Diversified miner Rio Tinto had touted its Simandou iron ore project in Guinea as one of the group's key growth projects. It had also used the strength of the prospect in south eastern Guinea, together with the Oyu Tolgoi copper project in Mongolia - to defend itself against a hostile takeover bid from archrival BHP Billiton, recently dismissing an offer of 3.4 BHP shares for each Rio share as not reflecting the strength of its project pipeline.
But a number of issues are likely to be changed or reversed altogether as the West African country begins a process of reviewing mining agreements sealed with companies looking to develop its resources. Rio Tinto's shares shed A$1.45, or 1.1%, over Tuesday's trading figures to A$132.10 in Australia Wednesday as the company announced that a Guinean presidential legal advisory team was conducting a review of the mining concession for the US$6-billion project.
The world's second largest producer of iron ore had received a letter from the secretary general of the president's office querying the validity of the decree that issued the mining concession for the project.
The mineral endowed West African country, which also boasts the world's largest reserves of bauxite believed to be about 30% of the global total, announced in April that it would review mining agreements, saying the move was in response to bullish commodity prices. But no-one suspected that Rio Tinto would be the first target given that iron ore mining in the country is still a developing sector.
Guinea's move also affects Russia's Rusal, which operates the Friguia alumina and bauxite complex at Fria that refines 1% of the world's alumina. The government recently warned Rusal, the world's largest aluminium producer, that it risked losing Friguia if it did not successfully renegotiate a share transaction with the West African state.
Rio Tinto, in partnership with the International Finance Corporation, plans to develop a 70-million ton a year mine at Simandou, which could be ramped up to 170-million tons a year.
It however said the letter from the government referred only to a review by the presidential legal advisory team that queries the validity of the decree that granted it the concession in 2006, not the validity of the Rio Tinto Simandou 2002 Mining Convention, which had been approved by law.
Rio Tinto is confident that its convention and concession are in all respects in conformity with Guinean laws in their current form, the group said in a statement to the Australian Securities Exchange Wednesday. This view is also supported by a letter from the president of the National Assembly in Guinea.
Rio Tinto has complied with its obligations under both the convention and concession, and the letter from the Secretary General of the President's Office does not dispute this fact.
This development is likely to play in the hands of predator BHP, which has been arguing that some of the growth projects Rio Tinto is touting are on paper and in high-risk investment countries.
Rio Tinto has already experienced headaches associated with investing in high-risk countries. Recently, its partner in the Oyu Tolgoi copper project, Ivanhoe Mines warned that the Mongolian government was contemplating taking over a 50% share in profits or production from the US$7.3-billion project in a move aimed at kick-starting the stalled approval of an investment agreement on the mine.
Last month Rio Tinto unveiled a 2.25-billion ton resource for Simandou, with its CEO of iron ore Sam Walsh commenting that the project represented a major new iron ore province that was strategically located to give the company access to the Atlantic Basin and the ‘fast-growing' Middle Eastern market.
But the iron ore project lies 750 kilometres from the sea and the lack of infrastructure in that area would be a challenge that will only be solved by constructing, from scratch, a railway line to ferry the ore to the cost for export.
Before the Guinean government move, the company had expected to make an investment decision on the project in 2009, with first ore production at an initial rate of 70 million tons per year expected 2013. It said it had already spent US$300-million on the project to date and had 1200 people on the ground conducting resource and infrastructure studies.
It was in discussions with senior government representatives to resolve what it considers to be issues based on the misinterpretation of the Simandou mining convention'', it said.