Tuesday, March 29, 2011

Political Risk: The Case Of Uzbekistan

The Republic of Uzbekistan has the fifth-largest reseves of any nation, which makes it ostensibly attractive to gold explorers and mining companies. It boasts the largest mine in the world, the Muruntau, which has produced over 50 million ounces to date. The mine's reserves are expected to last until 2032. It's operated by the Navoi Mining and Metallurgical Combine.

Despite the attractiveness of the reserves, Uzbekistan's government has a taste for seizing gold properties from Western companies on arguable grounds.
The State Committee for Geology and Mineral Resources (Goskomgeologia) oversees the mining industry in Uzbekistan. While the Uzbekistan government allows foreign investment in mineral reserves- historically, there has been a great deal of conflict between foreign minerals at the state committee. In 2006, Newmont Mining Corp. (NYSE:NEM) was ejected from the country. Newmont had been extracting gold through a 50-50 partnership with Uzbekistan’s government; however, the company was accused of non-payment of taxes. The Uzbekistan courts quickly sided with the tax authorities and within a month of their ruling, the Republic of Uzbekistan seized all gold, silver and unfinished products belonging to the Newmont venture, according to the company’s 2007 annual report to the US Securities & Exchange Commission. Following the ruling, Newmont filed a grievance against Uzbekistan with a World Bank arbitration panel, and reached an undisclosed settlement....

[A] recent dispute between British-based Oxus Gold (LON:OXS) and the Uzbekistan government has halted the joint venture. Oxus Gold announced in March 2011 that is had called force majeure, and completely halted its operations in Uzbekistan. Oxus Gold, the only publicly listed gold mining company with primary operations inside the Republic of Uzbekistan is now preparing for a legal battle to challenge “that the commission appointed by the government to audit Oxus’s stake in AGF was not evaluating the assets of AGF in good faith- and appeared to be using the process to find reasons to justify putting AGF into liquidation,” according to the company’s statement. In addition, certain licenses and permits essential for AGF’s ongoing operations have not been renewed. The dispute could leave the Uzbekistan’s lucrative gold industry under near-total government control. The partnership between Oxus Gold and the government has been plagued with challenges since the get-go....

Those two incidents make for enough grounds to be wary if an exploration company snaps up an Uzbeki property. Like Venezuela, Uzbekistan looks like a country to give a pass to.

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