Vale Loses Mining License, Faces Legal Battles

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Vale (NYSE:VALE), the world’s largest iron ore producer, faces a long drawn out legal battle after mining licenses indirectly held by the company through a joint venture in Guinea were revoked. Compounding Vale’s misery are legal proceedings initiated by Rio Tinto against a host of parties including Vale. Rio Tinto alleges that illegal activities by the defendants led to it being stripped of its mining rights to the northern part of the Simandou concession, which were subsequently granted to Vale BSGR (Guinea) Limited (VBG). According to a Reuters report, Vale has initiated legal proceedings of its own against Beny Steinmetz Group Resources (BSGR), its joint venture partner in VBG.

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The Simandou Story

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The Republic of Guinea recently revoked the mining licenses for the Simandou and Zogota concession areas held by Vale BSGR (Guinea) Limited (VBG), ruling that the licenses were illegally obtained. VBG is a joint venture between Vale and BSGR in which Vale acquired a 51% interest in 2010. Vale itself has not been accused of wrongdoing. [1]

Simandou is one of the world’s largest untapped high-grade iron ore deposits. The ore is so rich in iron that processing costs are expected to be quite low. The challenge in exploiting the Simandou deposit is its location. Located about 700 km from Guinea’s coast, it is estimated that it will cost around $10 billion to exploit the ore. Massive investment in infrastructure is required to transport the ore for export. Vale has already invested about $1.1 billion in the project. [2]

The targeted production of the VBG Simandou project is 50-70 million tonnes per annum of high grade iron ore (>66-68% Iron) when fully developed. Vale would be entitled to about half of the iron ore produced. This is significant when compared to Vale’s total iron ore production of around 310 million tonnes in 2013.((The Simandou Project, BSGR Website))

Rio Tinto was awarded exploration licenses for the Simandou deposits in 1997 and subsequently a mining concession in 2006. The company was stripped of its rights to the northern half of the Simandou concession, which comprised of Blocks 1 and 2, in 2008. The reason given for stripping Rio Tinto of its rights was that it had fallen behind on its development schedule. These blocks were granted to BSGR later in 2008. BSGR sold 51% of its mining interests at Simandou to Vale in 2010.

After the death of President Lasana Conté in 2008, Guinea was under military rule until 2010. Following the return to civilian rule, the government decided to conduct a comprehensive review of all mining licenses. A committee known as the Technical Committee for the Review of Mining Titles and Agreements (Technical Committee) was constituted for the purpose. The Technical Committte concluded that the mining concessions had been obtained through corrupt practices by BSGR. It did not find Vale to be involved in any corrupt practices. The government revoked the mining licenses held by VBG, following the recommendations of the Technical Committee. [3]

Legal Battles

Following the revocation of VBG’s licenses by the Guinean government, Rio Tinto filed a complaint in the United States District Court for the Southern District of New York last week against a host of defendants including Vale. The complaint relates to the loss of its rights to mine in the northern part of the Simandou mining concession in Guinea. [4]

According to a Reuters, Vale itself has initiated arbitration proceeding against BSGR in order to recoup at least a part of its lost investment. We will keep you updated regarding any developments on this front. [5]

The Road Ahead

As per the recommendations of the Technical Committee, the government should re-tender the mining rights to the northern portion of Simandou. The committee recommended that VBG and BSGR be excluded from reallocation of mining titles, but did not exclude Vale. Other mining giants such as Rio Tinto and BHP Billiton have also expressed interest in participating in a tender for mining rights to the northern portion of Simandou. ((Panel Says Guinea Should Strip BSGR, Vale Of Rights To Iron Deposit, Reuters))

The government estimates it can earn $3 billion from re-tendering the mining rights to Blocks 1 and 2. However, in the current environment of weak iron ore prices, that may be an optimistic estimate given the logistical hurdles to iron ore mining in the region.

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Notes:
  1. Vale Informs On Simandou Developments,Vale Press Release []
  2. Guinea Reignites $2.5 Billion Mining Tussle, Financial Times []
  3. Guinea To Review Mining Licenses, Financial Times []
  4. Rio Tinto Files Complaint In United States District Court In Relation To Mining Concessions In Guinea, Rio Tinto Press Release []
  5. Vale Launches Arbitration Against BSGR Over Lost Guinea Funds, Reuters []