Tuesday, 25 September

The Armenian Mining Sector: Victim of the Economic Crisis

“We have reached an agreement with the owners. In the coming three months there will be no layoffs and wage levels will be maintained as much as possible. We will again assess the situation in three months time when we will formulate a new decision.” stated Energy and Natural Resources Minister Armen Movsisyan at a November 13th government session.

Three Armenian government Ministers were dispatched to Syunik Marz by a decree issued by the Prime Minister on November 10th to study and discuss issues related to worker job and wage cuts and to avert worker protests and strikes. The three ministers would be presenting their findings to the Prime Minister and other government members at the November 13th session.

In the last few months, due to the global financial crisis, a drastic fall in the price of metals has occurred. The price for copper on the global market fell from $8,000 to $4,000; molybdenum from $80,000 to $24,000-$34,000; zinc from $2,800 down to $1,100. As a result, mine owners have decided to halt operations and wait for prices to stabilize. Unfortunately no one can predict if and when prices will stabilize. By that time, there is a good possibility that many companies will go belly up.

To better illustrate what would happen if the Kapan, Kajaran and Agarak mines in Syunik halted operations let us cite an excerpt of the speech made by Prime Minister Tigran Sargsyan at the government session, “Presently, the number of workers at the three largest plants is 6,000 and about 10,000 in satellite services. We will have a serious problem in the Marz given that 10,000 of the registered 25,000 officially registered rely for employment on these three large plants. 6,000 of these directly work in the plants and about 200 in service jobs.

Let’s take a look at Dundee Precious Metals (DPM) and its mining operations in Armenia. First some background information. Dundee is a Canadian firm than owns 100% of Chelopech Mining EAD. Chelopech produces gold, silver and copper in Bulgaria. Dundee also owns the Back River gold mining concern also in Canada as well as three other mine sites in the copper and gold fields of Serbia. Let’s next turn to its activities in Armenia.

DPM owns 95% of Vatrin Investment Ltd., a firm with offshore registration. According to credible information at our disposal the remaining 5% is owned by two top-level Armenian officials. Vatrin is the sole owner of the Deno Gold Mining Company CJSC that operates in Kapan, Armenia. So important is the presence of Deno Gold that its owners, that in this economic crisis period, its owners will be forced to negotiate with the government in order to moderate the temporarily halted worker protest actions. However, Deno Gold isn’t the only problem confronting DPM; it has problems with its other mine operations around the world as well.

Perhaps this prompted DPM owners to declare a temporary halt to Deno Gold operations on November 6th.

On December 22, 2005, Deno Gold received a $4.5 million credit from the European Bank for Reconstruction and Development (EBRD). The company has yet to pay back the credit. Discussions between Armenian government officials and representatives of the EBRD are continuing to insure an orderly transition and to maintain positive and constructive relations.

DPM’s third quarter financial reports state that – “  The Company will temporarily suspend operations at Deno Gold. As of early November 2008, an orderly shutdown of the Deno Gold operations had commenced, to effectively place the facilities on care and maintenance, pending a significant improvement in metal prices. Discussions with Armenian government officials and EBRD representatives are ongoing to ensure a smooth transition and to maintain positive and constructive relationships. DPM is committed to its investment in the region and recognizes the significant operational improvements that have been made in a very short period of time and looks forward to resuming operations and its development plans when the economic climate improves.

DPM has ceased all exploration and drilling activities on its Armenian and Serbian properties and at its Back River project. At the same time, the Company has entered into discussions surrounding strategic opportunities for the advancement of the Back River project. The Company is taking steps to ensure that its titles and licenses are preserved. DPM is committed to its long-term projects and its strategy.”

After reading these statements it remains unclear what the Armenian ministers discussed when they traveled to Kapan. Nevertheless, the fact that there will be no job cuts for the next three months was a significant achievement. Why DPM agreed to such a move is also hard to gauge. Our sources say the DPM owners are now in Armenia and that they’ll probably have a sit-down with the Prime Minister. The one thing that is clear in all this is that the Armenian government cannot shield the mining industry in the country from being impacted by the global crisis.

The only plausible reason that Minister Movsisyan was able to secure a three month job cut hiatus is that new funding sources have appeared. For years on end the Armenian government has not been paying back VAT overpayments on exported ore concentrates to the exporting companies. The government literally owes millions to companies in this sector. A year ago Armenian Copper Programme (ACP) Executive Director Gagik Arzumanyan informed Hetq that the government owes ACP some $5 million in VAT overpayments.

One of our government sources tells us that the government has promised Deno Gold to return its Vat overpayments, something that will allow the company to pay wages for another three months. DPM owners might accept the government’s offer if they believe the debt owned to them to be irretrievably lost. On the other hand, if they don’t, there is no guarantee that they will stick to their promises of no job cuts for three months. If DPM bites at the government’s offer that will put the government in another very vulnerable spot – other firms will also demand their VAT overpayments to be returned to them as well.

The global financial crisis is already making itself felt in Armenia. It will profoundly affect the lives of many families and it appears that we aren’t prepared to withstand the blows.

P.S. On November 17th we learned that the VAT overpayment debt owed to Deno Gold by the government totals some 800 million drams ($2.6 million) and that this past Friday 510 million drams ($1.6 million) was transferred from the state budget to Deno Gold’s bank account.

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