Vale’s Big Headache In Guinea
Vale (NYSE:VALE) is facing an uphill task at its Zogota iron ore mine in Guinea due to stiff resistance from the local community. Despite the damage caused at the mine in last month’s attack by local villagers, the company said that it remains confident of beginning production by end of the year. The mine was attacked on 30th July 2012 and the damage caused has been estimated between $50-$100 million. Three days after the attack, security forces cracked down on the village of Zogota in an overnight clash that killed at least five people. This has added fuel to fire and made it more difficult for Vale to make peace with the local community. ((Vale says Guinea mine attack will not alter startup plan, Reuters))
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Guinea is the world’s top supplier of bauxite and has attracted billions of dollars of investment into its iron ore deposits, but it remains one of the most politically turbulent and least developed countries on the planet, with tensions evident between mining firms and local communities. Vale said in May that tight credit and the government demand to be awarded a bigger cut by boosting royalties on iron ore production, could ultimately lead it to abandon the Zogota mine project, which taps into the Simandou iron ore deposits.
Significance of Simandou
Simandou, one of the highest-quality untapped iron ore resources in the world, has attracted both Vale and Rio Tinto to Guinea despite the country’s history of volatile dictatorship, weak rule of law, and recurring threats of licence re-negotiations. Rio controls the southern half and Vale the northern half of the concession. Vale controls only 51 per cent of its concession. The remainder is held by Beny Steinmetz Group Resources. ((Vale woos Guinea with social projects, Financial Times))
It is one of Vale’s biggest current projects and is considered key for the company to maintain a leading role as the top global supplier of high quality iron ore, a raw material in steelmaking.Vale delayed the start of its $1.26 billion project, in the country’s south, to the second half of 2012, the company said on July 25 during an earnings presentation. The company expects to be able to produce 2 million tonnes per year from the mine, as reported in its Q2 2012 quarterly report. The production is expected to eventually rise to 15 million tonnes per year. ((Guinea Investigating After 5 Killed Near Vale’s Zogota Site, Bloomberg Businessweek))
Although the demand for iron ore is subdued right now owing to weak macroeconomic sentiments, particularly in China, it is expected that the Chinese government will provide stimulus to the economy in the next quarter which will lead to increased demand in the infrastructure and housing sectors. The long-term outlook for the commodity looks bright on the back of expected demand from emerging countries owing to infrastructure development and auto sales. [1]
Mining companies have always been susceptible to macroeconomic and political risks. Being one of the largest mining companies in the world, Vale cannot remain insulated from such issues. We believe that it can ride through the opposition by paying for education and agriculture in the communities where it mines. Such initiatives will make the local populace a stakeholder in the success of the project.
We believe that the Simandou issue will be resolved sooner or later, given the importance of the project for Guinea itself. The ongoing tussle looks like a deliberate maneuver by the government to extract the maximum royalties for itself from precious resources. The government might be pressurizing Vale to agree to a deal similar to the one it cut with Rio Tinto. Vale has thus far claimed that project economics won’t work for it on those terms.
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Notes:- Vale Q2 2012 Report, Vale Investor Relations [↩]