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ANALYSIS: Iron Ore Majors Give Guinea the Green Light – Political Stability a Minor Issue

May 12, 2010

ANALYSIS-Iron ore majors give Guinea the green light
   
Thursday May 13, 2010 05:14:10 AM GMT

GUINEA-MINING/ (ANALYSIS)

* Mining majors spending billions despite political crisis

* Investors shrug off contract threat from opposition

* Guinea wants to add iron ore to mineral export list

By Daniel Magnowski and Saliou Samb

DAKAR/CONAKRY, May 12 (Reuters) – A deal between the world’s top iron ore miner Vale and BSG Resources to build a massive mine in Guinea is the latest sign that resources firms care more about what lies underground there than chaotic politics on the surface. April’s $2.5 billion accord was the second mega-deal in Guinean minerals this year, after Rio Tinto agreed in March a $2.9 billion joint venture with China’s Chinalco, also to develop an iron ore mine.

The contracts are remarkable because many potential investors had been holding off financing major new projects since a 2008 military coup which pitched Guinea, poor despite being the world’s biggest exporter of aluminium ore bauxite, into a prolonged political crisis.

While mining firms already working in Guinea continued doing so, the government said the political situation was at least partially responsible for a downturn in mineral exports in 2009.

Conventional wisdom has it that investors prefer to put their money into stable countries, ideally with elected governments and strong governance records.

But political stablility is a minor concern compared with size and quality of resources, and with iron ore prices in key market Asia recently hitting their highest in almost two years, demand for the steelmaking material justifies investment in countries with high-grade deposits.

“As long as it doesn’t affect the physical safety of staff, it doesn’t matter,” said Lydie Boka, manager at StrategiCo, a French firm which specialises in assessing the risks of doing business in Africa.

She said that even in locations such as the Niger Delta, where violence and kidnappings are frequent, resources firms such as Total and Chevron still work in great number.

In Guinea, concerns revolve around security of title rather than attacks on workers, but recent history shows that even when a serious sanction is supposedly invoked, work can continue.

A Guinean court said last year RUSAL’s 2006 purchase of the Friguia alumina refinery was illegal, a decision endorsed by Mines Minister Mahmoud Thiam.

The two sides are now talking about how to resolve their differences, but at no time has Guinea demanded RUSAL stop working, or hand over operational control. The only events that have interfered with production at Friguia have been strikes by RUSAL’s own workers, and protests from the local population.

The Vale acquisition will give it access to properties with reserves that include the Simandou South property known as Zogota as well as exploration blocks Simandou North 1 and 2.

Output will begin in 2012 with 10 million tonnes of iron ore and reach 50 million tonnes by 2015, Vale said, declaring it was tapping into “among the best deposits” of iron ore in the world.

POLITICAL THREAT DOWNPLAYED

When an opposition politician said last week that, were he to win the presidential election scheduled for June, he would consider the Zogota deal invalid, BSG Resources, Vale’s junior partner in the iron ore project, dismissed that threat.

“These comments come from an isolated voice from a virtually unknown party and the entire government of Guinea, which includes the main opposition, has endorsed the Convention de Base (agreement),” a spokesman said in response to emailed questions.

“The process followed the standard procedure set out in Guinea’s mining code … In addition, the (acting) President has now signed and issued a Presidential decree ratifying the Convention de Base. This has been a thorough and detailed process and the Convention de Base is a legally binding document between the Republic of Guinea and BSGR (Guinea),” the firm said, echoing comments from Vale..

Mines Minister Thiam, seen by many analysts as a moderate voice, wants the deal to be viewed as a green light for more investment in Guinea, which sits on gold as well as bauxite and iron ore.

“Guinea will be a player on the world iron market within four years, and could be the number three producer in six years,” he said. “This decision will also kick-start other mining projects in Guinea.”

(Editing by William Hardy)

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