Vale Poised for Massive Loss in Guinea

Rich iron ore deposit in the West Africa nation comes undone after charges of corruption exposed.

Apr 13, 2014 at 4:00PM

Having spent more than $1 billion developing its claims in Guinea's Simandou mountains, mining giant Vale (NYSE:VALE) is poised to have the entire investment lost as a governmental technical panel recommends stripping the miner of all its rights to explore the massive iron ore deposit.

Although the panel hasn't found any wrongdoing on Vale's part, the miner acknowledged as recently as last month in its annual Securities and Exchange Commission filing it might lose everything, and reports are now surfacing that is in fact what will happen. 

A Dickensian tale
Guinea is one of the poorest countries in the world, an irony lost on no one since it sits atop some of the richest mineral deposits found anywhere around the globe. The Simandou mountains are themselves a veritable bastion of untapped iron ore alone worth some $50 billion or more, but Guinea is also home to one of the world's largest reserves of bauxite, along with significant quantities of diamonds, gold, uranium, and even oil in the waters off the country's coast.

Mining interests in the country, however, are on lockdown at the moment as an outbreak of the deadly ebola virus is sweeping across Guinea and spreading to neighboring countries. The World Health Organization claims it's "one of the most challenging ebola outbreaks" it's ever been confronted with and it ravages an already impoverished nation.

A looming legal quagmire
Rio Tinto
(NYSE:RIO) was granted exploration rights to Simandou in 1997 and subsequently given a concession to develop the deposit in 2006. Two years later, however, Guinea's dictator Lansana Conte charged Rio with being dragging its feet and stripped from it the rights to the northern half of the claim. Just before his death in 2008, Conte granted those rights to BSG Resources, which invested $165 million in developing the project, only to sell to Vale a 51% stake for $2.5 billion, $500 million of which was due up front with the balance paid over time.

A new democratically elected government of Guinea was ushered in in 2012 and immediately launched a probe into the transactions to determine whether bribery and corruption were involved in the bidding process. Vale halted payments to BSG when the corruption charges surfaced and the governmental inquiry subsequently found "precise and consistent evidence establishing with sufficient certainty the existence of corrupt practices" in how BSG won its mining rights. Last week, a panel endorsed those findings and the technical committee is now set to recommend stripping BSG and Vale of their concession. 

Although BSG Resources has maintained its innocence since the allegations of wrongdoing were first leveled, but with the report declaring "These corrupt practices tarnish and thus void the mining titles and the mining convention," it will have little recourse than to seek international arbitration for what it claims are "incredible and unsupported" allegations.

It's estimated that reissuing the mining rights to Simandou could fetch the Guinean government upwards of $3 billion, and though some analysts contend in today's depressed iron ore market they might not go so high, prices are moving upward once more. Import prices of 62% iron ore fines at China's Tianjin port are running 14% above the lows hit in mid-March, as exports from Australia's  Port Hedland, which accounts for roughly 20% of the seaborne trade, jumped 27% last month.

While Rio Tinto finalizes its investment framework, anticipating a bank feasibility study will be completed by early next year, Vale is confronted with the stark reality its investment is gone for good and an opportunity lost as the technical committee also recommends it be banned from being part of rebidding for rights. Ultimately, that could be an even greater loss for the miner.

Boost your 2014 returns with The Motley Fool's top stock
There's a huge difference between a good stock and a stock that can make you rich. The Motley Fool's chief investment officer has selected his No. 1 stock for 2014, and it's one of those stocks that could make you rich. You can find out which stock it is in the special free report "The Motley Fool's Top Stock for 2014." Just click here to access the report and find out the name of this under-the-radar company.

Rich Duprey has no position in any stocks mentioned. The Motley Fool owns shares of Companhia Vale Ads. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

4 in 5 Americans Are Ignoring Buffett's Warning

Don't be one of them.

Jun 12, 2015 at 5:01PM

Admitting fear is difficult.

So you can imagine how shocked I was to find out Warren Buffett recently told a select number of investors about the cutting-edge technology that's keeping him awake at night.

This past May, The Motley Fool sent 8 of its best stock analysts to Omaha, Nebraska to attend the Berkshire Hathaway annual shareholder meeting. CEO Warren Buffett and Vice Chairman Charlie Munger fielded questions for nearly 6 hours.
The catch was: Attendees weren't allowed to record any of it. No audio. No video. 

Our team of analysts wrote down every single word Buffett and Munger uttered. Over 16,000 words. But only two words stood out to me as I read the detailed transcript of the event: "Real threat."

That's how Buffett responded when asked about this emerging market that is already expected to be worth more than $2 trillion in the U.S. alone. Google has already put some of its best engineers behind the technology powering this trend. 

The amazing thing is, while Buffett may be nervous, the rest of us can invest in this new industry BEFORE the old money realizes what hit them.

KPMG advises we're "on the cusp of revolutionary change" coming much "sooner than you think."

Even one legendary MIT professor had to recant his position that the technology was "beyond the capability of computer science." (He recently confessed to The Wall Street Journal that he's now a believer and amazed "how quickly this technology caught on.")

Yet according to one J.D. Power and Associates survey, only 1 in 5 Americans are even interested in this technology, much less ready to invest in it. Needless to say, you haven't missed your window of opportunity. 

Think about how many amazing technologies you've watched soar to new heights while you kick yourself thinking, "I knew about that technology before everyone was talking about it, but I just sat on my hands." 

Don't let that happen again. This time, it should be your family telling you, "I can't believe you knew about and invested in that technology so early on."

That's why I hope you take just a few minutes to access the exclusive research our team of analysts has put together on this industry and the one stock positioned to capitalize on this major shift.

Click here to learn about this incredible technology before Buffett stops being scared and starts buying!

David Hanson owns shares of Berkshire Hathaway and American Express. The Motley Fool recommends and owns shares of Berkshire Hathaway, Google, and Coca-Cola.We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

©1995-2014 The Motley Fool. All rights reserved. | Privacy/Legal Information