Guinea's New Mining Policies: Rio Tinto Pays $700 Million for Iron Ore Project, Vale Loses Rail Project

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Written by Richard Finlayson, Senior International Editor for Industrial Info--Representatives of the Guinean government and mining officials are due meet in May with international mining companies and stakeholders to discuss the country's new mining code. The new code will seek to root out corruption in mining contracts, create transparency in mining plans and increase the direct interest of the state in mining ventures.

Two companies are already experiencing shifts in their project plans for the Simandou iron ore deposit because of the government decisions. Vale SA's (NYSE:VALE) (Rio de Janeiro, Brazil) $1 billion project to rebuild the 6,400-kilometer rail line from the capital city of Conakry on the Atlantic coast to Kankan in the southwestern interior has been cancelled by president Alpha Conde and will now be opened to competitive bids.

At Rio Tinto plc's (NYSE:RIO) (London, England) Simandou iron ore project, Rio Tinto has agreed to pay the Guinea government $700 million and allocate 15% of the project to the government for no cost. The government will also have the right to purchase an additional 20% in the project.

There will be opportunities for the government to increase its stake in the project in five-year stages over a 20 year period. Rio Tinto's subsidiary, Simfer SA, will pay the $700 million to the Guinean public treasury upon promulgation of presidential decrees granting its mining concession and approval of the proposed Chalco and Rio Tinto Simandou joint venture. Aluminum Corporation of China Limited (NYSE:ACH) (Chalco) (Beijing, China) will acquire a 47% interest in a new joint venture by contributing $1.35 billion on an ongoing earn-in basis within a period of years.

In August 2010, Rio signed a binding agreement with Chalco for a joint venture to develop and operate the Simandou iron ore project. Included in the initial plan was a 700-kilometer rail line to Conakry to carry 95 million tons of high-grade sinter fines to a new deepwater port to be constructed at Conakry. The state has the right to 51% of infrastructure developments and will take control of the port after a period of 25 to 30 years.

The mine project will enjoy an income tax holiday for the first eight years of operation, followed by a general tax rate of 30%. Royalties will be payable at 3.5% free on board (FOB) for all exported ore. Simfer will be exempt from withholding tax on dividends. All imported goods used in construction and maintenance will be exempt from value-added tax (VAT) and customs duty.

Sam Walsh, the chief executive of Rio's Iron Ore group, said, "The agreement gives us the certainty we need to allow us to invest and move forward quickly so we can bring this great resource into production and deliver its benefits to the Guinean people and Simfer stakeholders. This is a major project and a significant undertaking and we expect a total investment of more than $10 billion to bring the mine and associated infrastructure on stream."

The first shipment of iron ore from the project is scheduled by mid-2015 but the first production tonnage could be advanced to the end of 2014. The agreement covers the southern concession of Simandou, known as blocks 3 and 4. The total Simandou resource, consisting of northern and southern deposits, is estimated at 2.25 billion tons of high-grade iron ore.

The rights to two more blocks of Simandou have been in dispute between Vale and Rio, and talks between the two companies and the government are ongoing. The cancellation of the Vale-sponsored rail line and infrastructure proposals by Rio may overlap. All the government will currently say is that all previously signed joint venture agreements will come under review.

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