Biggest Iron Bounty Locked in Spat Supports Ore Prices

The bitter wrangling over rights to mine a West African mountain range may wind up keeping the world’s biggest untapped deposit of iron ore in the ground into the next decade.

Years of delays in unlocking Simandou, a lode capable of meeting about 12 percent of global demand, will curb a growing surplus. That should cushion any decline in prices and bolster earnings for Rio Tinto Group, Vale SA (VALE5) and BHP Billiton Ltd. (BHP) The three biggest mining companies controlled about 60 percent of last year’s $170 billion trade in the raw material.

Legal disputes over who is entitled to Simandou’s bounty will also deprive the impoverished French-speaking nation of Guinea of the economic benefits from its most valuable natural resource. The World Bank says 55 percent of its population lived in poverty in 2012, up from 40 percent in 1995.

“This kind of court case is actually a good thing for the iron ore price, for as long as this is going on, who is going to develop Simandou?” said Paul Gait, an analyst at Sanford C. Bernstein Ltd. in London. “Simandou is probably the most important undeveloped mining asset on the face of the planet today. Those are the stakes that are being played for here.”

Simandou’s mineral wealth has attracted two of the world’s biggest mining companies and a billionaire Israeli diamond trader. The fight for control last month spilled over into a Manhattan court, with Rio Tinto filing a suit that accused Vale, Beny Steinmetz and Guinean government officials of conspiring to steal control of Simandou.

Legal Quagmire

Steinmetz, his mining company BSGR Resources Ltd. and Vale have all denied wrongdoing. BSGR plans international arbitration with Guinea over the dispute and said this week any attempt to negotiate fresh rights to Simandou would be challenged as unlawful.

The legal quagmire, combined with a drop in iron ore prices this year, may thwart renewed attempts by Guinea to attract investors to Simandou. The country last month rescinded two of the four licenses covering the deposit that were held by a BSGR-Vale venture.

Guinea may seek to raise about $1 billion from offering the two licenses again, a person familiar with the government’s plans said, asking not to be identified because the process is confidential. The state has received initial expressions of interest and may announce a winning bidder by the end of the year, the person said.

The dispute may also hinder Rio Tinto’s efforts to find partners for a 650 kilometer (404 mile) railway and port at an operation that it planned to have up and running in 2018 to serve the new mine.

‘Long-Shot’

“We always thought Simandou was a long-shot to be in production this decade, but now that chance looks to be close to zero,” said Richard Knights, an analyst at Liberum Capital Ltd. in London.

The benchmark price of iron ore delivered to China’s Tianjin port lost 23 percent this year, reaching $102.70 a dry ton today, the lowest since September 2012, according to data from The Steel Index Ltd. While prices may be firmer over three months, there may be a drop below $100 a ton over six months, toward $90, on new supplies, Kamal Naqvi, global head of metals at Credit Suisse Group AG, told a conference in Singapore this week.

The project is so rich in high-quality ore it could be mined for more than a century, according to Bernstein’s Gait. It’s rivaled only by existing mines in Brazil and Australia and has the potential to reshape the iron ore market for decades.

Massive Output

The mine could produce as much as 150 million tons a year, said Gait. That would be enough to satisfy about 12 percent of the 1.25 billion tons of demand last year, according to Morgan Stanley.

London-based Rio is seeking damages under the Racketeer Influenced and Corrupt Organizations Act, a piece of legislation introduced in the 1970s by President Richard Nixon to combat the Mafia. Rio claims the rights revoked were worth “billions of dollars,” and Chairman Jan du Plessis said yesterday the company would pursue its claim “vigorously.”

Statements by Guinean President Alpha Conde suggest the government is preparing to hand back control of the disputed ground to Vale, Mahmoud Thiam, the country’s former mines minister, whom Rio has accused of accepting a $200 million payment, said in a phone interview last week. No charges have been brought against Thiam.

‘Tactical Move’

Rio has “decided to make enough noise around it to try disrupt that attempt or at least delay it,” said Thiam, who was minister between 2009 and 2010 and has rejected Rio’s bribery claim. “It could be a good tactical move on their behalf.”

Spokesmen for Rio Tinto and BHP declined to comment. Vale’s press office in Rio de Janeiro declined to comment on Simandou. Guinea Mines Minister Kerfalla Yansane declined to comment on the legal dispute over Simandou during an interview at the World Economic Forum on Africa in Abuja yesterday.

BSGR said in a statement this week that had its “rights not been unlawfully interfered with, Guinea’s citizens would, by now, have been enjoying the fruits of the proper and responsible development of, and planned $10 billion investment in, their county’s precious resource.”

Rio CEO Sam Walsh last year said the company would be interested in regaining the Simandou licenses. Rio had planned to start production next year from a mine which it has said has the potential to double Guinea’s economy. The delays are probably costing the country about $2 billion annually, Bernstein’s Gait estimates.

“The Simandou project is a huge project that has a lot of relations with all sectors of the economy, so when the project is not working it may affect a lot of other sectors,” Guinea’s Yansane said yesterday in the interview.

The World Bank agrees. It has said poverty is increasing in Guinea’s urban areas because of rising prices for essential goods, an exodus from the countryside and a lack of jobs.

“Unfortunately, it’s Guinea’s economy that will continue to suffer,” Thiam said.

To contact the reporter on this story: Jesse Riseborough in London at jriseborough@bloomberg.net

To contact the editors responsible for this story: John Viljoen at jviljoen@bloomberg.net

Bloomberg reserves the right to remove comments but is under no obligation to do so, or to explain individual moderation decisions.

Please enable JavaScript to view the comments powered by Disqus.