Centerra rebuffs Chaarat’s $800M offer for Kumtor mine

Excavation on glaciers at the Kumtor mine site. Credit: Centerra Gold.Excavation on glaciers at the Kumtor mine site. Credit: Centerra Gold.

Before Chaarat Gold (LON: CGH) launched an US$800-million, cash-and-share proposal to acquire Centerra Gold’s (TSX: CG) Kumtor mine in Kyrgyzstan, very few North Americans had even heard of the junior mining company.

But what Chaarat lacks in visibility on this side of the Atlantic, it makes up for with deep management roots in the mining business, hosting a board of directors that includes Artem Volynets, a Russian businessman who cut his teeth consolidating aluminum assets in Russia and parts of the former Soviet Union.

Volynets, who joined Chaarat in March as a non-executive director, made a name for himself as the CEO of Russia’s En+ Group from December 2010 until June 2013, where he implemented strategies to make the group a global leader in mining, metallurgy and energy.

Before the En+ Group, Volynets was senior vice-president of strategy at Siberian-Urals Aluminium Co. (Sual), and played a key role in the US$20-billion, three-way merger of Sual, Rusal and Glencore’s (LON: GLEN) aluminum assets to create UC Rusal, where he worked as deputy CEO and director for corporate strategy.

Volynets also stick-handled UC Rusal’s US$2-billion initial public offering on the Hong Kong Stock Exchange. (En+ Group and Rusal are among a number of Russian companies caught up in the net of U.S. sanctions against Russia announced on April 6.)

Volynets left the En+ Group five years ago and looked for opportunities in the gold sector, consolidating small, typically privately held gold companies in Russia and other countries in Central Asia that were once part of the Soviet Union, and where “there are no big gold companies similar to that in North America.”

“The sector is very fragmented,” Volynets says in an interview from London. “The single-asset companies have anywhere from 30,000 oz. gold up to 600,000 oz. gold, and yet the sector is very profitable. It is profitable because the local currencies in places like Russia and Kyrgyzstan and Kazakhstan have all depreciated, and revenues are in U.S. dollars. Earnings before interest, taxes, depreciation and amortization margins are something like 50% or more.”

Open-pit operations at Centerra Gold’s Kumtor gold mine in Kyrgyzstan. Credit: Centerra Gold.

Open-pit operations at Centerra Gold’s Kumtor gold mine in Kyrgyzstan. Credit: Centerra Gold.

Now Volynets wants to build “one of the leading emerging market gold companies,” and describes Chaarat’s pursuit of Centerra’s Kumtor mine as “only the tip of the iceberg.”

“We want to be over 1 million oz. gold in two or three years,” he says. “The assets we’re currently considering are in two other countries — Russia, and one more. The company we want to build will have multiple assets across the countries of the former Soviet Union.”

But first, Chaarat must convince Centerra and its shareholders that they should part ways with Kumtor, a mine that represents 33% of Centerra’s net asset value.

Centerra stated in an April 24 press release that it had “no interest” in the offer, and that “in recent meetings with the Kyrgyz Republic government, senior Kyrgyz Republic officials have confirmed to Centerra that the government is also not interested in pursuing the transaction proposed by Chaarat.”

Centerra declined a request for comment from The Northern Miner.

Kumtor — the largest gold mine operated in Central Asia by a Western mining company — has produced more than 11.5 million oz. gold since 1997.

Last year, the mine — 350 km southeast of the capital, Bishkek, and 60 km north of Kyrgyzstan’s border with China — produced 562,749 oz. gold at all-in sustaining costs on a by-product basis of US$698 per oz. gold sold.

It also generated US$188 million of free cash flow.

Kumtor has more than 4 million oz. gold left in its open-pit reserves that can be extracted at a low cost, according to Chaarat, and another 3.4 million oz. gold grading 7.3 grams gold per tonne in the inferred resource category.

Chaarat says it offers fair value for the mine.

“Centerra’s market capitalization is currently $2.2 billion, implying that the market values Kumtor at approximately $740 million,” Volynets says. “Our proposal of US$800 million, or about $1.03 billion, represents a premium of more than 30% of the value the market currently places on Kumtor.

“It’s actually more than you would typically see as a takeover of an entire company, let alone an asset in a politically difficult jurisdiction.”

