On August 15, 1997, the Kazakhstan State Property Department unilaterally canceled the
Management Contract with Gold Pool in disregard to the terms and guarantees contained in the
contract. The principle reasons stated by the government for the cancellation were arrears in
payments of wages and debt, decreased production, and social tension in the mining villages.
The government refused to recognize events of force-majeure and non-fulfillment of the
Proprietor's contractual obligations by the State Property Department leading to the force majeure
events which are described below.
Gold Pool had been operating the mines of state-owned JSC Kazakaltyn for 17 months and
invested over $18 million in the process. Management of Gold Pool believes that the reason for
cancellation of the contract had more to do with the government expectation that Gold Pool
would continue to carry more of the responsibility for social services. Gold Pool is optimistic
that a solution could be found to jointly revive this gold producing Combinat of JSC Kazakaltyn.
Contractual rights and obligations of the Managing Company
In accordance with Articles II, III and IV the Managing Company's objective was to stabilize
production by restoring all producing Properties to an acceptable level of profitability; creating a
favorable financial situation, and developing effective marketing contracts and a final products
sales network. To do so, in accordance within Paragraph 3.2.4, the Managing Company had the
right to "suspend mining, processing and other operations which are not economically viable".
During the entire period of management the "Managing Company shall have an exclusive right to
Purchase the State share of the Enterprise." All capital contribution into the Enterprise "shall be
applied in reduction of the Purchase Price for the State Share of the Enterprise."
Investment Commitments Under the Contract
Paragraph 5.4 of the Contract stipulates that the investment for the second phase of financing
(ending on August 10, 1996) is the amount of not less than US $5,000,000 and the investment
for the third phase of financing (ending on April 10, 1997) is the amount of not less than US
$5,000,000. Accordingly, Gold Pool was to invest not less than US $15,000,000 by April 10,
1997, being the end of the third phase of financing. However, Gold Pool has actually
contributed a total amount of US $18,697,788, which is US $3,697,788 more than the total
investment required by the Contract.
ASSET DESCRIPTION
Key assets include three gold mines - Aksu, Bestube, and Jolymbet, located near Stepnogorsk in
the Akmola Oblast of north central Kazakhstan. The Company also had five minor gold
producing properties. In addition to its mining operations, Gold Pool has license to and is
exploring a large exploration license consisting of two properties covering approximately 12,500
square kilometers.
At the time of assuming management by Gold Pool, all the mines and processing plants of
state-controlled JSC Kazakaltyn were shut down and the workers had not been paid for up to six
months.
Due to neglect for several years before closure, the Combinat was operating in far less than
optimal conditions, which resulted in a gradual deterioration of equipment.
STABILIZATION
As part of its Management Agreement, in August 1996, Gold Pool delivered a comprehensive
report to the Ministry of Industry and Trade proposing a two-stage revival of the mines. Stage I
would cover the first two years while Stage II would carry on for a minimum of eight additional
years.
Defined costs during Stage I included U.S. $3.5 million for back wages, due diligence and
engineering and an additional U.S. $7.0 million for plant refurbishment, inventory costs, social
issues and back wage costs and U.S$5.0 million in general operations costs to bring the mines
back to 1995 production levels. The company expected the mines to be marginally economic
during Stage I with all production revenue during this stage to be returned to the enterprise.
Gold Pool's August 1996 report stated that the transition into Stage II could only be justified if
both start-up and Stage I were successful. This meant that Gold Pool needed assurance that the
mines could be sustained on their own generated revenues. Once this was certain, the Company
intended to undertake a feasibility study and then invest U.S. $30 million for mine and plant
improvements to substantially increase reserves and annual production to 250,000 ounces per
year at internationally competitive costs. Throughout its involvement with the mines of
Kazakaltyn, Gold Pool had to deal with a whole range of serious problems often not related to
production. Power shortages was one of them. The Company could never depend on the power
companies for continuous power despite the Company making advance payments for power on a
regular basis. In the latter months of the contract the power price increased by 175%. Power
outages continued and endangered the lives of the underground workers and caused substantial
losses of production.
For entire period of its operations Gold Pool was not able to resolve the issue of back debt in
excess of US $30 million accrued by JSC Kazakaltyn Combinat prior to Gold Poll's take over.
Although the Management Contract clearly states that the company is not responsible for the back
debt of the former operation, Gold Pool was constantly harassed by old creditors of JSC
Kazakaltyn. Creditors were constantly attempting to strip the mine of its equipment and supplies.
