Another view of the Chinalco Rio Guinea deal

Written by Paul Adkins

This article comes from Business Day.    The article expresses doubts as to whether the Guinean Government will approve and allow the JV partners to proceed with mining the iron ore.  

A rebuff by the Guineans would be a major loss of face for Chinalco and indirectly for the Chinese government.    The latter would like also mark down the team at Chinalco, not to mention marking down the company itself.   According to our information, the last thing that the company can afford is to lose its backing from the Government.   We are told that the company is financing its cash losses via secret payments from the Government.

The article is a little long, but worth reading.

China’s metals giant, the Aluminum Corp of China Ltd. (Chalco aka Chinalco), tied another knot for its future mining plans in the Republic of Guinea with London-based Rio Tinto in a signing ceremony in Beijing today. But Guinea’s Mining Minister Mahmoud Thiam told Business Day this will not deter the government in Conakry from revoking Rio Tinto’s mining concessions in Guinea if the company fails to comply with the mining law and its concession obligations.

The latest move focuses the spotlight of the mining world once more on whether the Guinean government — in transition before the second round of the presidential election next month — is capable of cutting the Gordian knot which the internationals have tied around their lucrative mining concessions. United Company Rusal is hoping that its Friguia and Dian-Dian bauxite concessions will not be revoked, as the government and Minister Thiam (image below) have been threatening, also on account of violation of concession agreements and concealment of income from the state.

In the Rusal contest, Chinalco’s aluminium metals group has so far positioned itself on the sidelines, waiting to see if Thiam or his successors in the new Guinean government will have the political will and personal independence to oust Rusal and put up the bauxite rights for fresh international bidding.

This afternoon, Beijing time, the Chinese and UK companies put their signatures to a pact which calls for Chinese funding of about $1.4 billion to develop the Simandou iron-ore deposit, one of the world’s largest, in the southern corner of Guinea, close to the Liberian border. Today’s release by Rio Tinto claims “the binding agreement follows the signing of a memorandum of understanding between Rio Tinto and Chalco’s parent Chinalco announced on 19 March 2010. The agreement covers all aspects of how the JV and project itself will operate and be governed, including planning, construction and management of the mine and associated rail and port infrastructure”.

Chalco, which is the listed subsidiary of the state-owned Chinalco holding, has also been bilateral negotiations with Minister Thiam, in the event that Rio Tinto’s conflict with the government in Conakry ends in the ouster of the company.

Rio Tinto’s CEO, Tom Albanese, issued a statement in Beijing today saying he expects the Simandou joint venture with Chalco to begin production within five years.

Thiam told Business Day the latest sign of Chinese backing for Rio Tinto will make no difference to the government’s process of revocation of the Simandou concessions. Thiam said he was surprised Chalco would suspend share trading for today’s show of support for Rio Tinto’s position in Guinea, because that position is “unlawful”.

The Gordian knot the Chinese and British companies tied today still leaves them vulnerable, since both have refused to respond to a letter sent late last week by the Guinean government demanding a reply to earlier requests for information establishing Rio Tinto’s rights to the concessions. According to a warning letter from the Guinean Government delivered to Chinalco and Rio Tinto on July 23, and released to Business Day, unless Rio Tinto complies with the government’s disclosure requests and meets the concession terms, the joint venture agreement “will have no legal effect with regard to the Republic of Guinea.”

Thiam told Business Day that Chalco has acknowledged receipt of the July 23 letter, but added there will be no reply after it had been translated. Thiam said no reply has been received in Conakry yet.

Rio Tinto had earlier failed to respond to the Guinean government’s first warning letter of June 23, which was signed by Thiam and by the Guinean Minister of Economy and Finance, Kerfalla Yansane. That letter had requested a copy of the protocol of agreement between Rio Tinto and Chinalco, signed last March; details of Rio Tinto’s spending to date on the deposit; and copies of studies Rio Tinto has completed on the two blocs the company retains at the Simandou site.

