ANALYSIS: Another twist in the Simandou saga

After years of legal wrangling, seismic corruption scandals and a military coup, Rio Tinto has decided to abandon its plans to develop the Simandou iron ore mine in Guinea. One of the most sought-after and potentially lucrative mineral deposits in the world has now become a millstone, too burdensome for even a mining giant to bear.

Rio’s decision to cut its losses was undoubtedly the depressed global demand for iron ore amid the severe downturn in Chinese steel production. The firm’s CEO said the cost of developing the $20bn mine is simply unjustifiable because iron ore prices are unlikely to recover within the next decade. But the principle reasons why the project never got off the ground, despite Rio having acquired an exploration permit in 1997, are indicative of the major risks facing businesses considering investing in many parts of West Africa.

Corruption Issues

Simandou has been synonymous with allegations of corruption ever since former dictator Lansana Conté revoked Rio’s permit in 2008 and controversially handed the concession to Israeli firm, Beny Steinmetz Group Resources (BSGR), on unusually favourable commercial terms. The bizarre deal with a company that had no history of mining iron ore sparked numerous investigations into whether BSGR bribed the Guinean government to secure the licence.

Indeed, Conté’s fourth wife, Mamadie Touré, subsequently told US investigators that she had received cash and shares to advance BSGR’s cause. With little recourse to appeal the decision in Guinea, Rio Tinto undertook legal action in the US against BSGR over the loss of its mining rights. BSGR’s decision to sell 51% of its stake to Vale in 2010 further complicated the matter, spawning yet more costly litigation that has dragged on for years and hindered Simandou’s development.

Allegations of this kind are far from isolated, as demands for bribes are rife throughout the region. Of the 15 countries in mainland West Africa, 14 are categorised as either extreme or high risk in Verisk Maplecroft’s Corruption Index 2016-Q4; Ghana is the only nation to earn a medium risk score.

During the past year, allegations of corruption have hit several mining companies operating in the region. In May, international NGO Global Witness claimed that Sable Mining secured an exploration licence in Liberia by paying over $950,000 in bribes via its Liberian lawyer, Varney Sherman. Sherman, who was chairman of the ruling Unity Party at the time of the deal, reportedly told Sable it would need to bribe influential stakeholders to obtain a concession to mine the Wologizi iron ore deposit. Sable refutes these claims.

Sable’s share price has more than halved since the revelations and company executives are now facing legal action over their alleged involvement. And just last month, Rio itself sacked two senior executives after an internal investigation reportedly uncovered evidence of illicit payments worth $10.5m in relation to Simandou. These examples highlight how corruption can significantly increase costs for firms investing in West Africa and jeopardise their reputations.

Government Change

Despite the litigation and numerous investigations concerning Simandou, it was the coup d’état in 2008 that ultimately proved pivotal for the companies involved. The military takeover following Conté’s death paved the way for the election of Alpha Condé as president in 2010.  After initiating its own inquiry into BSGR’s acquisition, Condé’s government concluded that Steinmetz’s firm had paid bribes to win the concession. It rescinded the permit, allowing Rio to regain its exploration rights from BSGR and Vale.  

Other cases show that dramatic and unanticipated instances of government instability can have serious consequences for investors. For example, in Burkina Faso the abrupt end of Blaise Compaoré’s 27-year rule in 2014 and the subsequent election of a more reform-minded administration have created a major headache for Pan African Minerals. The company is now in danger of losing its exploitation permit for the Tambao manganese deposit.

In November 2016, a Burkinabè parliamentary inquiry determined that Pan African had paid bribes to secure the concession from Compaoré’s administration in 2012; the leaders of the inquiry also recommended that the present government withdraw the company’s licence. With disputes over the construction of transport links to service the mine further souring relations between the firm and the state, the matter appears to be heading for international arbitration.

Sudden changes of government remain a salient risk to investors across West Africa. However, the threats are far from uniform. Verisk Maplecroft’s Government Stability Index 2016-Q4 reveals a large range in the degree of risk, in contrast to the corruption ratings. Whereas perennially unstable Guinea-Bissau scores as low as 3.40/10.00, neighbouring Senegal – one of the few African countries never to have experienced a coup – receives a score of 9.31.

The Simandou and Tambao mines have failed spectacularly to live up to investors’ expectations thus far. The fact that in both cases the mineral wealth remains in the ground serves as a powerful reminder of how a potent mix of corruption and political upheaval can undermine business plans. It remains to be seen whether Chinese state-owned metals producer, Chinalco, which has agreed a preliminary deal to buy Rio Tinto’s stake in Simandou, is able to finally make a success of the project.

Seán Smith, West Africa Analyst at global risk advisory company Verisk Maplecroft