The Western world has long thought of Africa as a continent to take things from, a view shared in more recent times by the Chinese. Whereas in the past this process of extraction was relatively straightforward, today the risk landscape is far more complex as exemplified by the controversy surrounding the Simandou iron ore project in Guinea.
One of the world’s largest known deposits of iron ore lies in the southeast of the small West African country of Guinea. Hidden in the Simandou Mountains, four hundred miles from the coast in jungle so impenetrable that the first drill rigs were airlifted in, the ore is so unusually rich that it can be fed into a blast furnace with minimal processing. Simandou is set to become one of the largest iron ore projects in the world and has the potential to shift the balance in the global iron ore trade.
Mining iron ore is complex and hugely capital intensive, with only a few global players capable of developing the Simandou deposits and building the infrastructure necessary to excavate and export the ore. In 1997 Rio Tinto was granted the exclusive rights to explore and develop Simandou but in July 2008 the Guinea government announced that the Anglo-American company was developing the mine too slowly and stripped it of its licence. Exploration permits for half of the deposit were then granted to Beny Steinmetz Group Resources (BSGR), a smaller Israeli company with no experience in exporting iron ore.
Rio protested the decision, suggesting that BSRG had no intention of developing the mine and would sell the concession for a significant profit. This came to pass in 2010 when Vale paid BSRG $2.5bn for a 51 per cent stake in its Simandou operations. As is customary with exploration licenses, BSRG had paid nothing up front and overnight their asset increased in value to USD 5 billion. To put this in context, the government of Guinea’s annual budget was $1.2bn.
Rumours abound that BSRG resorted to bribery to acquire the concession. These claims are now being investigated by the government of President Alpha Condé, who was elected in 2010 in the first democratic election Guinea had held since independence. Condé ran on a platform of good governance and greater transparency in the mining sector. With the US Justice Department also investigating the Simandou deal, Vale, having so far paid $500m to BSGR has put a hold on future payments.
Simultaneously with these investigations, the Guinean government passed a new mining code. Under the terms of the new code, in April 2011, Rio Tinto agreed to pay $700m to the government of Guinea and grant it a 35 per cent stake in the iron ore mine to settle outstanding disputes. The 35 per cent government stake can be build up over time, with the final 10 per cent to be bought at market value in 15-20 years time. Tax rate is set at 30 per cent after the first 8 years, with additional 3.5 per cent royalties. This implies that the Guinean government may be a fair partner if a company is able to maintain its operations into the medium term.
The rescinding of the Simandou contracts exemplifies the highly subjective nature of contractual ‘legitimacy’ in foreign investments. If international mining companies sign contracts with the host government of the time, whatever their ilk, should they have the right to expect those contracts to be honoured by future governments? Under what circumstances is it legitimate for a government to rescind a contract?
These events highlight the importance of transparency of process and the alignment of economic interests between host government, local stakeholders and foreign investors. The original deals Guinea’s military dictators signed with Rio Tinto and BSGR were considered inequitable in the division of wealth generated by natural resources projects. In contrast, the latest Rio Tinto deal was transparent and the details are freely available on the internet.
The challenges have intensified for foreign investors with the heightened attention western governments are giving to bribery and corruption. While the giving of gifts as part of business negotiations may be considered standard practice in many regions of the world, the US Foreign Corrupt Practices Act and the UK Bribery Act are being stringently enforced. The Organisation for Economic Cooperation and Development (OECD) has also instituted a convention against bribery. In response, many multinational corporations have established internal compliance departments that monitor company and employee practices.
Whatever the deliberations of the government in Conakry, events on the ground around the Simandou project are taking on a momentum of their own. Rising ethnic clashes have been reported in Simandou, the region where past military coup leaders have originated. The government could send the military to intervene to stop the deaths but such intervention could be perceived as biased and heighten the potential coup risk. Attempts have already been made to assassinate Condé.
The struggle between governments, international corporations and local ethnic groups over the riches of Simandou look set to continue. Yet the exploitation of those riches requires a level of stability and cooperation between all stakeholders to enable the development of the billions of dollars of infrastructure necessary to extract and export the ore. In the absence of this, Guinea may appear rich on paper but it will remain poor.
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