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Posts Tagged ‘Simandou’

Vale woos Guinea with social projects

July 11, 2011 Comments off

“Vale’s finance chief said the Brazilian miner would invest in development programmes in Guinea in an attempt to safeguard a $2.5bn mining concession and avoid making a large pay-out to the African country’s new government. In spite of still being vulnerable to a review of mining licenses in Guinea, Guilherme Cavalcanti said that Vale could win the government’s approval for its Simandou iron ore project that it shares with rival Rio Tinto by paying for education and agriculture in the communities where it mines.

‘Our approach to Africa in Guinea is not to become only a mining extraction [company] but bring country co-operation,’ he said. ‘So, as we do in Mozambique, we can help people in agriculture, we can help in education, we can train local people … So it’s more an approach to communities as well, not only mining extraction.’

Rio Tinto only gained clear tenure in Guinea in April after promising the government $700m in cash as well as rights to take up to a 35 per cent stake in Simandou. Simandou, one of the highest-quality untapped iron ore resources in the world, has attracted the two largest iron ore miners to Guinea despite the country’s history of volatile dictatorship, weak rule of law, and recurring threats of licence renegotiations.”

Source: Financial Times, July 6 2011

Observations:

  • The Simandou deposit is divided into 4 blocks: Vale controls blocks 1 and 2 with the Benny Steinmetz Group (BSG) as minority shareholder; Rio Tinto controls blocks 3 and 4 of the Simandou deposit, working together with Chalco. In an earlier stage Rio Tinto held title to the full deposit, but the Guinean government cancelled this deal.
  • In a review of mining licenses announced in March the Guinean government requires a minimum of 33% of ownership of strategic mining projects in the country to increase government control.
  • Rio Tinto struck a deal on the redistribution of ownership at the end of April, setting up a long term phased process of acquisition of ownership by the government. Furthermore the company agreed to a conditional one time $700mln payment to the government and promised to develop a railway to export the ore via a Guinean port.

Implications:

  • The social projects promised by Vale are a mere hygiene factor in the negotiations about transfer of ownership. The government will clearly expect any operating partner to take an active role in community development. However, Vale’s experience with large scale operations in developing areas in Brazil and Mozambique might help to gain trust.
  • Most likely Vale will agree on a conditional and phased deal similar to Rio Tinto’s agreement with the government. The agreement will be designed to make any payments or ownership deals conditional on crucial milestones and actions by the government. Vale will still need to decide on a way to export the ore, either negotiating to use the railway build by Rio Tinto, or setting up the infrastructure to export via Liberia.

©2011 | Wilfred Visser | thebusinessofmining.com

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Rio Tinto signs agreement with Guinean government

April 25, 2011 Comments off

“Rio Tinto’s most troubled mining project appears poised for multibillion-dollar development after the company agreed to pay $700m to the government of Guinea and grant it a 35 per cent stake in its iron ore mine. The deal was reached on Friday ahead of plans by Guinea, a west African country rich in iron ore and bauxite, to review all mining licences as part of its push to secure bigger returns from its mineral wealth.

Vale and other multinational miners active in Guinea now have a precedent for their negotiations with the government. Vale, the Brazilian company that is the biggest iron ore miner, paid $2.5bn for a stake in a Guinean deposit last year. Rio’s deal allows Guinea to move towards a 35 per cent stake in Simandou, the iron ore deposit – located in a remote corner of the country – that is thought to be one of the world’s best untapped lodes of the ore.”

Source: Financial Times, April 23 2011

Observations:

  • Last month Guinea announced a review of mining licenses, including the demand to get minority stakes in all major mining projects in the country.
  • Rio Tinto controls blocks 3 and 4 of the Simandou deposit, with Brazil’s Vale controlling blocks 1 and 2. First shipment of iron ore by Rio Tinto is expected by mid-2015.

Implications:

  • The agreement of Rio Tinto to construct a railway through is a major blow for the government of Liberia, which hoped to convince the miners to export the ore with a shorter route via Liberia. The decision on the export route will further trigger challenging negotiations with Vale about using the same infrastructure to export ore from the area.
  • The 35% government stake can be build up over time, with the final 10% to be bought at market value in 15-20 years time. Tax rate is set at 30% after the first 8 years, with additional 3.5% royalties. The $700mln payment is only made conditional on granting the concession and approving the Rio Tinto / Chalco joint venture. Based on these conditions it appears Guinea intends to be a friendly host to international mining companies in the long term, but requires strict payment and infrastructure development contribution in the short term.

