A Daunting Legal Battle Looms for Vale in Guinea

Stripped of its rich iron ore rights at Simandou, Vale needs to take legal recourse to recoup.

May 1, 2014 at 10:33AM


Simandou operations. Source: Rio Tinto

Not that it was unexpected, but the Republic of Guinea officially stripped Vale (NYSE:VALE) of its rights at the vast Simandou iron ore project following an investigation of charges that the entire process of rewarding the rights was rife with bribery. Not that Vale was party to the wrongdoing, but because it still reaped the fruits of the poisonous tree, it couldn't be allowed to profit from it. Vale is now considering legal action as a result.

Vale acquired a 51% interest in Simandou in 2010 from BSG Resources in a $2.5 billion deal, $500 million of which was due upfront, with the balance paid over time. In its annual report issued last month wherein the miner for the first time revealed it could lose the entire value of its investment in the project, it estimated the book value of that investment was $1.1 billion.

Now that Guinea has stripped it of its concession, Vale is mulling legal action -- whether against the government, BSG for tainting the process, or both it doesn't say. For its part, BSG maintains its innocence and claims it, too, is a victim.

The Simandou mountains of Guinea are an immense, untapped deposit of iron ore worth at least $50 billion. Rio Tinto (NYSE:RIO) was originally granted exploration rights to the region in 1997 and was subsequently given a concession to develop the deposit in 2006. But in 2008 Guinea's dictator in power at the time alleged it was taking too long to develop Simandou and stripped from it the rights to the northern half of the claim. He turned around and awarded those rights to BSG.

Two years after Vale obtained its stake in Simandou, a new democratically elected government launched a probe into the stripping of Rio Tinto's rights and subsequently found "precise and consistent evidence establishing with sufficient certainty the existence of corrupt practices." It was just a matter of time before the hammer fell, and this past Friday it rained down on Vale.

The committee that investigated the alleged corruption also recommended the partnership created by Vale and BSG Resources called VBG not be allowed to bid again on the mining rights, so it may be that Vale is able to bid on its own.

Iron Ore Spot Price (Any Origin) Chart

Iron Ore Spot Price (Any Origin) data by YCharts

Yet in a new twist, Rio Tinto just filed a lawsuit against Vale, BSG, Benny Steinmetz (BSG's owner), VBG, and other subsidiaries alleging a conspiracy to deprive it of its mining rights. No dollar figure was assigned to the suit, saying that would be determined in court, but it seeks compensatory, consequential, exemplary, and punitive damages. Rio Tinto took pains to clarify that Guinea's government wasn't a party to the case as the two continue to work cooperatively on its southern claim.

Even if Vale is ultimately found blameless and it bids and wins the northern concession again, there remain significant hurdles to surmount before the riches within the mountains can be tapped. They are far from ports, roads, and railways. When Vale originally bought into the project, it said it was committed to renovating 660 kilometers of the Trans-Guinea railway and was negotiating contracts with Liberia for construction of an integrated railway-port system for transporting iron ore from Simandou to a maritime terminal on Liberia's Atlantic coast. All that infrastructure is still required and Rio Tinto is simultaneously pursuing their completion. 

While some estimates for new bids on the northern claim have run as high as $3 billion, others contend that in the current depressed pricing environment for iron ore, the price tag won't come in nearly as high as that. Iron ore pricing of 62% iron ore fines at China's Tianjin port has tumbled over the past year as inventories soar, and though it could be a costly legal battle for Vale to wage, it's a necessary one if it hopes to recoup anything from this on-again, off-again deal.

3 stock picks to ride America's energy bonanza
Record oil and natural gas production is revolutionizing the United States' energy position. Finding the right plays while historic amounts of capital expenditures are flooding the industry will pad your investment nest egg. For this reason, the Motley Fool is offering a look at three energy companies using a small IRS "loophole" to help line investor pockets. Learn this strategy, and the energy companies taking advantage, in our special report "The IRS Is Daring You To Make This Energy Investment." Don't miss out on this timely opportunity; click here to access your report -- it's absolutely free. 

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.

Money to your ears - A great FREE investing resource for you

The best way to get your regular dose of market and money insights is our suite of free podcasts ... what we like to think of as “binge-worthy finance.”

Feb 1, 2016 at 5:03PM

Whether we're in the midst of earnings season or riding out the market's lulls, you want to know the best strategies for your money.

And you'll want to go beyond the hype of screaming TV personalities, fear-mongering ads, and "analysis" from people who might have your email address ... but no track record of success.

In short, you want a voice of reason you can count on.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich," rated The Motley Fool as the #1 place online to get smarter about investing.

And one of the easiest, most enjoyable, most valuable ways to get your regular dose of market and money insights is our suite of free podcasts ... what we like to think of as "binge-worthy finance."

Whether you make it part of your daily commute or you save up and listen to a handful of episodes for your 50-mile bike rides or long soaks in a bubble bath (or both!), the podcasts make sense of your money.

And unlike so many who want to make the subjects of personal finance and investing complicated and scary, our podcasts are clear, insightful, and (yes, it's true) fun.

Our free suite of podcasts

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. The show is also heard weekly on dozens of radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable. Rule Breaker Investing and Answers are timeless, so it's worth going back to and listening from the very start; the other three are focused more on today's events, so listen to the most recent first.

All are available for free at www.fool.com/podcasts.

If you're looking for a friendly voice ... with great advice on how to make the most of your money ... from a business with a lengthy track record of success ... in clear, compelling language ... I encourage you to give a listen to our free podcasts.

Head to www.fool.com/podcasts, give them a spin, and you can subscribe there (at iTunes, Stitcher, or our other partners) if you want to receive them regularly.

It's money to your ears.


Compare Brokers