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As the Guinean Mining World Turns: Rio’s $700M Payment to Gov’t. Faces Scrutiny

May 22, 2011

Rio’s $657m payment to Guinea government faces scrutiny

Matt Chambers
From: The Australian
May 21, 2011 12:00AM

THE end use of a $US700 million ($657m) payment Rio Tinto has made to the Guinea government will be independently audited but is expected to face increased scrutiny as British and US regulators toughen their stances on companies operating in other nations.

It is understood the recently elected Guinea government has indicated to Rio that the money will go to a national emergency plan designed to improve water, electricity, food security and education.

It is also understood that in the payment agreement, which was signed on Good Friday, President Alpha Conde has agreed to undertakings to guard against improper use, including to submit the use of the funds to independent audit and to publish the results.

But neither Rio, 5 per cent project owner the International Financial Corporation (a unit of the International Monetary Fund), future partner Chalco nor Guinea has put their name to a public statement on what will happen to the payment.

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Related Coverage

China Inc shows its subtle side The Australian, 29 Apr 2011
Rio signs another JV with Chinalco The Australian, 27 Apr 2011
Brief cases: Toyota drives on after rise The Daily Telegraph, 25 Apr 2011
Rio, Guinea reach deal on Simandou Perth Now, 25 Apr 2011
Rio seals deal but on Guinea’s terms The Australian, 24 Apr 2011

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Guinea is one of the riskiest countries in the world to do business and is ranked 164th of 178 countries in Transparency International’s 2010 global corruption perception index.

Corporate lawyers specialising in mining and corporate governance told The Weekend Australian that while there was no indication of anything untoward in Rio’s payment, they expected it would come under global regulatory scrutiny.

One corporate mining lawyer said deals in countries with lower rankings on the corruptions perception index would come under a brighter spotlight from regulators in Britain and the US as enforcement tightened.

Big miners, such as London and Australian-listed Rio, operating in Third World countries were likely to receive close early scrutiny he said, adding that the Simandou deal was likely to be a prime candidate.

Another lawyer said the British Bribery Act, that will come into effect in July, was designed to look more closely at deals such as the Rio one with Guinea. The act will be among the strictest in the world. The US is also boosting enforcement of its Foreign Corrupt Practices Act.

To deal with any ethical or governance concerns, Rio’s payment is understood to have been directly made to the Guinea State Treasury.

The audits to be done on the payment will be in line with the global Extractive Industries Transparency Initiative guidelines designed for miners to avoid corruption when dealing in developing countries.

Rio’s competitor BHP Billiton has found itself under scrutiny in this area, coming under investigation last year from the US Securities and Exchange Commission over potential corruption involving up to $US3.5m of payments made in Cambodia from 2006 that a government official there had publicly referred to as “tea money”.

That investigation is ongoing.

If approved for development, Simandou would be the largest iron ore mine developed in one hit anywhere in the world and would be Africa’s largest private infrastructure project.

Big miners favour development of major projects in countries with stable legal and operating environments, such as Australia, Canada or the US. But increased demand and a lack of new discoveries is pushing them further into areas like Guinea.

After it was elected in November last year, the Conde government renegotiated the old Simandou deal with Rio and the Chinese state-owned Chalco, which has an agreement to buy nearly half of Rio’s stake.

The government received $US700m, according to Rio, “in recognition of all outstanding issues and the finalisation of new investment agreement terms”.

The Guinea military government that was overturned in the November elections had issues about how long Rio was taking to develop the project and had already taken two of the miner’s four Simandou tenements. As well as the cash payment, Rio, Chinalco and 5 per cent owner the IFC agreed to give Guinea 15 per cent of the project at no cost to the government, 10 per cent at something called “historic cost” and the right to buy an extra 10 per cent at market value.

Rio is targeting 95 million tonnes a year of high-grade iron ore exports starting in mid-2015 from Simandou at a cost of more than $US10 billion. This is just less than half of what Rio’s big Pilbara region iron ore mines, ports and railways currently export.

A government requesting cash payment to renegotiate previous iron ore agreements is not without recent precedent for Rio.

The only public statement made by Rio that hinted at ethical issues or end use of the payment was by iron ore chief Sam Walsh, who said he welcomed Guinea’s commitment to implement and uphold the EITI.

The EITI is a global standard set up by a coalition of governments and companies to ensure transparency in payments made by resource companies to developing countries.

In March, a 15-month suspension of Guinea’s status as a candidate country to the EITE was lifted.

Guinea’s EITE co-ordinator did not respond to questions from The Weekend Australian about the payment.

Chalco, which will indirectly pay about half the $700m payment, also did not respond, while the IFC directed questions back to Guinea.

“The Simandou project and its related infrastructure — port and railway — have the potential to make a significant contribution to Guinea’s economy and poverty reduction,” an IFC official said.

The IFC referred questions on the use of the payment to Guinea.

During BHP’s unsuccessful takeover tilt at Rio in 2007 and 2008, Rio said it planned its first iron ore from Simandou in 2013.

Delays to this timetable led the previous government to strip half of Rio’s tenements (which did not contain the main project) and give them to Israeli diamond tycoon Benny Steinmetz, who then sold half of his project to Brazilian giant Vale for $US2.5bn.

That deal is also being reviewed by the new government.

Illustrating that timing concerns still exist, Rio has had to agree to make “every reasonable effort” to achieve first production by the end of 2014.

What this entails, or the penalties for not doing so, have not been disclosed, but it is worth noting that the government is up for re-election in November 2014.

How that could impact the government’s stance on whether Rio has made a reasonable effort, and what the result could be is unknown.

The project, which requires more study before getting full board approval, will need a mine, 650km of rail (including 21km of tunnels) and a port built before it can start exporting.

There has been no word from Rio on when board approval of Simandou is expected.

According to Control Risks’ 2011 “RiskMap” study, Guinea is rated as having both high political and security risk, and is one of only 11 of 201 rated countries or states (five are in Africa) around the world to do so.

Only Somalia, Iraq and Afghanistan are rated as more risky places to do business, with extreme ratings in either or both categories.

Under a 2010 agreement, Chalco, which is controlled by Rio’s 9 per cent shareholder Chinalco, will buy 47 per cent of the Simfer joint venture for $US1.35bn.

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