VANCOUVER — Toronto-listed gold miner Centamin (CEE-T, CEY-L) has run into legal issues at its flagship Sukari operation near the Red Sea in southeastern Egypt. On Oct. 30, Centamin acknowledged that the Egyptian administrative court had annulled its concession agreement at the Sukari mine, though the company noted that it had not been provided with details from the ruling that would allow it to conclude what parts of its concession may be affected.
Judge Said al-Qusair stated that the exploitation contract held by Centamin was invalid and subsequently voided a previous decision allowing the company a 30-year extension on its license.
Roughly a year and a half after the Arab Spring upended Egyptian politics and toppled Hosni Mubarak’s regime — making way for a government led by Mohamed Morsi and backed by the Muslim Brotherhood — the country’s courts continue to review contracts and agreements ratified under previous administrations.
Centamin’s agreement with the Egyptian government came into effect in 1995. The company has a unique agreement insomuch as it is immune taxes over the first 15 years of operation and maintains additional rights protecting its cash flows.
Under contractual terms, Centamin is entitled to recover all current operating expenses incurred and paid after it achieved commercial production, as well as all exploration costs at a rate of 33.3% per annum. The company is also allowed to recoup all exploitation capital costs related to mine development. In return, Egypt recieves a 3% royalty on net sales revenue from gold and associated minerals produced at Sukari.
Centamin enjoys additional benefits under the deal including an exemption from custom taxes and duties paid on capital imports, like machinery and mining equipment. Following the reimbursement of expenses and payment of the 3% royalty, Centamin is obligated to split profits equally between itself and the Egyptian government.
On Oct. 31, Centamin released an official response to the court ruling. The company reported it is working with its 50-50 partner, the state-owned Egyptian Mineral Resource Authority (EMRA), to take action and defend its rights to extract gold under terms of its mining concessions. Potential recourse includes the filing of a notice of "objection of enforcement," which effectively delays the implementation of any judicial decision.
A Centamin report indicated it continues to run Sukari's operations unhindered, and intends to legally challenge any ruling against its contractual rights.
“If, through our due diligence process in the coming weeks, we do uncover any such threat, we will spare no effort in order to defend our position, which at all times has been in accordance with the terms of [our agreement],” stated Centamin’s Chairman, Josef El-Raghy, noting the company has invested US$700 million in Egypt to date, and directly employs 1,200 people locally. “All of our mining and processing operators are now Egyptians and mining now represents a key means of bringing economic development into the region in which we operate.”
Centamin also received support from EMRA Chairman Fekry Youssef, who indicated the authority’s full backing of the Sukari gold mine. Youssef described the relationship as "positive and constructive," citing substantial cash flows and world-class development as benefits for the Egyptian people. He labelled the concession agreement as "reasonable and fair to all parties concerned."
Egypt's administrative court occupies the lowest rung on the country's judiciary ladder, and Centamin's case seems destined to be appealed at higher levels. Challenges of contracts signed under the Mubarak regime are becoming common, though, as with any legal system, the process can be defined as long and arduous.
Centamin's shares remain halted in Toronto at time of writing, though the company has thus far avoided significant value-loss, closing Oct. 29 at $1.55 per share. In London, the news struck a predictable blow, with Centamin's shares dropping roughly 52% or £0.50 since Oct. 29, en route to a £0.58 press-time close. Trading remains halted in London.
Sukari's 2012 production guidance falls in the 250,000 oz. of gold range, and Centamin is in the process of a US$288-million capital upgrade program that would double output to 500,000 oz. of gold within the next five years.
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