The troubles for mining giant Rio Tinto (NYSE: RIO) continue to mount in connection to its failed foray into the Republic of Guinea’s massive Simandou project. One-time mine owner BSG Resources has advised Rio Tinto that it plans to file multibillion-dollar lawsuits against it, alleging that it paid bribes to Guinea officials to secure rights to the project — rights that were stripped from BSG.
The Republic of Guinea is a land of extremes. On the one hand, it’s ranked among the 10 poorest countries in the world; on the other, it sits atop some of the planet’s richest mineral deposits, which — if exploited — could transform its economy. The key problems with that are the remoteness of the resources, the costs of blazing new transport routes across dense jungle to access them, and governments that are rife with corruption.
Simandou is emblematic of the situation. It is estimated to contain reserves of iron ore worth $50 billion, but extensive and expensive infrastructure would need to be laid down through thick forest before the ore could be mined — some 80 miles of roadway and 400 miles of railroad track, at an estimated cost of $20 billion.
Charges of corruption have played a role in the project almost from the beginning. Rio Tinto was granted exploration rights to the site in 1997, and subsequently given a concession to develop the deposit in 2006. But two years later, Guinea’s dictator charged the miner with dragging its feet on developing the site, and stripped from it the rights to the northern half of the claim. Just before his death in 2008, the strongman granted those rights to BSG Resources, which invested $165 million in developing the project, but sold a 51% stake in it to Vale.
A democratically elected government came to power in 2010 and launched a probe into the deal, determining that bribery and corruption were involved in the bidding process. It subsequently stripped BSG and Vale of their rights to the concession.
Rio Tinto won new rights to Simandou totalling 46.6% of the project, with the Chinese government-owned miner Chinalco getting another 41.3%, the Guinea government holding 7%, and the World Bank holding the remaining 4.6%.
As costs skyrocketed, the World Bank opted to get out of the project. Then, Rio Tinto made a deal to sell its stake to Chinalco for as much as $1.3 billion based on future production, but not after first writing down virtually the entire value of its $2 billion investment in the project and putting it into mothballs.
Then came the revelation that Rio Tinto executives paid $10.5 million to a consultant working on Simandou for his assistance in negotiating with Guinea’s current president, with emails showing both former CEOs Tom Albanese and Sam Walsh were aware of the payments. Both the head of Rio’s energy and mineral division and its executive in charge of legal and regulatory affairs were first suspended, and then fired. Now BSG Resources in a detailed letter to Rio Tinto says it will sue the miner for its losses which it says “runs to billions of US dollars.”
It is a saga that has a long way to go before it reaches its final chapter.
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