Jousting for an iron hand in Africa
Whenever an African (to a lesser extent a Latin American) government threatens to change investment practices, ostensibly to secure more income for its citizens, up shoot the warning flags. Previously these were raised by multilateral banks and other investors. Now, more often than not, they are hoisted by mining companies.
Over the past five months, mixed messages have been coming from the military regime in Guinea which is one of Africa's richest mineral-dependent states. Guinea's new military ruler has announced a review of previous contracts with foreign mining companies, presumably along the lines of that set up by DR Congo's administration two years ago.
This has prompted Rio Tinto to harp on one of its traditional themes, characterised by promising a carrot while wielding a stick, in effect claiming "We're not trying to influence government policy, but..." The UK company has urged Guinea's junta not to alienate foreign miners, since "the population has not seen any real evidence of ... the [country's] huge mineral wealth." This is despite the fact that Rio Tinto has long been involved in mining projects in the country and must therefore bear some responsibility for such an unacceptable outcome.
Under Guinea's former government, Rio Tinto secured tenure of one of the world's largest iron ore deposits (Simandou), appearing fairly happy in its relationship with that corrupt regime. But, according to an Australian journalist, this wasn't necessarily the case. Not only did the previous government "award" a significant part of Rio's concession to BSRG - an outfit owned by the eponymous Barry Steinmetz whose operations in Sierra Leone have proved even more contentious than those of Rio Tinto. It also offered to oust the British company should China's state-owned Chinalco take over the Simandou concession.
This was an offer that the Chinese wisely turned down. At the time Chinalco was positioning itself for a major increase of its stake in Rio Tinto itself (and still is). However that particular battle turns out, and whether or not Guinea re-admits Rio Tinto to Simandou, Chinalco seems to have a better appreciation of the realities of African extractive politics than its UK partner.
[Commentary by Nostromo Research, London]
Rio worried about tenure security of Simandou iron ore project in Guinea
A Rio Tinto executive says mining companies are nervous about security of tenure for projects in Guinea and delaying capital programmes as a result.
BY Daniel Magnowski and Saliou Samb, Reuters
30th April 2009
CONAKRY- Guinea risks jeopardising the mining investments that form the backbone of its economy if it does not reassure companies their contracts are secure, Rio Tinto's top executive in the West African country said on Wednesday.
Guinea's military leader Captain Moussa Dadis Camara, who took power last December in the world's biggest bauxite producer and a potentially huge source of iron ore, has promised to review mining contracts, and has repeatedly threatened to cancel ones it finds unacceptable.
Only when the review is complete will firms have security of tenure, said David Smith, chief executive of Rio Tinto's Guinean operations.
"Lots of mining companies are pulling back capital expenditure. Companies will make decisions based on lots of factors, and one of those will be the risk of the project," Smith said.
"For the government of Guinea, there's a real incentive to get on with the things they're doing so the risk factor is decreased. If not, Guinea could suffer more than others."
Many mining projects in Africa and elsewhere have been scaled back or shelved as metals prices have crashed in the past nine months, and Guinea, one of the world's poorest countries, can ill afford to lose revenue from its mineral exports.
The promised review has not yet begun, but the government has taken the first steps toward establishing a review committee, Smith told Reuters in an interview.
Rio, which has already spent $450 million on exploration at the Simandou iron ore project, hopes the review will resolve a dispute over its concession.
"We welcome a review of mining contracts, it will put everything out in the open. We are going through a period of some legal uncertainty. A company that is going to invest a lot of money ... wants certainty about tenure," Smith said.
In one of its final acts before the death of long-standing President Lansana Conte that ushered in Camara's takeover, Guinea's previous government awarded a large portion of Rio's Simandou concession to BSGR, a firm owned by an Israeli diamond trader, which has no history of producing iron ore.
Rio contests that decision.
"Restoration of our concession will send a signal to the investment community that large reputable investors in Guinea can have certainty of investment," said Jordan Feilders, Rio's spokesman in Guinea. "We need the full concession to make it work as per our design."
Mining firms active in Guinea have become targets for Camara's frequent television broadcasts in which he has criticised their behaviour and threatened to cancel contracts, though Rio has not come in the firing line.
The attacks on the industry grab publicity and unnerve investors, but Smith said these are more expressions of frustration than policy statements.
"The population in Guinea, and the new government, are saying, 'here is a country that has huge potential wealth that could be generated, but the population has not seen any real evidence of it,' and the Guinean government has a great deal of frustration about that," he said.
Key to longer term security for investors will be the reduction of political risk that comes with the transition from military rule to elected government.
Camara, whose authorities arrested more than 20 soliders last week on suspicion of plotting to overthrow his young government, has said elections will be held by the end of 2009.
"We're all keen to see democratic government, we want certainty," Smith said. "We hope there will be elections sooner rather than later."
(Editing by Peter Blackburn)
(c) Copyright Thomson Reuters 2009.
Why Rio's Guinea iron ore was an offer Beijing could refuse
John Garnaut, Sydney Morning Herald
27th April 2009
China is wise to Africa's divide-and-rule tactics, writes John Garnaut in Beijing.
China has underscored its power in the developing world by revealing it was offered a huge African iron ore deposit seized from Rio Tinto but declined to accept out of "sensitivity" to international repercussions.
