Canada’s Centerra Gold (TSX: CG) initiated binding arbitration against the Government of the Kyrgyz Republic in a legal skirmish related to the company’s Kumtor mine.

In early May, lawmakers in Kyrgyzstan passed a bill allowing the state to seize Kumtor for up to three months. The decision was made under the argument that the mine – the largest gold operation in the Central Asian nation – may pose danger to locals and the environment.

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A few days later, on May 9, 2021, a district court imposed a $3.1 billion fine on Kumtor Gold Company, which is Centerra’s local unit in charge of running its namesake operation and which was found to have breached environmental laws by placing waste rock on glaciers, according to private civil environmental claims.

The Kyrgyz government also put before the court a series of tax claims that say that the Toronto-based miner owes more than $170 million. This, after the state Tax Service revived previously dismissed claims against Centerra.

The company, on the other hand, insists on the dismissal of such claims based on a number of agreements that were signed in 2009, which contained a specific tax and fiscal regime that contemplated that no taxes were payable by Kumtor Gold on intercompany transactions with Centerra, including dividends.

However, since Kyrgyzstan has insisted on its position, Centerra said it will seek to enjoin the government from taking further steps to implement the legislation to take over the mine or to pursue the fines and tax claims against the Kumtor Gold.

The Toronto-based miner said all of these recent measures violate the government’s investment agreements with respect to the Kumtor mine.

Centerra’s position

“The leadership of the Kyrgyz Republic has acted with astonishing speed since the beginning of this year to undermine the basis on which the Kumtor mine has been operated and has refused to engage with us on any matters it considers to be the subject of dispute,” Scott Perry, Centerra’s president and CEO, said in a media statement. ”The government’s actions have left Centerra no choice but to exercise our legal rights, through the pursuit of arbitration and otherwise, to protect the interests of KGC, Centerra and our shareholders. In the event the government wishes to engage in a constructive dialogue, we remain willing and available to do so.”

In the brief, Perry also says that the Kyrgyz Republic State Commission and other Kyrgyz Republic state and law enforcement authorities have been applying intimidation tactics against KGC’s personnel by performing police visits to the homes of several senior managers and a raid of KGC’s office in Bishkek on May 15.

IF BOTH PARTIES DON’T AGREE ON AN ARBITRATOR WITHIN 28 DAYS, CENTERRA WILL ASK THE PERMANENT COURT OF ARBITRATION AT THE HAGUE TO APPOINT AN ARBITRATOR

“This and other recent conduct by the government undermines the fundamental investment protections guaranteed to Centerra and its Kyrgyz Republic subsidiaries under the 2009 Restated Project Agreements governing the Kumtor Mine,” the release states. “Under the 2009 Restated Investment Agreement and the 2017 Strategic Agreement on Environmental Protection and Investment Promotion, Centerra’s claims will be adjudicated by a single arbitrator in arbitration proceedings to be held at Stockholm, Sweden and conducted under the rules of the United Nations Commission on International Trade Law. The parties have 28 days during which to agree on an arbitrator, failing which Centerra will ask the Permanent Court of Arbitration at The Hague to appoint an arbitrator. Under the agreements, the governing law is the law of the State of New York.”

The company’s brief also says that no assurances can be given that any of the current or future legal claims and other disputes that have arisen in relation to KGC or the Kumtor mine can be resolved without a material impact or potentially the loss of Centerra’s entire investment in the mine.

Kumtor produced more than 13.2 million ounces of gold between 1997 and the end of 2020. Last year’s output was slightly over 556,000 ounces and, based on Centerra’s numbers, the mine is the largest private-sector employer and taxpayer in the Kyrgyz Republic and the largest foreign investment in the country, having contributed 12.5% of Kyrgyz GDP in 2020.