Gold theft and physical violence was an ever increasing concern to Gold Pool. With the
exception of the assistance of a small, private security force retained by Gold Pool, there was
very little else Gold Pool could do to safeguard produced metals and protect the safety and
security of employees of the mines. The Ministry of Industry and Trade was informed of this
concern of Gold Pool by a letter of October 28, 1996 but no assistance was offered.
MINE OPERATIONS
For the first few months after undertaking the Management Contract Gold Pool was required to
defer the start of operations until a satisfactory repair was completed. On of the immediate Gold
Pool's big concerns was the payroll confusion at JSC Kazakaltyn. By December of 1996, only 7
months from signing the contract, Gold Pool had succeeded in restarting the mines and exceeded
former annual production levels for the past 10 years. The production was attaining the rate of
150,000 ounces (4.8 mt) per year at costs less than $300 per ounce before the Balkhash smelter
closed only a month after.
Because of the long established production process at the mines, an outside smelter was required
for intermediate and final processing and refining. In September 1996 Contract No. 614AO/96
was signed with JSC Balkhashmys smelter to process 5,000 tons of concentrates per month on a
tolling basis for one year. In the event of failure of the Combinat, the contract required sufficient
notice and return of the concentrates and gold products. Concentrates were continuously shipped
to the smelter from October 1996 to January 1997. Because of the 60-day processing period the
first out turn was due in January 1997.
In January 1997, Gold Pool was notified by Balkhash smelter that it had to drastically cut its
capacity of processing Gold Pool concentrate. A few weeks later the smelter stopped production
completely and was declared bankrupt by the government. Disregarding numerous demands by
Gold Pool, the smelter refused to return 256 kilograms of processed gold worth US$3.0 million
and/or the concentrates shipped from the mines, as required by the contract. Instead, the smelter
redirected 63 kg of gold in the electrolytic sludge belonging to Gold Pool and valued at
US$700,000 to Leninigorsk Combinat. These above funds were vital for the payment of mine
wages and suppliers. The closure of the Balkhash smelter and the long delay in receiving funds
from gold sales factored into the decision of Gold Pool to immediately suspend operations at the
Aksu and Jolymbet mines and place them on care and maintenance status, as permitted in article
3.2.4 of the Management Contract. The Ministry of Industry and Trade was informed of this
decision in writing on January 19 and again on February 5, 1997. The workers were neither
fired nor laid off but were placed on administrative leave. This enabled Gold Pool to pay all the
miners a monthly allowance until the mines are restarted along with paying maintenance costs
pending receipts for gold production at Balkhash and commissioning of a new process facility on
site to replace the smelter.
Production at Bestube mine was maintained until June 1997. The flotation concentrate was
stockpiled for later treatment. This production however was not sufficient to carry the Bestube
mine costs and the cost of flotation product inventory. The mine continued production at a rate of
500 metric tons per day. Between 30 to 70 kg of gravitation gold was produced per month. After
several months of negotiations with Samsung and their subsidiary Zhezkazgantsvetmet Combinat
and with personal involvement of Mr. D.T. Duisenov - then Deputy Prime Minister of
Kazakhstan , on June 16, 1997, Gold Pool finally succeeded to sign a new gold concentrate
sales contract with Samsung for a one year period. Gold Pool had almost 4,000 tons of gold
concentrates accumulated over a six month period at the mines in need of processing. The terms
of the contract were far less favorable for Gold Pool than those of the former smelting contract
with JSC Balkhashmys. However, on July 4, 1997, the contract was unilaterally cancelled by
Samsung for ostensibly economic reasons.
Starting from June 1997, the mines were hit by a severe power outage. The local power provider
Akmola Tselinenergo company formally informed Gold Pool that power would be kept on the
emergency level only for up to two months. Faced with the inability to process the concentrates,
the discontinuation of power supply, and the lack of production revenues, Gold Pool had no
economic alternatives but to suspend operations at the Bestube mine.
For the period from April 10, 1996 to August 15, 1997, the volume of gross production
comprised the sum of almost US$7.5 million. A total of 656.40 kg of gold was produced,
including 444 kg in concentrates and 212.4 kg in gravity gold (sponge). Up to 3,000 employees
were on the payroll at the mines, and a number of independent mining, maintenance, supply, and
other service companies were engaged on contracts. In October 1996 a "Gold Tail" joint venture
agreement was signed for this purpose between Gold Pool and Globa Kazakhstan. A recent
study determined that heap-leaching the tailings (ore concentrate stockpiled at the mine sites after
higher grade concentrates are extracted) could contribute an additional 1.5 metric tons of gold at
low production costs.
