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How Russian Platinum solved Jerooy problems

A year and a half ago, the Russian company Vostok-Geoldobycha, part of the Russian Platinum group, received the right to develop Jerooy- the second largest gold deposit in Kyrgyzstan.

What has been done during this time, what problems do investors in Kyrgyzstan face and who is behind the ambitious project? The General Director of Alliance-Altyn LLC (a subsidiary of Vostok-Geoldobycha in Kyrgyzstan) Mikhail Shubin gave an exclusive interview to 24.kg news agency.

-It is increasingly said in Kyrgyzstan that it is not necessary to put the priority on the mining industry. It is more important to preserve the untouched nature and good ecology for the future generation, and keep the country’s wealth in subsoil. What would you say to those who adhere to this point of view?

— I think such statements are of a certain populist nature. It is important, of course, to preserve the unique nature and ecology of our country. But there is a real economic situation, and it is, at least, irrationally not to use its wealth for the development of the country.

The competition for the sale of Jerooy field was conducted in 2015. As a result, the winner paid $ 100 million for the license. Vostok-Geoldobycha, Polyus Gold and Kyrgyzaltyn participated in the contest.

Today, the mining industry uses innovative technologies that minimize environmental risks.

Everything depends on the level of the development company, on its integrity and the professionalism of its employees.

— It’s not a secret that Jerooy was problematic. How did you settle the issue?

— The right to mining, that is, a license costs $100 million. This is the first precedent in the history of independent Kyrgyzstan, when the license was sold for such a sum. If you remember, earlier licenses were sold for 300 soms.

But, in addition to purchase of the license, one of the conditions of the contest was to resolve the dispute in international courts with the former owners of the mine — Kazakh Visor investment group of companies. The amount of her claim to the government of Kyrgyzstan was about $ 548 million. We managed to reach an amicable settlement with the Kazakhs. In September 2015, the plaintiff and the defendant, represented by the government of Kyrgyzstan, entered into out-of-court settlement.

— Information that Vostok-Geoldobycha came to the market thanks to Omurbek Babanov periodically appears in the media. What role did he play in the deal?

— It is not a secret that Omurbek Babanov and Musa Bazhaev are friends. Babanov publicly stated this more than once. I will assume that he recommended his friend to invest in his country.

It is obvious that investing in Kyrgyzstan with its political and economic situation is a big risk, especially when it’s a large public corporation listed on the world market.

I think it was Babanov’s personal initiative, since Talas is his little homeland, and he, as a politician, is vitally interested in the development of this region in particular and in the development of the country as a whole. It should be noted that at that time he did not hold any posts, he was not a deputy.

The main beneficiary of the company is the Russian businessman Musa Bazhaev.

-But there is no smoke without fire?

— Strategic projects, such as Kumtor and Jerooy, are often politicized; they are used in political games. Everyone knows this.

— Do you monitor how the money paid by your company to the national budget is distributed?

— As we were informed by representatives of the Ministry of Finance, money was sent for the construction of 100 schools throughout the country and for social support of the region.

Three percent of the amount, that is, $ 3 million, was transferred to the rural administration where Jerooy is located, three percent — to Talas district and three percent — to Talas region.

There was one more condition — to provide a social package to the region. According to the agreement between the local government bodies, the well-being fund Bakuubat Talas was established, in which we are obliged to invest 100 million soms in the first three years to support the local community and another 150 million soms — in subsequent years.

It should be noted that 70 percent from 100 million soms tranche are allocated as bank loans at 8 percent per annum and 30 percent are allocated for social projects in Talas region.

In 2015–2016, 450, 652 million soms were paid to the budget of Talas district. Other 6 million soms were received by the Social Fund of the Kyrgyz Republic.

— At what stage is the project now, and when do you plan to proceed directly to mine development?

— Under the terms of the contest, the first year is for design work and the development of a technical project. But we faced with a number of problems here that do not depend on our company.

For example, we were surprised to learn that we have bought out the right to develop subsoil, but we do not have the right to use the land plot over them.

Mikhail Shubin

It is clear that any design work was out of question in this situation. Land ownership right at that time belonged to the subsidiary of Visor CJSC Jerooyaltyn, which got it for use from Kyrgyzaltyn.

This was a big tangle of legal problems that we had to resolve until April 2016.

As a result of long negotiations with Kyrgyzaltyn we came to the decision that it would sell us these land plots at market price. The sum of the contract was 261 million soms. The Russian investors did not know anything about this conflict, of course. This is an absurd situation.

The second issue, which is also important, was the lack of adequate power supply.

Mikhail Shubin

Yes, there is a power transmission line, connection to the electrical networks for domestic use, but the development of the field requires a capacity of 15 megawatts. The nearest substations could not provide such power. Our company appealed to the country’s leadership, ministries and departments, and as a result of long negotiations with NESK, energy companies, energy holding, the issue was decided only in January 2017. Under what conditions? We undertook to carry out reconstruction of the nearest substations in the amount of more than 66 million soms.

The next problem is environmental payments. At previous rates, we had to pay $ 84 million during the project implementation period.

Mikhail Shubin

And here we had to think about the profitability of the project as a whole. It should be taken into account that there are no glaciers or forests around the mine, and our company uses the most innovative methods of waste reclamation. The very method of collecting environmental payments was developed without taking into account the peculiarities of the territories of the Kyrgyz Republic.

Thus, the start of construction of infrastructure facilities is planned for the second quarter of 2017. In 18 months, we must build and within 6 months reach the production capacity of 50 percent. We will begin to extract gold in 2019.

— What is the amount of budget payments?

— $ 492 million is payments to the budget for the entire period of the project’s work with a price of $ 1,000 for an ounce of gold.

— How do the company’s relations with the local population evolve? It’s not a secret that this problem has become a stumbling block for many mining projects.

— We understand why there is a certain negative from the local population. People are tired of various investors who promised a lot, literally «whole mountains of gold," but they did not start development. The credit of trust is exhausted.

We seriously dealt with the problem. We conducted information work, created a demonstration hall in Talas regional administration, where every resident can come and get acquainted with our work, hold roundtables and public hearings. I can say that as of today we have won a certain trust of the residents of Talas region and found a common language.