In this article, I will discuss few events that have taken place in Guinea in the last few months, which have created a difficult environment for iron ore miners to invest in the country.
In April 2014, the Guinean government stripped Beny Steinmetz Group Resources (or BSGR) and its partner Vale (NYSE:VALE) of the mining rights to Simandou and Zogota. The decision was based on the recommendations of the technical committee that accused BSGR of obtaining the rights from the previous regime in Guinea through corruption. BSGR has denied the allegations, and is looking for international arbitration. Vale is seeking a compensation of $1.1 billion from BSGR due to the losses suffered by the company in Guinea.
Rio Tinto (NYSE:RIO), along with Chalco and International Finance Corporation, is developing the 100 million tonnes per annum (or Mtpa) iron ore project in the southern part of Simandou. In February 2014, the company was in talks with sovereign wealth funds of Kuwait and Qatar over a possible investment in a 650 kilometer railway and deepwater port near Conakry for exporting iron ore to China. Last month, the company sued Vale and BSGR alleging that the duo devised a fraudulent scheme to steal its mining rights over the northern part of Simandou.
The Guinean government has allowed Vale to reapply for the mining rights. However, Vale will have to look for a partner to execute the project. Since Rio Tinto sued Vale, it is most likely that they won't join hands in developing the Simandou deposits in the future. If BSGR goes for international arbitration, then it can prevent the Guinean government from conducting the tendering process until the issue is resolved. Also, the legal tussle between iron ore miners may keep investors away from Guinea. This could also delay production at Rio Tinto's project in southern Simandou beyond 2019, since developing of railway line and port is critical for the exporting iron ore from Simandou.
Railway line through Liberia
Liberia has an existing railway line that connects southern Guinea to the Buchanan port. The Liberian deep sea waters allow the use of very large ore carrier vessels in the range from 2 to 3 kilometers (or km) from the coast, while in Guinea the range is about 15 to 20 km from the coast. This offers a shorter and cheaper export route for Guinean deposits like Mount Nimba instead of developing a route across Guinea itself, which would require time and huge capital investment.
In 2013, ArcelorMittal (NYSE:MT) exported 5 million tonnes (or Mt) of iron ore through this railway line. The company claims to have no spare capacity once it completes the capacity expansion of this railway line to 20 Mtpa by the end of 2015. The feasibility study indicates that the potential capacity of this line is about 50 Mtpa. However, the Liberian and the Guinean government have very limited resources to expand the railway, and want miners to bear the related costs. The railway line is critical for Sable Mining Africa Limited (OTC:SBGGF) for exporting iron ore from its Mount Nimba project.
BHP Billiton (NYSE:BHP) will face difficulty in exiting its Guinean iron ore project. In February 2014, B&A Mineracao pulled out of talks to buy the BHP Billiton's 40% stake in Mount Nimba deposits. The Brazilian miner is concerned over the political stability in Guinea and whether the government will allow exports through Liberia.
VBG, the joint venture between Vale and BSGR planned to export iron ore from Simandou through a 350 km railway line across Liberia, which is half the distance stated by a Guinean railway corridor. The Phase 1 of the project involved construction of a connecting railway from Zogota to an existing railway in Liberia. The phase 2 involved building of an integrated new railway and deep-sea port south of Buchanan for exporting 50 Mtpa iron ore from Simandou Blocks 1 & 2. The miners who win these blocks from the tendering process will have to secure approvals from the Liberian and the Guinean government for this route. If that doesn't happen, then transporting through Guinea can make the project economically unviable.
I would conclude by saying that Guinea has rich deposits of iron ore. However, the recent events that have taken place in the country have made it a riskier and costlier investment destination.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.