The late dictator Lansana Conte's offering to Chinese companies including Chinalco has implications for the Australia-China relationship, particularly in the Pacific, and Chinalco's $US19.5 billion ($27 billion) investment bid in Rio Tinto, which Canberra will soon have to block or approve.
Rio had sunk $US400 million into Guinea's Simandou iron ore tenement and had planned to invest another $US10 billion to make it the largest iron ore mine outside Australia and Brazil.
At the same time, the Chinese Government built a 50,000-person sports stadium, a national assembly building and other landmarks in the Guinean capital, Conakry, and provided services including training for the army's special forces.
Guinea is one of the world's poorest and most ill-governed nations, with annual per capita income of just $US442 and ranking number 173 of 180 countries on Transparency International's corruption perception index.
Wang Wenfu, who leads Chinalco's overseas acquisition team, including its pursuit of 18 per cent of Rio, told the Herald that the Guinean Government last year offered to hand Rio's iron ore tenement to Chinese state-owned companies in exchange for railways, roads, ports and hydro-electricity projects.
"The Guinea Government was trying everyone in China including Chinalco," he said.
Ultimately, some time after the August Olympics attended by the late Mr Conte, Beijing declined.
"The Chinese Government encourages Chinese companies to go to Africa but they are also sensitive to the international results," Mr Wang said. "Chinalco said no - it wouldn't have been professional."
The episode also shows how China is pulling back from a previously gung-ho attitude to investing in unstable developing nations. "China is getting better aware of the practices of African governments to divide and rule among Chinese companies and foreign powers," said Zha Daojiong, professor of international relations at Peking University.
But China's decision to knock back the multibillion-dollar iron ore-for-infrastructure deal has not yet helped Rio Tinto.
Late last year, Mr Conte handed the northern half of Rio's Simandou tenement to BSG Resources Mining & Metals, controlled by a controversial Israeli diamond-mining billionaire, Benny Steinmetz.
"They will see us in court," said Sam Walsh, head of Rio's iron ore division.
One version of events is that Guinean politicians were said to have ended Rio's tenement at Simandou because they were unhappy that Rio wanted to connect the proposed mine directly to an existing port in Liberia rather than build a railway to a new port on the Guinean coast. "For them, it's if you invest in our infrastructure we'll pay you back with mining resources," Mr Wang said.
In another version, Rio was also considering the indirect railway-and-port option and lost its grip on Simandou only when some Beijing leaders systematically courted Mr Conte and undermined the Anglo-American miner after the China-Africa Co-operation summit in Beijing in November 2006.
China's ambassador to Guinea, Huo Zhengde, promised in 2007 to "spare no effort" in assisting the country because the two nations were "good brothers and good friends".
Chinalco's Mr Wang said African countries wanted to work with the Chinese Government because of its long history of support, including scholarships for thousands of African students who are now rising to senior posts, and because of its unrivalled record in building fast and cheap quality infrastructure.
He said it showed how China's influence in Africa could prove useful for Rio and Australia.
"It's an example of how Chinalco could enhance the position of Rio Tinto," Mr Wang said. "This sort of thing is happening wherever you go in Africa."
Mr Wang said China might not be so accommodating of Australia's international interests if the Government did not approve Chinalco's investment in Rio. State-owned companies such as Chinalco tend to compete vigorously with each other and make their own investment decisions, while also being swayed by privileges given to companies and executives who fulfil government objectives.
Mr Walsh said Rio had talked with Chinalco - which has bauxite exploration activities in Guinea - about running Simandou as a joint venture. But the discussions were superseded by more comprehensive investment talks after BHP Billiton dropped its hostile takeover bid for Rio in November.
Rio has said it plans to mine more than 70 million tonnes of iron ore a year in Simandou and possibly as much as 170 million, which would make it one of the largest iron ore mines in the world.
On December 27 Moussa Dadis Camara announced that Mr Conte had died and that he had seized power and dissolved the constitution and what remained of the institutions of government.
Mr Walsh said the new dictator had not overturned his predecessor's decision to deprive Rio of its tenement rights.
"We're now in a hiatus," Mr Walsh said. "But we are confident we retain legal rights to the full Simandou tenement."
Mr Walsh said Rio had been pulling back its work in the southern half of the tenement, where the company has focused on infrastructure, exploratory drilling and other development, until clarity was restored.
Mr Walsh acknowledged recent erratic behaviour by Captain Camara towards global mining companies but said the new military leader provided some cause for optimism because he was "pro-development and clearly working actively to remove corruption and bribery."
Four former mining ministers have been investigated for corruption since Captain Camara took power.
Analysts say China's calculus of risk and reward in Africa is changing. The investment rewards have crashed with commodities prices and some African governments have reneged on Chinese investment deals.
"Like all newcomers with deep pockets, they run the risk of being exploited or expropriated," said Susan Shirk, a leading China official during the Clinton administration and now director of the University of California's Institute on Global Conflict and Co-operation.
"China's investments in Africa and Latin America may give it a new appreciation of the value of solid governmental and legal institutions," she said.
Kidnappings and murders of their employees in Africa have raised the stakes for Chinese companies operating in conflict zones that Western miners would not touch.
Professor Zha said China has reached a turning point in Africa, out of self-interest. He pointed to the conflict-ridden mess of Chinese oil investments in Angola and Sudan with Angola - China's single largest oil supplier - so problematic that "it's just not worth it".
"It's not because China wants to be nice to other international governments ... but because China is learning that African governments are pretty good at milking the cow."