Kyrgyz Republic Mining Sector Review
Total Page:16
File Type:pdf, Size:1020Kb
Report No. 13024-KG Kyrgyz Republic Mining Sector Review May 5, 1994 Agriculture, Industry and Finance Division Country Department III Europeand Central Asia Region FOR OFFICIAL USE ONLY Documentof the WorldBank Thisdocument has a restricteddistribution and maybe usedby recipientsonly in the performanceof their official duties.Its contents may not otherwisebe disclosedwithout World Bankauthorization WEIGHTS AND MEASURES Metric weights and measures are used, unless stated otherwise. Exchange rates used July, 1993: 1050 roubles = US$1.00 Abbreviations of elements follow international convention (Medeyev Table), (for instance: Au = gold) Geological times follow international geology time line. FOR OFFICIAL USE ONLY LIST OF ACRONYMS EBRD = European Bank for Reconstruction and Development IFC = International Finance Corporation CIS - Commonwealth of Independent States MK - Morrison Knudson Corporation DCF/ROI = Discounted Cash Flow/Return on Investment g/tonne Grams per tonne LME = London Metal Exchange FSU = Former Soviet Union GIS = Geographic Information Service EEC = European Economic Community VAT = Value Added Tax This documenthas a restricteddistribution and may be usedby recipientsonly in the performancoof their officialduties. Its contentsmay not otherwisebe disclosedwithout World Bank authorization. KYRGYZ REPUBLIC: MINING SECTOR REVIEW Table of Contents EXECUTIVE SUMMARY ............................ i 1. SECTOR BACKGROUND ........................... 1 Economic Contribution ............................ 1 Current Production .............................. 3 Metals and Minerals Trade ......................... 5 Current Operational Considerations and Constraints ... ..... 6 2. FOREIGN INVESTMENT AGREEMENTS, PROJECTS AND PROSPECTS .................................. 8 The Role of Direct Foreign Investment in Mining .... ....... 8 Best Practices in Mining Investment Agreements .... ....... 10 Foreign Investment Prospects ........................ 13 Current Foreign Investment Projects ................... 14 3. GEOLOGY PROSPECTIVITY ........................ 17 Geological Data Base ............................. 17 Exploration Methodology and Approach ................ 18 Kyrgyz Republic Gold Prospects ...................... 19 Copper - Gold Prospects ........................... 19 Other Prospects ................................ 19 4. LEGAL REGIME ................................. 21 Legal Regime .................................. 21 Law on Sub-soil Resources ......................... 21 5. FISCAL REGIME ................................. 26 General Tax Regime ............................. 26 Mining Specific Taxes ............................ 26 6. INSTITUTIONAL ORGANIZATION ................... 28 Creation of Senior Mining Policy Agency .... ........... 28 State Concern Kyrgyzaltin ......................... 29 State Committee on Geology ......... ............... 30 Ministry of Energy ............................... 31 Academy of Sciences .............................. 31 7. ENVIRONMENTAL MATTERS ........ ............... 33 8. RECOMMENDATIONS............................. 35 Mineral Sector Policies and Strategies ............... ... 35 Review and Revise Minerals Legislation .............. ... 35 Privatization of Existing Operations ...... ............. 36 Enterprise Management ........................... 36 Public Administration of Mining Sector .............. ... 37 Geology Database ..................... ......... 37 Environment .................................. 38 Local Investment in Mining ......................... 38 LIST OF ANNEXES ANNEXES: 1. Kyrgyz Republic Mineral Production Facilities 2. Technical Considerations 3. Taxes i EXECUTIVE SUMMARY i. The mining and metallurgical sector is an important contributor to the Kyrgyz economy: 10 percent of industrial production and over 11 percent of the industrial workforce. Official statistics on the value of production expressed in local currency are largely meaningless, nor does the government report the value of gold or uranium production. Using reasonable assumptions on the production of these commodities plus the information supplied on other mineral products, this report estimates the total value of non-coal minerals production in 1992 at US$47-58 million using international market prices. Exports of mineral products to non- CIS countries are more difficult to determine; it is here estimated that approximately US$ 27 million was exported in 1992. ii. Principal mineral products produced in Kyrgyz Republic include antimony and antimony oxides, mercury, gold, uranium oxide, and minor production of rare earths, and molybdenum. Production of tin/tungsten has not yet commenced even though the mine is 80 percent completed. International