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Vale SA Likely to Lose Its Guinea Investment

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It has been a tough year for miners so far as iron ore prices have slumped amid a slowdown in China. For Vale (NYSE: VALE  ) , one of the top iron ore miners in the world, there is more bad news: The company appears likely to lose its entire investment in a project in Guinea. But Vale's loss could very well end up as a gain for rivals such as Rio Tinto (NYSE: RIO  ) and BHP Billiton (NYSE: BHP  ) .

The Simandou iron ore project
Vale in 2010 bought a 51% stake in the Simandou iron ore mine from BSG Resources, which is the mining arm of Israeli billionaire Beny Steinmetz's conglomerate. 

The Guinean government nearly six years ago awarded BSG half of the mining rights to the Simandou deposit. The move was controversial, as then-Guinea President Lansana Conte had ordered those rights to be stripped from previous holder Rio Tinto and awarded to BSG Resources. Conte died just a few days after the deal was sealed.  

Vale initially entered into a $2.5 billion deal with BSG Resources for a 51% stake in the mine. The Brazilian mining giant made a payment of $500 million to BSG immediately after signing the deal. However, it halted later payments and put work on hold after it was alleged that BSG Resources had won the rights through a bribery scheme.

Bribery allegations and verdict
Following a three-year inquiry by a committee established by the Guinean government, BSG Resources was accused of obtaining the rights through corruption. One of the late President Conte's wives, Mamadie Toure, claims BSG bribed her in order to secure the mining rights. 

While the committee has not found any evidence of Vale's involvement in the bribery scheme, it recommended that both the company and BSG Resources be stripped of their rights to the project.

Vale could lose its entire investment
If the Guinean government acts on the recommendation, Vale might lose its entire investment in Guinea -- a fact the company noted in its annual report to the U.S. Securities and Exchange Commission. The company, however, has not commented on how much it stands to lose.

It is not clear whether Vale made additional investments beyond its $500 million up-front payment to BSG Resources. However, BSG said the two companies' joint venture has already invested $1 billion on pre-mining work in Guinea. Therefore, it is likely that Vale stands to lose more than $500 million.

Other miners interested
Miners such as BHP Billiton and Rio Tinto have already expressed interest in the mining concession should the Guinean government follow the recommendation of the investigatory committee, an informed source recently told The Wall Street Journal.

The interest from competing mining giants is not surprising, given that Simandou is one of the world's largest untapped, high-grade resources, according to Rio Tinto. In fact, Rio Tinto, along with Aluminum Corp. of China, still controls two of the four blocks in Simandou, with the other two being awarded to BSG in 2008.

As I have noted in previous articles, iron-ore prices could remain under pressure due to an increase in supplies and a slowdown in demand. That makes low-cost, high-grade projects very attractive to miners. In addition, miners such as BHP Billiton and Rio Tinto have already said that they want to focus on their core businesses, which includes iron ore. Therefore, if the Guinean government acts on the committee's recommendation and the two Simandou blocks become available again, they are likely to see significant interest from major mining organizations. 

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Varun Chandan

I have a Master in Finance degree from IE Business School in Madrid. I use the top-down approach when it comes to investing. I like to analyze macroeconomic factors and how they impact individual companies.

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