©2011 | Wilfred Visser | thebusinessofmining.com

Guinea to review mining licenses

March 7, 2011 Comments off

“Guinea is planning a comprehensive review of its mining licences that could disrupt a $1.35bn iron ore agreement between China’s Chinalco and Rio Tinto, a $2.5bn iron ore acquisition by Brazil’s Vale, and a slew of smaller mining deals in the mineral-rich west African state.

All mining companies in Guinea will have to submit to higher standards of transparency in order to invest, as will the countries from which they originate, according to a joint statement from Alpha Conde, Guinea’s new president, and George Soros, the billionaire philanthropist who advised him.

‘All contracts will be reviewed and reworked by the beginning of the second half of this year,’ said a senior official from Guinea’s ministry of mines at a conference in Paris on Thursday. ‘The government will become a minority shareholder in all mining contracts.'”

Source: Financial Times, March 7 2011

Observations:

  • According to the new licensing structure all foreign investors and their host countries will need to subscribe to the WorldBank’s EITI (Extractive Industries Transparency Initiative). Furthermore the government will request minority ownership of all projects.
  • The most important mining project in the country is the iron ore complex around Simandou and Kalia. Rio Tinto and Chinalco, Vale, and Bellzone and CIF hold licenses to various blocks of the complex, from which production should start within 2 years.

Implications:

  • China and Chinese companies, as brought in by Bellzone and Bellzone, don’t subscribe to the EITI yet. This could lead to significant development delays and/or break-up of consortia. It is unlikely that the government will push the large foreign investors out of the projects, as they need the foreign money to get the projects going.
  • In the Economist’s country operational risk benchmark, Guinea ranks 149th out of 149 countries, tied with Iraq. The 10 risk categories included in the benchmark are: security; political stability; government effectiveness; legal and regulatory; macroeconomic; foreign trade and payments; financial; tax policy; labour market; and infrastructure. Next to the changing regulatory environment the infrastructure risk is important for Simandou’s projects, as Guinea and Liberia are fighting over the port to be used for shipping the ore and the way the ore should be transported to the port.

©2011 | Wilfred Visser | thebusinessofmining.com

Vale reports record full year financials

February 28, 2011 Comments off

“Vale, the world’s largest iron ore miner, reported record net profit for last year as demand remained strong in China and nickel volumes recovered. The company on Thursday said it earned net profit of $17.26bn in 2010, more than three times what it made a year earlier, as sales reached $46.48bn, nearly double the $23.94bn of revenue in 2009.

Asia accounted for more than 53 per cent of operating revenue, with China contributing more than 33 per cent and Japan 11 per cent.”

Source: Financial Times, February 25 2011

Observations:

  • Revenue for 2010 is 21% higher than the previous record of 2008. EBIT, EBITDA and Net Earnings are up over 30% since 2008 as the EBITDA margin increased by 6%, mainly driven by higher iron ore prices. Earnings per Share of $3.25 are on the top side of analyst expectations.
  • The company is working on iron ore expansion projects in Carajás (Northern Brazil) and the new Simandou deposit in Guinea. Apolo (Brazil’s Southeast system) and Carajás Serra Sul are further down the line of expanding production, planned to be delivered in 2014. Ferrous minerals accounted for 92% of adjusted EBIT over 2010, showing the company’s large dependence on iron ore prices.
  • Expansion for non-ferrous commodities mainly takes place outside Brazil: Mozambique’s Moatize coal project; Zambia’s Konkola North copper project; Argentina’s Rio Colorado fertilizer project; and Peru’s Bayovar fertilizer expansion signify the increasing international presence of the company.