The follow-up letter of last week is addressed to Chinalco’s chief executive, Xiong Weiping, and to the Chinese Ambassador to Guinea, Huo Zhengde. “As of today,” the letter to the Chinese says, “the majority of the documents [requested] have not been handed over.”

Rio Tinto told Business Day through a spokesman: “We don’t disclose details of confidential communications with governments. Rio Tinto and the IFC are engaging with the Guinean Government on a range of matters and will to continue to do so.”

Chinalco holds a 9% stake in Rio Tinto after failing to get Australian government and shareholder agreement last year for a $19.5 billion bid for a worldwide joint venture; buying rights for the iron-ore Rio Tinto ships from Australia to China; and up to 18% of Rio Tinto’s shares. The relationship with Beijing then deteriorated, when four Rio Tinto employees in China were arrested in July of 2009, and charged with espionage. They were convicted on lesser charges on March 29, this year. By then Rio Tinto and Chinalco had signed their agreement for cooperation in Guinea. According to today’s announcement, Chinalco (through Chalco and other affiliated companies) has agreed to spend $1.35 billion on development work at Simandou, and also on the proposed rail link to port which is required for the project. Through this project spending, Chinalco would earn a 45% stake in the project, with Rio Tinto holding 50%, and 5% held by the International Finance Corporation, a World Bank affiliate.

Rio Tinto’s relations with the Guinea government have deteriorated badly. The London-based Anglo-Australian mining company began exploring Simandou with a permit in 1998; in April 2006 the company said it had received the right to mine, but this was challenged by the Guinean Government in mid-2008. Thiam told Business Day today the agreement was invalid because then President Lansana Conte had not signed it. Conte died in December 2008, and was replaced by a military junta led by Dadis Moussa Camara and Sekouba Konate. They are in the process of ceding power to an elected government; the second round of the presidential election will be held next month, though the date has not yet been fixed. Thiam has been asked by the opposition candidates and the transition government headed by Prime Minister Jean-Marie Dore to continue in his post until a new government and new minister can be appointed.

Rio Tinto’s troubles in Guinea preceded the appointment in January 2009 of Thiam, a US and French trained investment banker. They worsened when Thiam revoked Rio Tinto’s rights to blocs 1 and 2 of Simandou for failure to meet investment and other conditions of its concession agreement. These blocs were then awarded in July of 2009 to Beny Steinmetz Group Resources (BSGR); Steinmetz is an Israeli entrepreneur with diamond and other mining interests in central Africa. In April of this year BSGR announced a joint venture to develop Simandou blocs 1 and 2 with the Brazilian mining giant, Vale.

Rio Tinto claims the loss of blocs 1 and 2 at Simandou is illegal, and has lobbied directly and through the British Government for a change of Guinea government policy. Guinean officials believe that Rio Tinto has withheld data on the extent and value of the reserves it has discovered at Simandou, and tried to slow down the Guinean development while benefitting instead from sales to China from Rio Tinto’s Australian iron-ore mines.

Thiam told Business Day the latest warning should now focus Rio Tinto and Chinalco on the possibility that they will lose blocs 3 and 4. Exploration permits for these may then be reissued at the discretion of the ministry. “We are not at revocation stage yet,” Thiam said. “They do not have a valid convention to mine blocs 3 and 4 since the presidential decree was not signed. They hold an exploration permit and thus will be faced with another retrocession event in early 2011 if they don’t get their act together. If they continue on their arrogant and defiant path, I am certain the next government will simply revoke their permit.”

Separately from Rio Tinto, Chinalco has approached the Guinean government to ask whether it would be eligible for exploration and mining rights in the event Rio Tinto loses them. According to Thiam, “any deal Chinalco makes with Rio Tinto would not give them any rights to Simandou as it would be deemed invalid by the Government of Guinea.” But if Rio Tinto loses its rights, Chinalco would be eligible to bid for the rights, Thiam added.

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