GOCERNENMENT RELATIONS
After the Balkhash crisis the company was missing up to US$3 million of production capital
from the gold held up at the smelter. In order to resolve the issue, Gold Pool representatives had
numerous meetings with high ranking government officials, among them Mr. H.A. Ospanov -
former Minister of Industry and Trade, Mr. U.Y. Shukeev - Minister of Economy, Mr. A.S.
Yesimov - First Deputy Prime Minister, Mr. D.T. Duisenov - Deputy Prime Minister. Gold Pool
also held negotiations with Executives of Samsung, new managers of the Balkhash smelter. Only
in June 1997 could the company return less than half of its missing gold (107 kg less smelting
and refining charges). The gold up to the value of US $1,500,000 has still not been returned.
The illegal action by one of the biggest Kazakstani producer and the inability of the government
of Kazakhstan to completely resolve the situation dissuaded investors of Gold Pool and
Kazakstan Goldfields Corporation, on whose support the company, like all Western companies
operating in Kazakhstan, heavily depend.
In order ensure investors' financial commitment to the project and secure funds for production
needs and for the construction of the CIP plant, in April 1997 Gold Pool submitted a formal
application for privatization with the Department of Industry and Trade of the Ministry of
Economy of the Republic of Kazakhstan, the department that had been responsible for
supervising the execution of the Management Contract. The Management Contract provides the
Managing Company with an option to purchase the State shares at any time. In the letter dated
May 4, 1997, # 01-556 (signed by Mr. Ospanov H. A.), the Department of Industry and Trade
concluded that, based on the balance sheets, Gold Pool had fulfilled its obligations under the
Contract.
The letter was forwarded to the Department of Management of State Property and Assets for final
approval. Instead of an anticipated privatization decree, on May 19, 1997, the State Property
Committee issued a letter signed by Mr. S.S. Kalmurzayev, stating its intention to unilaterally
terminate the contract.
No well founded reasons of the violation of the Contract were given. A response was sent from
Gold Pool on June 4, 1997, which reiterated the terms of the Management Contract and rejected
allegations of non-fulfilment of its terms.
The Managing Company received an acknowledgement of their right to exercise the privatization
option from Mr. Kalmurzaev of the Department on June 6, 1997, Letter # 40-1/1940. Since that
time, a number of excuses for not permitting the privatization of the Enterprise were put forward
by the Department. Pursuant to Article 12.3 of the Contract, the Department is not entitled to
terminate the Contract after it has received notice that the Managing Company wishes to purchase
the State shares of the Enterprise.
The Department, acting through Mr. Kalmurzaev, did not provide the Managing Company with a
proper notification listing contractual defects and requesting correction of those defects. The
Department also did not fulfil its obligation not to hinder the performance by the Managing
Company of its rights, when it did not take into account the force majeure events. The
Department only noted the figures on decrease of the volumes of production without taking into
account the reasons.
Several letters (April 21 and May 19, 1997) were also forwarder to Mr. S.M. Yesimov - First
Deputy Prime Minister and Executive Director of the State Committee for Investments.
The Committee acknowledge Gold Pool's complaint, but did not express any particular interest
about the issue and did not provide any assistance whatsoever in resolving the dispute. Gold
Pool's legal counsellors, Macleod Dixon, contacted the Department of State Property on Gold
Pool's behalf in writing on July 30, 1997, outlining Gold Pool's disagreement with the position
of the government and offering a possible resolution of this crisis situation. Nevertheless, On
August 15, 1997, Department of Management of State Property issued Decree No. 257
unilaterally cancelling the Management Contract with Gold Pool in violation of the terms of the
Contract and disregarding demands and explanations of Gold Pool. On September 1, 1997, Gold
Pool registered a formal Demand letter with the Ministry of Finance and the Department of State
Property of Kazakhstan stating its strong disagreement with the government actions and
proposing to settle the issue before arbitration procedures are initiated. Macleod Dixon legal firm
was engaged to represent Gold Pool in a possible litigation.
Gold Pool is currently awaiting a response from the government of Kazakhstan. |