Implications:

  • The improved gross margin of the company does not indicate it has costs under control, but mainly that prices were higher. Vale did not suffer from exchange rate fluctuations as much as its peers as most of its costs are incurred in currencies linked to the dollar, but it mentions cost pressures in the areas of depreciation (resulting from expansion of the equipment fleet) and in procurement.
  • Cash position of $10bln at the end of 2010 and the outlook to beat last year’s cash flow from operations of $20bln in 2011 gives Agnelli a lot of flexibility in expanding. Vale will have to use the pile of cash to build a sustainable position among the supermajors even if iron ore prices come down. As the senior management indicates no major acquisitions will be done, the company will focus on organic growth (33 projects to be delivered by 2015) to achieve this objective.
  • When presenting the results no mention was made of election of a new CEO for Vale. Reelection of Roger Agnelli when his current term ends in March is not fully certain as tensions with the government are mentioned. Henrique Meirelles, Brazil’s former central bank governor, and base metals chief Tito Botelho Martins would be potential candidates to succeed him. The decision will have to be made by the powers behind Vale: the Brazilian government, Pension fund Previ and Banco Bradesco, and Mitsui.

©2011 | Wilfred Visser | thebusinessofmining.com

Guinea: Mining Fight Shows Pressure on Multinationals

January 28, 2011 Comments off

“Alpha Condé, the new president of Guinea, pledges to do what none of his predecessors have: Harness vast iron-ore reserves contained in the Simandou mountain chain to give the West African country one of the continent’s most prosperous economies.

To succeed where others have failed, Mr. Condé is revisiting an existing Simandou mining contract with Anglo-Australian miner Rio Tinto, as well as other pacts signed by his predecessors. Foreign investors, no matter how big, will have to follow rules or leave Guinea, he says.

In Guinea, the Simandou contracts are just some of several that are under review in disputes with companies from Russia, China and the U.S. And the outcome of the Simandou dispute is likely to rattle at least one powerful international investor: either Rio Tinto or rival Vale SA of Brazil. Aluminum Corporation of China also has a dog in the fight.”

Source: Wall Street Journal, January 27 2011

Observations:

  • Rio Tinto has teamed up with Chinalco to develop its part of the Simandou deposit (although it is still unclear which part it is exactly entitled to). The Chinese pay $1.35bln for infrastructure development, giving it the right to buy the ore from Rio Tinto.
  • The Guinean government is keeping a close watch on the development plans, pressuring the companies to file plans and start investments, threatening to revoke licenses granted in earlier stages.

Implications:

  • The export of the Simandou iron ore is an interesting case of shared responsibility of corporates and government in infrastructure development. The shortest route to the sea would be a direct link through Liberia, but the infrastructure development to ship the ore through a Guinean port is one of the main benefits the Guinean government could achieve from the involvement of the foreign companies. The government will therefore have to find a balance in pressuring the companies to invest and investing itself to convince the companies to skip the Liberia-alternative.
  • Vale smartly managed its transaction of BSG’s share of the Simandou asset by making 80% of the $2.5bln payment conditional on achievement of specific milestones, limiting the country risk it is exposed to. These types of conditional deals are likely to be the way to move forward in order to limit risk in many countries that are struggling to become more stable and attract investment.

©2011 | Wilfred Visser | thebusinessofmining.com

Disquiet over ENRC’s purchase of Congo assets

September 7, 2010 Comments off

“Anger is growing among London’s investor community over the decision by a FTSE 100 miner to buy a disputed copper project in the Democratic Republic of Congo.

Eurasian Natural Resources Corp, the London-listed Kazakh miner, last week bought a majority stake in a collection of Congo mining assets that includes the controversial Kolwezi project.

First Quantum Minerals, a Canadian copper miner, is fighting what it sees as the Congo government’s expropriation of Kolwezi and other assets. First Quantum and its partners spent $700m developing Kolwezi until September 2009, when a government prosecutor shut down the project citing contract violations. “

Source: Financial Times, September 3, 2010

Observations:

  • ENRC paid $175mln for a controlling stake of the asset that has been partly developed by Quantum Minerals. The government of Congo seized the asset after Quantum invested $700mln. The company and the government disagreed on the rights given to the company for prospecting and/or mineral extraction.
  • ENRC is strongly integrating vertically, buying mining assets around the world. The potential IPO of Zamin would make the ENRC benefit from the capital this would free up to develop the Bamin iron ore deposit in Brazil, one of the most important projects.

Implications:

  • Though the Kolwezi asset is a financially attractive asset many miners refrained from bidding as the government’s action against Quantum was regarded to violate the business code. Many miners will have been afraid of similar future action of the government in case they would buy the asset.
  • This year the government of Guinea decided to take part of the rights to the Simandou deposit away from Rio Tinto, saying the company did not honor the investment agreements made earlier. Redistribution of these rights have not yet led to a reaction in the mining industry that would hurt the reputation of a future owner of the rights.

