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. Last Updated: 07/27/2016

Kazakh Gold, Oil Lure Investors

ALMATY, Kazakhstan -- Kazakhstan over the weekend awarded one of the world's largest gold mines, the country's main oil refinery and a sizable oil enterprise to foreign investors, in a series of public tenders designed to rid the country of its image of a back-room dealer.


A consortium of three Western gold companies -- Teck, First Dynasty and Bakyrchik Gold -- won exclusive rights to negotiate a contract for a majority stake in the Vasilkovskoye gold ore deposit, which has proven extractable reserves of 6.5 million troy ounces.


The group pledged $360 million in investments, an $85 million bonus and undisclosed royalties, in return for an 80 percent stake in the mine. But Curtis Coward, adviser to the Kazakh government from the U.S. law firm McGuire, Woods, Battle & Boothe, said Almaty would try to negotiate a better offer for a smaller share and reserved the right to approach the other bidders if no deal had been reached by July 1.


Vitol, the Dutch oil trader, won an open tender for purchase of a 90 percent stake in the Shimkent oil refinery, Kazakhstan's largest, by bidding $230 million in cash and investment pledges.


Government officials picked the U.S. oil company Samson over its Canadian rival Hurricane Hydrocarbons for a 90 percent stake in Yuzhneftegaz, a Kazakh oil enterprise with proven hydrocarbon reserves of 650 million barrels. But a spokesman for the State Property Committee said Samson had put conditions on its investments and was still negotiating an agreement with the government.


"It's a key event. The government is striving for open tenders to attract a wider range of foreign investors," said Nurzhan Subkhanberdin, chairman of KazKommerzBank, a consultant to the oil tenders. "In this country there are opponents and supporters of privatization. A successful deal will pave the way for more tenders."


Although Kazakh companies made bids in two of the tenders, they simply lacked the cash to make bids competitive with foreign investors.


By holding public tenders, the government of Kazakhstan is also trying to restore confidence among investors, shaken by aseries of scandal-ridden contracts which were awarded without tender at undisclosed sums.


The government has delayed privatization in favor of managementcontracts, which grant temporary control over an enterprise to an investor in return for investment and payments of outstanding debts. The investor gets priority in any later privatization, but more than a third of such contracts have collapsed, often because the debts turned out to be much higher than reported.


The open tenders have met with fierce opposition from some ministries, which have pointed at the lack of interest in the auctions to call for direct sales or management contracts instead.


The Vasilkovskoye mine is rated the world's fourth largest undeveloped mine but many major gold companies declined to bid, suspicious after Kazakhstan canceled an auction for the mine last year and handed it directly to Placer Dome of Canada. The cancellation also ruined relations with the European Bank for Reconstruction and Development, the main financier for investment projects in the region. Placer Dome never signed the contract.


Gold analysts had long since predicted a victory for Bakyrchik, led by Robert Friedland, a Canadian businessman who bailed out Bakyrchik earlier this year with funds from Malaysian and Indonesian investors.


His group had tried to buy Vasilkovskoye outright but won the tender after joining forces with two other bidders, Teck and First Dynasty. The group hosted Kazakh president Nursultan Nazarbayev on a private island off the coast of Malaysiajust days before it won the bid.


"There were five real bids," insisted Coward. "We had two objectives. One was to attract a respectable mining company. The second was to ensure that we re-established good relations with the European Bank for Reconstruction and Development and the mining sector. We feel we accomplished both objectives."


Bids for the refinery had dwindled to one when Munayinvest, a small Kazakh investment company, joined with Vitol. After government officials objected that the lack of counter bids would render the tender vulnerable to attack, Munayinvest submitted a separate bid, $75 million below Vitol's.


Major oil companies dropped out of the tender for Yuzhneftegaz, too, including Canadian Occidental and Chevron. Sarybai Kalmurzayev, chairman of the State Property Committee, said the oil production association had limited appeal because its oil was not suitable for export; oil executives said they had too little information and were worried about the solidity of the company'slicense to the Kumkol oil field.