains, 4,400 meters high on a snow-covered, moonlike plateau.

"The logistics in this part of the world are something else," said Moe Lindsay, vice president of the Saskatoon, Canada-based Cameco, the Kyrgyz government's partner in the mine. "These challenges have all been faced by one mine or another -- but they're rarely faced by one mine, all at the same time."

Soviet geologists determined in 1989 that mining Kumtor was not commercially feasible, but Cameco signed an agreement in 1992 to take a 33 percent stake in the mine, as well as management control.

Now, explosions and bulldozers are eating away at Kumtor Mountain, breaking away freezing, dark gray chunks that hide tiny particles of gold. In December, following a ribbon-cutting ceremony in fog and sub-zero temperatures presided over by Kyrgyz President Askar Akayev, chunks of ore began passing through two crushers and three mills to the carbon leaching tanks that separate gold from pyrite.

The company plans to extract 9.3 million troy ounces from the open pit mine over the next 19 years, at an average grade of 0.12 ounce of gold per ton of ore.

For all the logistical nightmares, Kumtor is about as close as it gets to a success story in Central Asia's gold mines. Many other gold mining companies in the region have failed to get financing or run afoul of local officials. The second- and third- largest gold ventures in Kyrgyzstan have both collapsed in recent months. In Tajikistan, rebels took over a British-run gold mine in December. In Kazakhstan, a venture at the largest gold mine ran out of funds when its processing technology failed.

One obstacle to project financing has been the insistence by local governments on controlling the exports of the gold produced, another their reluctance to offer a significant share in their gold deposits. But last year the governments of Kazakhstan and Tajikistan eased their grip on exports (Sidebar, Page II), while Kazakhstan became the first republic in the former Soviet Union to sell a whole mine to foreign investors (Story, Page II).

Cameco's $452 million Kumtor project started processing gold right on schedule, with start-up commissioning -- the testing period before commercial production begins in a few months -- beginning in mid-December and the first bar of gold poured on Dec. 30.

But there was certainly trouble getting to that point -- to the tune of a $90 million cost overrun. Everything that could cost dear, it seems, did.

Cameco had to allocate additional funds for construction, to reinforce the site against heavy earthquakes and subsidence on the permafrost that covers much of the plateau. Engineers will also have to move a glacier that tops the mountain and blocks access to part of the ore.

Moving in supplies -- such as some 17 tons of steel grinding balls consumed every day by the plant's sag mill and two ball mills -- takes three to four months. These are delivered by trains and then trucks that follow a path through Russia and Kazakhstan to Kyrgyzstan, past the giant Issyk Kul lake and then up a steep serpentine road 60 kilometers from the Chinese border. Large trucks that brought equipment for the mine and processing plant would get stuck in the sharp switchbacks and had to be lifted up by cranes. Now, to prevent shortages, Kumtor keeps $22 million worth of supplies and spare parts in inventory.

After a local helicopter crashed against a nearby mountain in heavy fog in 1995 and killed the 12 Kumtor employees aboard, Kumtor brought in a small Canadian plane and built a landing strip. But that was only part of the solution: Since no major Western airline flies to the Kyrgyz capital of Bishkek, Kumtor charters a plane from London twice a month.

"We underestimated transportation cost," said Kumtor president Len Homeniuk, a Canadian appointed by Cameco. "And we really underestimated the financing costs. We had to do a tremendous amount of financial due diligence to persuade the banks."

Because it was the first major investor in Kyrgyzstan, Cameco had to spend $12 million on lawyers struggling to find and interpret the few commercial laws that had been written in the newly independent country. Despite a grandfather clause, the venture has recently been affected by some tax hikes, for instance on salaries.

After the first agreement on the mine was signed in 1992, Cameco's investment was delayed by a corruption scandal that unseated the prime minister, a power struggle with parliament and three re-negotiations of the contract. The government and local officials forced Cameco to take on additional expenditure on infrastructure, such as paving a road and building a $38 million power line.

"We still had a Soviet mentality," said Dastan Sarygulov, president of Kyrgyzaltyn, the state mining company that is Cameco's partner. "We didn't quite understand what a market was. Now we trust and understand each other."

All this raised the cost of producing gold, but Homeniuk said he still plans to reach his goal of a $200 per ounce production cost. In a sign of faith in Cameco, the Kyrgyz government allotted the company five more sites for exploration and has permitted Cameco to jointly develop a second mine, Dzherui, with estimated reserves of 71 tons.

Even now that the Kumtor mine is up and running, its location will continue to pose a challenge. Machinery operates at 70 percent of capacity because at that altitude combustion engines lack oxygen. The venture has to send back about one in 12 workers within days because they cannot stand the thin air at the site. Because high altitude enhances the effect of alcohol, Kumtor is a dry camp in a country where heavy drinking is common.

Minimizing impact on the pristine mountains of Kyrgyzstan and the nearby river that flows through Uzbek farmland to the Aral Sea is a daunting task. For once the location is a blessing: All but the top of the tailing heap will freeze solid, making the unrecovered cyanide stored among the other unusable by-products of the refining process less likely to seep into the groundwater.

Cameco is one of the larger gold companies operating in Central Asia; while smaller companies had to rely on project financing, Cameco could put up $167 million of the total $452 million investment in its own funds.

Kumtor has more freedom than most other gold ventures in Central Asia in exporting the gold, a key requirement for obtaining financing. Kumtor can freely export and refine abroad, and if the National Bank of Kyrgyzstan wants to exercise its first option on buying the gold it has to pay the full going rate at the London bullion market rate. Cameco controls the venture's gold account, which means it has the last word in any gold sales.

"We were here earlier [than other companies]. As a result of that we were able to get a lot of cooperation from the Kyrgyz government," said Kumtor president Homeniuk. "Some of the other deals were pretty one-sided."

Will Cameco's hardships pay off? Some are skeptical. Cameco will lose management control of the site after 10 years, although it will retain its 33 percent stake. Gold experts say the company will be hard put to get a return of the $450 million invested within that period, let alone a profit.

Cameco is by far the largest investor in Kyrgyzstan, a mountain republic of 4.5 million people that has little to offer but gold and other hard-rock minerals. Sarygulov said the mine's 1997 revenues alone should boost Kyrgyzstan's gross domestic product by 19 percent.

"We have very little direct foreign investment," he added.

Fred Daley, vice president of Teck Exploration, a subsidiary of the Canadian mining company Teck which is exploring in Kyrgyzstan, gave the country low marks for security of title, tax climate and the share in mining ventures that the government is willing to sell.

"There is still a lot of room for improvement," he said.

Sarygulov said draft laws on foreign investment, mining and taxation are close to adoption and would improve legal security, allow majority ownership for foreign mining companies and lower taxes.

According to Homeniuk, Kyrgyz officials are eager to compensate their country's shortcomings by accommodating investors.

"In the early days it was difficult," Homeniuk said. "They thought the investor would just pour money into here and not demand control. But that's not the case now. They realize investors aren't going to come here unless the profit thresholds are met."