First Rio, Now Rusal, is Guinea Driving Away Foreign Investors?

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M&A Activity, Non-ferrous Metals

In a graphic illustration of why a leading CEO of a mining company once quipped, I would not invest in any place I would not go on vacation to both Rusal and Rio are going through gut wrenching reviews of major capital projects in Guinea. The West African country itself went through a bloodless coup following the death of President Lansana Conte last December and with him the end of a 24 year regime. His replacement, Captain Mousssa Dadis Camara has been very vocal on his domestic turf calling for fundamental reviews of mining concessions and previous sales contracts. Though this sounds like typical despot saber rattling, it is possible the military regime may have grounds for a review.

Rusal purchased the Friguia Alumina Refinery, Guinea’s biggest capital project, in 2006 for $19m from the previous regime. The refinery, which employees 1000 people, has a capacity to produce 640,000 tons of alumina per year. The Camara’s military regime claims the refinery was worth $250m and they don’t think they are being unreasonable in asking for a review. By way of comparison, Rio is having to invest $750m to build a 1.4m ton refinery in Australia, working out at $535/ton of capacity. On that basis, Friguia’s real value could be $340m, allowing for the fact a refinery in Australia will be worth more than one in a West African state. For obvious reasons, the regime’s figure of $250m is not unreasonable. We have no details of debt or other costs associated with the sale to Rusal but on the face of it $19m does sound awfully cheap.

Though Rio is not involved in Guinea’s bauxite or alumina reviews, they are caught up in a different problem over an iron ore concession called Simandou in which they were given exclusive rights to and on which they have invested to date some $450m in exploration costs. Simandou has the potential to be one of the world’s biggest and highest quality iron ore sources so one can understand Rio’s dismay when in the closing weeks of the previous regime they awarded a large portion of Simandou to BSGR, a company with no history of producing iron ore or it would appear  any significant mining operations apart from diamonds. The regime’s position is that Rio is sitting on Simandou and not developing it. The ore is worthless to the state lying in the ground and having two companies with access to acreage increases the chances of an early start to the project. Although one can sympathize with a poor country wanting to maximize its natural resources, the fact remains, if Rio cannot make further investment in an iron ore mine viable in the current market what hope does a newcomer like BSGR, who incidentally also have bauxite concessions in Guinea standing idle? One cannot help feel there is more to this story than meets the eye, but Rio and the regime appear at a standstill over the issue.

The west coast of Africa is quite possibly the richest source of minerals in the world. Large and as importantly high grade reserves of copper, cobalt, bauxite, iron ore, coal, diamonds and oil lie in many West African states, not to mention many minor metals such as tantalum, molybdenum, uranium and so on. But whilst political, legal and social instability are the norm the risk premium associated with investments in the area will continue to act as a drag on meaningful realisation of this wealth, particularly in times of low metal prices.

–Stuart Burns

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