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Canadian miner Uranium One Inc. has been sideswiped by a high-level political scandal in Kazakhstan, after police arrested the head of the state-run nuclear company and accused him of illegally selling uranium properties to foreigners.

The former Soviet Republic issued a statement yesterday confirming that Kazatomprom president Moukhtar Dzhakishev and several other executives were under investigation for allegedly embezzling stakes in major uranium fields and "handing them" to offshore companies.

At least one of these deals appears linked to Vancouver-based Uranium One, a development that panicked investors and sent the company's shares plunging by nearly 40 per cent.

Kazakhstan's National Security Committee claims it has found several instances of improper transactions, but it identified only one: the sale of a 30-per-cent stake in Kyzylkum, a joint venture that operates one of the country's largest uranium mines. Officials said the stake was sold in 2005 for barely more than $100,000.

Uranium One owns a 30-per-cent stake in the partnership, which it inherited when it bought another Canadian miner, UrAsia Energy Ltd. But UrAsia paid $75-million for the rights in 2005, and it purchased them from a private company called Jeffcott Group - not the government.

The murky allegations have sown considerable confusion, not least in the executive suite at Uranium One. A distressed Jean Nortier, the company's CEO, called the situation a "complete misunderstanding."

He pointed out that the government had previously conferred its blessing on the deal.

"When you do a transaction in Kazakhstan, you need the government's approval. UrAsia got the approval, and when UrAsia merged with Uranium One, that approval was given again," he said in an interview.

The company has asked Canada's ambassador to Kazakhstan, Margaret Skok, to intervene on its behalf, and she has sent a diplomatic request to the country's minister of foreign affairs seeking clarification. Mr. Nortier and other company executives will travel to Kazakhstan next week to meet with the new regime of Kazatomprom executives and government officials.

Several Kazakh observers speculated that Mr. Dzhakishev's arrest may have been politically motivated.

Kazakh president Nursultan Nazarbayev has already jailed the heads of state-owned rail and energy companies, and appropriated a bank owned by the oligarch Mukhtar Ablyazov, who fled the country. Mr. Ablyazov sold stakes in two other uranium properties to UrAsia, Uranium One's predecessor, and Kazakh Communist Party leader Serikbolsyn Abdildin suggested yesterday that the banker's case is connected with that of Mr. Dzhakishev.

A group of prominent Kazakh businessmen, meanwhile, attacked the government for arresting Mr. Dzhakishev in an open letter to President Nazarbayev.

"His arrest seems to be inexplicable and negatively affects the country's business climate as Kazakh entrepreneurs no longer feel they are protected by law," they wrote.

This isn't the first time that Uranium One's Kazakhstan properties have courted controversy. A New York Times article last year probed the relationship between former president Bill Clinton and Canadian mining mogul Frank Giustra, who founded UrAsia and negotiated the company's purchase of the three uranium properties in the country. The article detailed how Mr. Giustra accompanied Mr. Clinton on a diplomatic trip to Kazakhstan at the same time he was attempting to secure exploration rights there. Both men have denied there was any political interference.

Mr. Giustra later arranged a meeting between Mr. Dzhakishev, the jailed Kazatomprom executive, and Mr. Clinton at the former president's home in Chappaqua, N.Y.

Uranium One's Kazakhstan assets are the cornerstone of the company's mining properties. In addition to the Kyzylkum operation, which has yet to achieve commercial production, the company owns significant interests in two producing mines in Kazakhstan, the Akdala and South Inkai mines.

With about 15 per cent of the world's uranium reserves, foreign miners have flocked to Kazakhstan to secure the rights to mine the metal used to make nuclear fuel. But the country's political regime is notoriously unpredictable, and there are fears that even if Uranium One and other miners have a solid legal claim to their properties, the government might choose to ignore it.

Uranium One shares skidded $1.30 (Canadian) to $1.99 on the Toronto Stock Exchange.

"It's going to be a bit of a soap opera, and the majority of people aren't going to stick around to see how the soap opera ends," predicted one Bay Street trader who was moving the stock yesterday.

If this uncertainty lingers, it could undermine Uranium One's financial position. Since February, it has been trying to close a $270-million deal with a consortium of Japanese investors to buy a 20-per-cent stake in the company in exchange for a guaranteed supply of uranium.