By Emil Danielyan
The Armenian government looks set to level fresh accusations of fraud and violation of safety and environmental regulations against an Indian-owned company developing the bulk of Armenia’s gold reserves.
Environment Minister Vartan Ayvazian told RFE/RL on Friday that a key division of his ministry has again inspected the two gold mines controlled by the British-registered Sterlite Gold and found “numerous violations” there. But he denied reports that the government is intent on forcing the company out of Armenia.
Citing anonymous “Armenian sources,” a Western mining news service, Mineweb.net, said on Wednesday that the government has already decided to revoke Sterlite’s operating license. A senior Sterlite executive in Yerevan called the report a “nonsense.”
“We are demanding that they exploit the gold deposits properly,” said Ayvazian. “We will raise the issue of terminating the agreement only if they refuse to comply with it. The issue is not yet on the government agenda.”
The London-based firm has been dogged by controversy ever since it acquired in 2002 a company that owns Armenia’s largest ore-processing plant and manages the gold mines at Zod and Meghradzor. The Ararat Gold Recovery Company (AGRC) was until then a joint venture of the Armenian government and a Canadian company called First Dynasty Mines.
Sterlite, which is controlled by Indian mining tycoon Anil Agarwal, pledged to breathe a new life into the Armenian gold industry by making large-scale investments and significantly boosting production levels. However, AGRC’s output has since declined considerably, raising questions about the credibility of the foreign investor.
The company produced almost 103,000 troy ounces of gold in 2002. It says output fell to 59,000 ounces in 2003 before slightly rallying last year.
The Environment Ministry’s Ecological Inspectorate already inspected the Zod and Meghradzor mines last year. In a June 2004 report it accused the Indians of underreporting more than two metric tons of gold extracted from those mines. The inspectorate alleged that Sterlite thereby avoided 900 million drams ($2 million) in taxes. It asked Armenia’s Office of Prosecutor-General to launch a criminal investigation into its findings.
However, the Environment Ministry unexpectedly renounced its claims after it was taken to court by the company. The latter is said to have paid a $500,000 fine in an out-of-court settlement reached with the ministry last March. The AGRC management says the settlement showed that the accusations are unfounded.
According to Ayvazian, the ministry unit conducted another inspection at AGRC in accordance with a government instruction issued in late September. “We have prepared a report which says that they have committed numerous violations,” he said. “We are discussing it with [Sterlite] at the moment.”
Ayvazian declined to publicize details of that report, saying only that it deals with violations of safety standards, geological studies of the gold mines and concentration of gold in the ore. According to Mineweb.net, the report alleges that Sterlite has underestimated gold reserves at Zod "by more than two times” to minimize royalties paid to the government.
The fraud suspicions are fuelled by conflicting data about the actual volume of Armenia’s gold deposits. Sterlite claims that the Zod deposit, by far the largest in the country, is not as rich in ore as had been estimated by Soviet geologists. That is one of the stated reasons for substantial losses posted by AGRC in recent years. They equaled $7.3 million in 2004 and $4.14 million during the first nine months of this year.
However, the Soviet estimates were essentially confirmed by Western mining consultants who were contracted by First Dynasty Mines in 1998 to explore the mountainous area in southeastern Armenia. “The Indians cheat and therefore need to underestimate the gold reserves,” said one industry source. The source claimed that businesses owned by Agarwal are not known for the transparency and Western-style management of their operations.
“I have not seen an idiot who will keep operating at a loss for so long,” Ayvazian said for his part. “How can they produce gold and make losses?”
Another reason cited by Sterlite is the high cost of transporting ore from Zod to the southern Armenian town of Ararat where it is processed before being shipped to Europe for final smelting. The company says it can not expand and move AGRC into profit without relocating the ore-processing plant from Ararat to an area close to Zod. It says the $80 million plan would lead to a significant increase in gold production.
However, analysts point out that a feasibility study conducted by the Canadian engineering firm Kilborn-SNC in 1998 concluded that the 167-kilometer distance between Ararat and Zod does not prevent AGRC from being profitable in principle. Besides, they say, the price of gold has since jumped by 50 percent, making the business even more lucrative.
Environment Ministry and most Armenian ecologists remain strongly opposed to the plan, citing Zod’s proximity to the vital Lake Sevan. They argue that ore processing is accompanied by emissions of potassium cyanide, a highly poisonous substance that can wreak havoc on Sevan.
Sterlite officials insist that the proposed plant would have a cyanide storage facility that would make leakages practically impossible. “The last thing we need in Armenia is an environmental disaster,” a top company executive told RFE/RL. He said he is confident that the Armenian government will soon give the green light to the proposed relocation.
But Ayvazian categorically ruled out such possibility. He pointed to an Armenian law that bans the construction of processing plants in the vicinity of Sevan.
Meanwhile, there is persisting speculation, denied by Sterlite, that Agarwal himself is planning to pull out of Armenia. The industry source, who spoke on the condition of anonymity, claimed that Sterlite came up with the ambitious Zod project in order to boost the market value of its Armenian subsidiary and then sell it to another foreign investor.
Sterlite’s share price has plummeted dramatically since August 2004 when it stood at 21 U.S. cents. It is currently trading at 4 cents, putting the company’s market capitalization at less than $11 million. Its Yerevan-based executives admitted that government approval of the investment plan would send Sterlite shares soaring, but denied that this is part of Agarwal’s exit strategy. They said moving the plant to Zod would create thousands of new jobs in the unemployment-stricken area.
AGRC currently employs some 1,150 people across Armenia, about half of them working at Zod. They went on a strike this summer, demanding safer working conditions and a rise in their salaries pegged to the U.S. dollar. The dollar has appreciated by about 30 percent against the Armenian dram over the past two years.
The mine administration refused to meet any of the demands and fired hundreds of workers. According to press reports, most of them eventually asked the management to be re-employ them on the same conditions after failing to find other jobs.