guinea threatens to withdraw rio key asset

This is what worries me about cameroon. They had riots earlier this year and a history of political instability.

Guinea threatens to withdraw Rio's key asset

THE politically unstable West African nation of Guinea is threatening to withdraw Rio Tinto's rights to mine one of the key assets in its battle against a hostile $177 billion bid by BHP Billiton.

Rio Tinto chief executive Tom Albanese. Rio may be stripped of its Guinea mining concession. Picture: Lyndon Mechielsen
In what seems a divide between Guinean president Lansana Conte and the country's parliament, Rio has been told a document outlining its legal rights to the high-grade Simandou iron ore deposit was "stained with irregularities" and Rio's apparent intentions were to "freeze" the asset from development.

In a letter dated May 22 and sent to Rio Tinto chief executive Tom Albanese, Guinean Secretary-General to the President, Sam Mamady Soumah, said Rio would be stripped of its mining concession for Simandou and only issued with a new one if Rio could comply with the country's Mining Code.

"The irregularities are based on the fact that on the form provided, the permit provides no indication of a feasibility study as required by the Mining Code," according to the letter, which was translated from French to English by The Australian.

"Such a study is required to establish the existence of one or more orebodies that are economically mineable and must lay out the scale of the work and investment that your project needs.

"On reading the Decree and the Convention that's attached to it, the reader can take away the impression that it's a process intended to freeze our mineral resources in contrast to the efforts the Government is making to see an early exploitation of these resources to increase state revenue and to fight poverty amongst our population."

Rio received the letter on June 6 and had to do its own investigations to ascertain the legitimacy of the document. When convinced the letter posed a significant enough issue, Rio informed the Australian share market.

But Rio also points to a letter from the president of the Guinean legislative assembly, dated June 9, which promises Rio full rights to Simandou.

Simandou is one of the best untapped iron ore deposits in the world and Rio has used the project to provide proof that it would grow at a faster compound annual growth rate than BHP Billiton over the next seven years.

On May 29, a week after the original letter was penned by the Secretary-General to the President, Rio announced a 2.25 billion tonne resource for Simandou with production starting by 2013. Rio is not expected to make a decision about developing the project until late 2009 with feasibility studies for the port and rail infrastructure due this year.

The Guinean Government has a 20 per cent buy-in option for the project. It is unclear whether it is angling for a better deal.

However a government representative said on April 24 that Guinea would be seeking bigger profit shares from foreign miners.

Analysts said yesterday that the cost of developing Simandou could blow out by up to 200 per cent against the mooted $6 billion cost in Rio's early estimates.

They added that Simandou now had a whiff of risk attached to it and presented a good attack point for BHP Billiton, which had favoured the development of brownfield assets like Olympic Dam to build growth.

Rio declined to comment on what effect the move by the Guinean President would have on its bid defence.

There has been no stop work order issued by Guinea, but Rio is unsure of what the next step is in regards to ensuring it has full rights to the project.

"Rio Tinto is confident that its Conventions and Concession are in all respects in conformity with Guinean laws in their current form," Rio said in a statement.

The news depressed Rio's share price by 1.1 per cent while BHP Billiton shares gained 0.4 per cent.

Rio shares are now trading at a $15.60 discount to BHP's indicative 3.4-for-1 all scrip offer.

BHP declined to comment. Chief executive Marius Kloppers last week said even the world's biggest miners were not guaranteed of turning a lucrative resource into a "great profit opportunity".

"We have the world's most wonderful alumina bauxite resource in Guinea. We've been there the longest, we've spent the most money and we hope to turn that into an investment opportunity for a very substantial alumina refinery in the not too distant future," he told the Melbourne Mining Club.

"However, there is country risk. There is political uncertainty. There is the capability to operate in what is demonstrably a developing economy, remoteness, and so on."