markets for antimony and mercury are small and highly specialized. Kyrgyz Republic producers command respectable world and inter- republican market shares for these commodities, even though the market for mercury is particularly troubled. In the case of uranium, rare earths, tin/tungsten, and molybdenum international markets are very depressed. Kyrgyz Republic producers are very minor players in these markets and face difficulties in selling their products. Gold production at the Makmal mine is well below rated capacity due to fuel and spare parts shortages. Current levels of production of these commodities can only be sustained over the short to medium term by virtue low labor and energy costs per unit value of output. iii. The mediocre outlook for current minerals production is more than off-set by the prospective benefits from the development of very large and medium sized gold deposits at Kumtor and Dzherui. The former is one of the world's largest undeveloped gold resources and the government has entered into a joint venture agreement with the Cameco Corporation, a Canadian uranium producer. A feasibility study prepared by Cameco is being evaluated by the government. Preliminary estimations made available by Cameco indicate that a capital investment of approximately US$300 million is required to produce about 15 tonnes gold per year, with a world market value of US$165 million. The Dzherui deposit is much smaller and the government is negotiating with the USA based Morrison-Knudsen company. A reasonable assumption for this deposit would be the development of a 2 - 4 tonnes gold production capacity per year with an international market value of US$22 to US$44 million. The terms and conditions of the mining investment agreements for Kumtor and Dzherui, which provide for majority government ownership, tax exemptions, management fees to the foreign operator, among other terms and conditions, have been criticized by a Parliamentary gold commission. It is reported that the Kumtor agreement has been modified, though it is not known to what extent these modifications materially affect the economics of the project. iv. Since the 1930's the State Committee on Geology has actively explored the country. Kyrgyz Republic is fortunate to possess a geology database of technical information that compares favorably to most countries and superior to many. Basic geological cartography, geophysical and geochemical surveys of good quality have been completed for most of the country, though much of the data should be "digitized" to facilitate interpretation using sophisticated geology modelling software. Very extensive exploration drilling has been conducted on some targets and the technical information is in the main excellent, even though some improvements could be made in assaying and drilling techniques. Economic evaluation of targets differs in some respects from ii practices used internationally, particularly in respect classification of "geologic" and "economic" mineral reserves. Over 1000 mineral prospects have been identified of which 65 gold prospects are considered "interesting" by the State Committee on Geology. Most of the identified gold deposits tend to be small, vein type structures which could be of interest to small firms, foreign or local. Large multi-national investors, however, are primarily interested in large tonnage, bulk minable gold or copper-gold deposits. Good exploration potential may exist for these types of targets as evidenced by recent interest shown by large foreign mining companies (for instance, Teck Corporation of Canada). In the current international market environment it is doubtful that identified deposits of antimony, mercury, tin/tungsten would be of interest for foreign or local firms. v. In order to attract and retain private investment it is essential that the proper enabling environment be established. Even though the government has made some progress to devise a consistent and internationally competitive framework of policies in respect of the mining sector much work remains to be done. Policy aspects, among others, which need to be determined by the government include the respective roles of the State and private investors, capture by the State of value added through taxation or direct participation in mining activities, the appropriate roles of government supervisory bodies, the valuation of mineral deposits, the marketing of mineral commodities, and the incentives to be put into place to encourage development of the sector. The Law on Sub-Soil resources promulgated in 1992 tends towards too much government control and intervention in the sector. It is deficient in many respects, among others the delineation of national and regional authority, lack of security of tenure of mining titles, burdensome procedures and excessive