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Gold myths, or what fakes do economists feed us with in quarantine

Authorities of Kyrgyzstan are feverishly looking for ways to keep the republic afloat. The pandemic, which, fortunately, hit the country at a tangent, convinced many that successful development is possible only when there is medium and large-scale industry that produces not conditional, but real goods that are in high demand, despite the crises. One of these products has always been gold.

It is of little wonder that long before the coronavirus test, international financial institutions, including the Eurasian Development Bank, have recognized the obvious: economic development in the Kyrgyz Republic now, as in the foreseeable future, is directly dependent on the mining industry.

This sounds insulting for certain groups in the republic, of course, but you cannot get away from facts.

Mining is the sector of the economy that exists thanks to foreign investment and in spite of the wishes of the ultra-patriots, demanding either closure or nationalization of the mines.

As a result, no matter how many people have encouraged to protect investors, gold mining remains the subject of speculation and debate, or, in other words, the area in which local experts have become proficient. On the other hand, what else can they talk about if, in fact, there is nothing more? Any occasion will go here.

When figures stir up fantasy

Recently, Centerra presented such an excuse to local experts: first, through a message about the upcoming payment of dividends, and Kyrgyzstan, as the largest holder of its shares, can expect to receive $ 2.2 million per quarter (about 160 million soms).

A little later, the company published its results of work in 2019. The results, admittedly, are impressive. Over 18.6 tons of gold have been produced at the Kumtor mine during the year, and the total revenue from the sale of the precious metal amounted to $ 827.5 million.

So, it was on ...

It’s hard to say now what crazy head asked himself a seemingly reasonable question: why, with such head-spinning figures, the republic does not roll in billions of soms?

The revenue is impressive! And the crazy heads began to add up figures that do not match. Well, okay. The main issue, after all, is not to compose an equation correctly, but why are the dividends so small? It’s logical, isn’t it?

It isn’t. If only because the company has contributed at least $ 210 million to the Kyrgyzstan’s budget only in the form of various payments and taxes for the same year. If we take into account payment for goods and services in the country as a whole, including deductions for environmental protection and so on, it turns out that the contribution to the Kyrgyz economy last year is estimated at $ 366.9 million.

Surprisingly, quite adequate gentlemen have been seen in the dances around the dividends. It must be the magic of large figures that became the reason for this. In the end, who is not captivated by the figures published by the same Centerra?

When fantasies face reality

But it’s much more than that. If you get to the heart of the matter, a reasonable question arises for the so-called dividend experts: why, when calculating potential profits, no one takes into account production costs? Or gold is born in the Ala-Too mountains directly in bullions, and then they are squeezed out by the forces of nature to the surface? Just come and take it!

Perhaps, gold mining looks like that for some part of the population. And, if we continue on the course, no special efforts are required to develop Kumtor. In total, it is just necessary to send a truck to the mountains once a quarter with a pair of workers who will quickly fill the body with bars of the precious metal scattered here and there. Why no one did it before the insidious foreign investor?

Probably because gold mining in the permafrost conditions of the Kyrgyz highlands is actually an expensive and technologically complex process. If it is different, the republic itself would have long been extracting gold from a dozen well-known deposits. However, the country does not have such opportunities, and it has never had.

So far, there are plenty of brainy dividend experts in Kyrgyzstan, but, alas, there are no technologies and resources.

Here are some interesting figures about work at Kumtor from open sources. Only during 2019 at least 156.4 million tons of rock and ore had to be moved at the field. Equipment — special excavators and trucks that need to be maintained, repaired and refueled — are needed for it. This is tens of millions of dollars, while the last year mining costs are estimated at $ 197.6 million.

The extracted ore must be delivered for processing. Gold content in it, by the way, was estimated by geologists at 3 grams per ton! Just imagine, you have to process millions of tons of ore to extract 18.6 tons of precious metal. A factory with huge machines that also require maintenance and repair is also involved in such a difficult process. In total, ore processing costs in 2019 at Kumtor amounted to $ 71.6 million.

It is necessary to maintain the mine itself, not only the infrastructure, but also the people working there.

Employees need to be provided with food, special clothing and medical care. Maintaining the mine in the highlands also costs a pretty penny. Last year, the costs amounted to $ 49 million.

For the mine to continue working, it is necessary to engage in exploration. In the last quarter of 2019 alone, gold miners have drilled 72 new wells with a total length of over 17.7 kilometers. Costs go in eight-digit numbers. Last year, for the attention of skeptics, they reached $ 11.3 million.

If we sum up all the costs associated with operation of the mine, we can see: the cost of gold mining at Kumtor is a significant part of gold’s market value.

It looks like this: in 2019, the total cost of maintaining fixed assets amounted to $ 358.9 million, including taxes — $ 475.4 million. At the same time, the total costs of maintaining fixed assets do not include capital expenditures on development and other atypical operating expenses. Lump sum payments to the Nature Development Fund and the Social Partnership Fund for Development of Regions under the strategic agreement, which last year amounted to $ 55 million, are also not included.

What do we have? The real profit of gold miners is not at all the same as an impressionable layman envisions it. And, of course, it does not at all correspond to what might seem at first glance, especially if an «expert» eye catches the first lines of reports, and the words «total revenue» are simply thrown out as unnecessary. On the other hand, it is quite clear that otherwise it will not be possible to make a sensation and be indignant at the dividends. But one really would love to ...

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