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Risky Investment in Uzbekistan: Oxus Gold Prepares for Arbitration

Another cautionary tale about the high risks of investing in Uzbekistan: the British mining firm Oxus Gold announced yesterday that it is ceasing operations in Uzbekistan and plans to challenge an Uzbek government audit it says is being conducted in bad faith, Associated Press reported.

Back in February, we noted that Oxus Gold, which had a wholly-owned subsidiary, Oxus Resources Corporation (ORC) in a joint venture with the Uzbek company Amantaytau Goldfields, had agreed to sell its entire 50 percent stake and was exiting Uzbekistan. Oxus was then "in the process of negotiating the cash price" for its sales, according to proactiveinvestors.co.uk .

That seemed strange, as the price of gold has been rising, and the company was supposedly doing well. Then there was another sign of trouble -- an official related to the now-bankrupt Zeromax was stepping down: "ORC’s non-executive directors Miradil Djalalov and James McBurney will immediately resign as part of a program that will see costs slashed," proactiveinvestor.com reported.

Zeromax, a conglomerate of companies with interests in everything from oil to precious metals to sports was seized and put into bankruptcy last spring. Miradil Djalalov, the chief executive of Zeromax, was detained and interrogated for a time, then released, and his whereabouts now are not know as the company is being divvied up and sold. Zeromax had a stake in the joint venture with ORC.

Now, Oxus Gold is protesting that the Uzbek Finance Ministry has started a hostile audit of Amantaytau Goldfields (AGF), saying officials appear "to be using the process to find reasons to justify putting AGF into liquidation," AP reported, citing a statement from Oxus.

Oxus was founded in 1996 and has been listed on London's Alternative Investment Market since 2001. For years it was producing "significant quantities" of both gold and silver working at one of the world's largest gold fields in Uzbekistan, according to proactiveinvestors.com. Uzbekistan is among the world's top 10 producers of gold.

Today,the Uzbek State Geology and Mineral Resources Committees owns 40 percent and the Navoi Mining and Metals combine own the other 10 percent of the Uzbek government's 50 percent stake.

In the past, other foreign companies doing business in Uzbekistan have had forced government buyouts at below-market rates, notably Newmont, a U.S. mining company whose contract was cancelled by the Uzbek government which then seized it assets -- the subject of a WikiLeaks cable dated November 26, 2007:

Foreign companies in the mineral resources sector have had considerable problems with the government in the past two years. The GOU expropriated Newmont, a U.S. gold mining company, in 2006 from its joint venture that processed gold tailings. Before arbitration hearings began, the disagreement was resolved in September 2007. The GOU bought Newmont out of the joint venture, though for a sum much less than Newmont's expected profit over the remaining life of the joint venture.

That same cable also had a tidbit about a similar muscling of Oxus at the same time:

The GOU attempted the same with Oxus, a British company, in 2006. Oxus struck a deal with the Uzbek-Swiss company Zeromax. Zeromax bought 16 percent of Oxus and the British company's problems ended. (Note: Zeromax unofficially belongs to President Karimov's daughter, Gulnora Karimova. It is registered in Switzerland, but in practice is an Uzbek company.)

Apparently, the problem with putting in the fixes in Uzbekistan is that they don't stay put.

Zeromax was seized. And now Oxus says its Uzbek partners have not responded to an offer to sell its stake, says AP. Oxus plans to file an international arbitration claim if the Uzbek shareholders do not respond to their buyout offer, and has engaged Amsterdam & Peroff LLP, which specializes in disputes with governments.

Shares in Oxus Gold closed down 53.5 percent to 1.52 pence, Reuters reported, as Oxus lost more than half of its market value over the news of a potential legal battle. Back in February, Oxus said it would only take "fair value" for its 50 percent stake, the business site uzdaily.com reported. But the Uzbek government only offered a below-market price, the independent uznews.net reported March 7.

As the WikiLeaks cable divulged, despite admitting there was this kind of pressure on foreign companies and even reports of arrests of executives and forcible turning over of assets, the U.S. Embassy still decided not to discourage companies from doing business with Zeromax, as such a position did not seem justified to them. It advised entering into relations "with open eyes" and now continues to promote business with Uzbekistan as part of a larger strategy of enlisting the assistance of Central Asian nations in delivering supplies to NATO troops in Afghanistan, and pledging long-term economic prosperity.

Today, President Islam Karimov received a delegation from the U.S. company Honeywell in Tashkent, fergananews.com reported. The president expressed confidence that "mutually profitable and long-term high technology projects would provide a new impulse for development of Uzbek-American investment cooperation," according to a statement from the presidential press office.

Risky Investment in Uzbekistan: Oxus Gold Prepares for Arbitration

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