Thursday, May 9, 2013

Corruption Probe May Cost Steinmetz-Vale $50 Billion

On my way back to the office after a very relaxing spa treatment I receive a phone call with an update about a joint investigation conducted by the U.S. Department of Justice as well as Guinea. The investigation has led to the arrest of two executive officers of BSG Resource Limited which is owned by Israel’s richest man, Beny Steinmetz, in the African country as well as one French citizen who will stand trial in New York. Our main interest is with a potential positive outcome for Rio Tinto.

At stake is a $50 Billion iron ore mine in Guinea. The Simandou mine is one of the most lucrative iron ore mines in the world with an estimated 26.5 tons of iron ore deposits. Rio Tinto was asked by Guinea to give up part of it license it had in the Simandou project and BSGR stepped in to purchase the license from Rio Tinto. Guinea President Alpha Conde said his government seeks a solution which would allow Vale to continue work on the Simandou project.

BSGR sold a 51% stake to Vale for $2.5 Billion in 2010 and the two companies planned to invest up to $10 Billion in order to build the required infrastructure which would allow them to bring the iron ore to market. BSGR reported in March that it was ordered to give up its license in both the Simandou mine as well as the Zogota mine while Vale was assured by the U.S. as well Guinea that they are not under suspicion of any wrongdoing. Work in both projects has been suspended since 2012 given the dispute with the government as well as the joint investigation into corruption on part of BSGR.

President Conde vowed that Vale is one and will remain one of the biggest partners of his country and its large iron ore deposits and also said that his government offered Rio Tinto a strategic partnership between 50 years and 100 years. Rio Tinto could emerge as the biggest winner of this probe into BSGR and how they have obtained the license to begin with. Rio Tinto has already spent $2.3 Billion on the Simandou project while its bigger rival BHP Billiton also has a project in Guinea.

Guinea and its huge iron ore deposits have been heavily fought over since the start of last decade as demand from China as well as other emerging nations have spurred demand for iron. Guinea is already the world’s largest exporter of bauxite. Guinea relies on the mines as they are the backbone of their fragile and under-developed economy and understand the risk of key mining projects being offline while progress is being stalled.

According to Transparency International, Guinea ranks 154th out of 174 countries it ranks and monitors on their corruption index. Political instability in Guinea is one of the biggest obstacles to the country as corruption rules day-to-day operations. Foreign miners do not flock the African nation because they like to conduct business there, they do so solely due to the huge iron-ore deposits in the country.

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