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Vale Woos Guinea with Social Projects

July 6, 2011

July 6, 2011 7:38 pm

Vale woos Guinea with social projects

By Jack Farchy and William MacNamara in London and Samantha Pearson in São Paulo

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.

Rio controls the southern half and Vale the northern half.

In addition to giving cash and equity to the government, Rio agreed to build a railway from one side of the country to the other. It granted rights for the government to take a 51 per cent stake in the railway.

However, Mr Cavalcanti did not mention national infrastructure funding or cash payments.

Since Alpha Conde was elected Guinea’s president last November, the new government has sought to overhaul mining contracts to return more benefits to the desperately poor population.

The government is seeking to take a minimum 33 per cent stake in all mining projects, a percentage that Vale has not granted.

The stakes should be “enough to block any decisions and take part in the big decisions the mining sector makes”, according to Mohamed Fofana, minister of mines.

The economics of Vale’s Simandou investment could be threatened by a cash-and-equity deal similar to Rio. Unlike Rio, Vale controls only 51 per cent of its concession. The remainder is held by Beny Steinmetz Group Resources.

Brazil’s status as a fellow emerging market power and former colony might help Vale cut a better deal with the Guinean government than Rio Tinto, analysts said. “Vale is at an advantage in this respect but nevertheless, it will probably still have to pay something,” said Pedro Galdi, an analyst at SLW Corretora in São Paulo.

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