Under the proposed transaction, Chaarat would provide US$400 million in cash (a mixture of debt and equity “backed by two major international financial institutions”).

Subject to approval from the Kyrgyzstan government, US$400 million of Centerra’s shares held by state-owned Kyrgyzaltyn (which processes Kumtor’s gold at its own refinery) would transfer to Centerra and get cancelled, in exchange for a 50%, direct-preferred economic interest in the mine.

Mills turning at Centerra Gold’s Kumtor gold mine in Kyrgyzstan. Credit: Centerra Gold

Mills turning at Centerra Gold’s Kumtor gold mine in Kyrgyzstan. Credit: Centerra Gold.

If the deal gets done, Chaarat would own all of the common equity of Kumtor and have control over management and operations of the mine, and Kyrgyzaltyn would own all of the preferred equity of Kumtor and be entitled to 50% of the economic benefits from the mine.

Kyrgyzaltyn is the biggest company in Kyrgyzstan, and, with its joint-venture partners, produces more than 97% of its gold.

“Under our proposal, 100% of the cash flow from Kumtor stays in the country,” Volynets says. “The government will get 50% of dividends from Kumtor directly, and another 50% that Chaarat gets will be reinvested in the Kyrgyz Republic for the development of our two properties there, which require about US$600 million in capex over the next five to seven years.

“We are 100% confident that the transaction will proceed as planned, because it makes money for everyone. It creates value for all stakeholders,” Volynets says. “I’ve been in this business for quite some time and completed some US$30-billion worth of deals, and those deals that make money typically do get completed.”

What’s more, he says, Chaarat’s proposal was supported by its advisors, BMO, and accompanied by two support letters on funding, “one from one of the largest banks in Europe, and the second one from a cornerstone investor, with US$150 billion of investment in listed companies.

“We were able to provide those confirmations of interest and funding, because it’s part of the strategy we’ve been working on for a number of years.”

Volynets argues that the proposal will benefit Kyrgyzstan, “and, as such, will have full and popular support from all constituents in the country.

Operations at the Kumtor mine 350 km southeast of the Kyrgyz capital Bishkek. Credit: Centerra Gold.

“Obviously, they have to go through the proper debate, and we welcome that debate … most likely it will go to debate in parliament, where we will present our case, and independent experts will present their views based on whether it will be good for the country or not.”

Volynets also reasons that Centerra should appreciate the offer, given its history of troubles operating in Kyrgyzstan (including lawsuits and allegations of environmental infractions), and its goal over the last few years of diversifying out of politically risky jurisdictions.

“Not only will they get a full and fair price for this asset, but after it’s sold, the rest of Centerra’s assets are primarily in Canada, North America — tier-one mining jurisdictions — and there is no reason anymore for this company to trade at a discount to its peers. Therefore, its shares are likely to rerate.”

Volynets, who has lived in London for the last 20 years and is a dual Russian-British citizen, also brings to Chaarat a robust Rolodex, with investor connections in Russia and Asia that will be invaluable as the company consolidates gold companies.

“Chaarat has been working there for 16 years. It’s a small country and we know everyone,” Volynets says. “But it’s not the quality of our contacts — which we assure you are very good … and are top decision-makers in the country — but it is the transparency of our approach.

“We don’t want to sit down with any of the top decision-makers in a back room somewhere and sign a deal that isn’t transparent,” he says. “We want to get away from that legacy and have a proper debate in the parliament, and have full transparency on all of the agreements, because we believe it’s the best way to create value for our shareholders and investors.”

That goal will be even more important, he says, given the recent change in government.

On April 19, the government of Prime Minister Sapar Isakov was dismissed by Kyrgyzstan’s president after a vote of no confidence in parliament. The parliament is in the process of appointing a new government.

Meanwhile, Volynets warns, “the longer uncertainty prevails, the more difficult the negotiating position for Centerra is going to be.”

“They didn’t respond” to an update on the proposed offer that Chaarat released on May 1, he says.

“We want to engage in a friendly and constructive discussion because it’s the best way to create value for all parties, and the sooner the better, because from now on the [offer] price has only one direction to go, and that’s down.”

“My view is simple,” he says. “Fidel Castro used to say, ‘victory is persistence’ — and we have plenty of that.”


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