Steinmetz-Linked Probe Seen Spurring Race for $50 Billion Mine
A corruption probe into how a group run by Israel’s richest person secured rights to a Guinea iron ore project is set to spark interest from rival companies looking to swoop on one of the world’s most valuable deposits.
Rio Tinto Group (RIO), the second-largest exporter of iron ore, may be interested in regaining the ground it lost in 2008 should licenses held by Beny Steinmetz’s BSG Resources Ltd. and Vale SA be revoked, Liberum Capital Ltd. analyst Richard Knights said. Guinea is seeking a way for Vale to resume work at Simandou, President Alpha Conde said in a Jan. 23 interview.
A joint U.S. Department of Justice and Guinea investigation has led to the arrests of two BSGR executives in the African country and the detention of a French citizen, indicted to stand trial in New York. At stake is untapped ore in the iron-laden mountains of Guinea’s south east with an estimated value of $50 billion.
“It’s a prize worth fighting for,” Paul Gait, a mining analyst at Sanford C. Bernstein Ltd., said by phone. With an estimated 26.5 billion tons of iron-ore resources the deposit is one of the most prospective in the world, he said. “All that it lacks is the infrastructure and the political stability to bring it to market.”
Vale and Rio Tinto declined to comment for this story.
``Allegations that there was anything improper about the manner in which BSGR obtained mining rights in Guinea are entirely baseless," BSGR said in an e-mailed statement.
``BSGR will defend its reputation and its mining rights in Guinea through whatever legal means prove necessary, including international arbitration, if the government of Guinea continues with its illegal efforts to expropriate BSGR's interests.''
BSGR said in March that Guinea is preparing to cancel its mining rights to the Simandou and Zogota projects. Work at both sites held by the venture with Vale was frozen last year. Vale has said that U.S. and Guinea investigators have assured the company that it’s not under any suspicion.
Steinmetz, 57, has a net worth of about $8.9 billion, according to the Bloomberg Billionaires Index. His BSGR acquired rights to part of Simandou in 2008 after Rio Tinto was ordered by Guinea to give up a section of its license. BSGR subsequently sold 51 percent of its stake in Simandou and Zogota to Vale in 2010 for $2.5 billion. The venture had planned a $10 billion mining operation before a dispute with the government started to escalate last year.
Guinea is seeking a way for Vale to resume work at Simandou and “will find a solution,” Conde said in January. The company will be one of the big partners of Guinea in iron ore, he said. The government had also offered Rio “a strategic partnership for 50 or 100 years,” he said, without providing details.
Guinea’s rich iron-ore deposits have been fiercely contested since the end of the last decade as mining companies sought to gain from prices pushed to near records by Chinese demand.
Rio Tinto has so far spent $2.3 billion on its part of Simandou, which it describes as having the potential to be Africa’s biggest iron ore mine. BHP Billiton Ltd. (BHP), the world’s largest miner, also has an iron ore project in Guinea.
“The government is wary of perpetuating a situation where key projects remain stalled,” Roddy Barclay, an analyst at Control Risks, a London-based business consulting group, said in an interview. “The BSGR contract is the most contested in the Guinean mining sector. It’s an unrivaled resource, there are vast quantities of high-grade iron ore.”
Unlocking the Simandou deposit’s wealth would be transformational for the economy of Guinea, the world’s largest bauxite exporter. The country’s gross domestic product per capita was $498 in 2011 compared with $48,112 in the U.S., according to the World Bank. Its total GDP was $5.1 billion in 2011 when it had a population of 10.2 million people.
“The Simandou project is a very crucial project for the country in terms of size and also in terms of synergy with the rest of the economy,” Guinean Finance Minister Kerfalla Yansane said in a phone interview. “When we consider the synergies with the rest of the economy in terms of jobs creation, infrastructure, agriculture, the impact may be many-fold. Our goal is to transform the potential into better living conditions for our people.”
The deposit has attracted the attention of China, the biggest buyer of iron ore used to make steel. Aluminum Corp. of China bought into Rio’s share of the project for $1.35 billion in 2010. Chalco, as the Beijing-based company is known, said in 2011 that Baosteel Group Corp. and China Railway Construction Corp. will participate in the project.
Even so, potential developers must overcome obstacles. These include the risk of political instability in a country where legislative elections are due next month, as well as making the necessary investment at a time of falling iron ore prices as growth in demand from China loses pace.
A lack of clarity around how any developer would be able to rail the ore to the coast adds to uncertainty for potential investors. Simandou’s location makes a route through neighboring Liberia more economically viable than the government’s preferred path of a railway linking the east with the port of Conakry in the west.
“It will be very difficult for negotiations on some contracts to be conducted on purely technical and commercial considerations given how politicized the process will be,” Control Risks’ Barclay said. “Suspicions and mistrust in Guinea’s polarized political environment will continue to provide scope for hostile scrutiny or forced renegotiations.”
Berlin-based anti-graft group Transparency International ranked Guinea 154th out of 174 in its 2012 Corruption Perceptions Index.
Rio, which reported $24 billion of global iron ore sales for 2012, is part of a working group with the government on issues including state funding for part of the project, Alan Davies, the company’s chief executive officer for diamonds and minerals, said in an April 29 briefing with reporters.
Rio has said its planned project includes a 650-kilometer (404-mile) railroad and four-berth wharf.
“You still have this hurdle for which there isn’t an obvious solution which is incredibly expensive infrastructure,” said Liberum Capital’s Knights. The cost of building the necessary ports and railways to get the high-grade Simandou ore to the export market has been estimated to cost as much as $15 billion to $20 billion, he said.
The price of iron ore has tumbled 19 percent from a 16-month high in February after growth in China unexpectedly lost momentum in the first quarter. Iron ore with 62 percent content delivered to the Chinese port of Tianjin was $128.10 a dry metric ton on May 3, according to The Steel Index Ltd.
“If Guinea is expecting somebody big to come in and develop it in the near term, I think they’re going to be a bit disappointed,” Matt Fernley, an analyst at GMP Securities Ltd. in London, said by phone. “If you look at the majors who could invest in a project like that, you’re really only talking about Rio, BHP and Vale.”
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