©2010 | Wilfred Visser | thebusinessofmining.com

Top 10 Priorities of Vale’s CEO Roger Agnelli

September 2, 2010 2 comments

Roger Agnelli

What are the things the CEO of the world’s second largest mining company is worried about? What is Vale’s CEO Roger Agnelli doing to catch up with BHP Billiton? What is on top of his “To Do”-list?

An analysis of Vale’s latest annual and financial reports, investor presentations and the news about the company in the last months yields a list of 10 issues that are likely to be at the top of Agnelli’ list of priorities.

The list holds strategic, operational, financial and relational activities, each of which are scored in terms of importance and urgency. Priority 1 on the list is trying to prevent BHP’s acquisition of PotashCorp. Priority 10 is managing breakthrough innovation of copper processing in Carajás. Read on for the full list of priorities.

1. Assess opportunities to prevent BHP Billiton’s PotashCorp acquisition

BHP Billiton has made a hostile $39bln acquisition offer for PotashCorp, thus following Vale’s move of entering the potash business as a diversified miner. However, the potential changes to the market and to potash pricing (currently controlled by regional cartels) are likely to make Vale’s potash assets uncompetitive. Although the company has denied being in talks with PotashCorp to find alternatives, Agnelli will certainly devote a large portion of his time to finding a response to BHP’s offer.

2. Manage integration programs to reduce costs

Vale has grown rapidly partly because of a large number of acquisitions. Insiders comment that many of the acquired companies have never been integrated completely, creating operational inefficiencies and a lack of corporate culture. To sustain growth, Agnelli will be working hard on realizing the synergies from acquisitions by building global businesses. Part of this assignment is the carve-out of the aluminium business, which has been sold to Norsk Hydro this year.

3. Anticipate on Brazilian election results

Brazil will elect a new president, senate and governors on October 3rd 2010. Both economic policy and environmental policy on federal and state level could be impacted significantly by election results. Agnelli is certainly developing scenarios to react on post-election regulatory changes.

4. Study increase of gearing in order to accelerate growth

The company has traditionally grown by M&A, but is currently guarding its gearing carefully. However, in order to enable further acquisitions, Agnelli will be discussing increasing the gearing and accessing debt with the new CFO Cavalcanti, who took over from Fabio Barbosa at the end of June, and banking partners.

5. Compete for position in China

Compared to BHP Billiton and Rio Tinto, transportation distance poses a disadvantage to Vale in supplying iron ore to China. While Rio Tinto is creating strong ties with Chinese government via its partnerships with Chinalco, Vale will need to find alternative ways to improve relationships with clients and government in the country that is responsible for most of the growth in demand of its products.

6. Manage development of Guinean iron ore deposits

An important part of the growth of the iron ore production in the next decade should be coming from Guinea, where Vale will develop the Simandou South deposit. Vale will need to get infrastructure in place and start development soon in order to please the government, which recently took development rights away from Rio Tinto because the company was not proceeding fast enough.

7. Reduce iron dependence

Growing the copper business unit and building a fertilizer business are two of the ways in which Vale tries to reduce its dependence on iron ore. Although the iron ore business is a star business with solid growth perspectives, the volatility caused by the dependence on one single commodity will worry Agnelli. Diversification into other business units is crucial for the long-term stability of the company.

8. Gain access to coal in Latin America

Although a lot of iron ore is shipped to China, Brazil is booming too. In order to produce steel for the domestic market, Vale needs to develop coal capacity in Latin America, which will require strategic acquisitions and targeted exploration.

9. Manage employee relations after Vale Inco strike

The board will need to prevent repetition of strikes like they experienced at Vale Inco during the last two years in Canada. Reviewing and improving international employee relations is both crucial for the company’s productivity and to improve the image in labor market, where Vale still has difficulties to attract international management talent.

10. Manage technological processing innovation for copper in Carajás

The company is trying to scale hydrometallurgical copper processing technology to commercial level in the Carajás UHC plant. Success in this project would have significant profit impact and would position Vale with the current deposits in development as one of the most competitive copper producers globally.

Sources: Vale annual report 2009, Vale summary review 2009, Vale investor presentation February 2010