A few days after the Guinean government stripped Vale (NYSE:VALE) of its mining permits, the company faces more trouble. Australian miner Rio Tinto (NYSE:RIO) has filed a lawsuit against Vale and BSG Resources alleging that the two companies colluded to steal its mining concession in Guinea. The lawsuit clearly highlights the value Rio Tinto attaches to the Simandou iron ore deposit in Guinea.
Rio alleges conspiracy
As I discussed in an article last month, a technical committee was set up by the Guinean government to investigate allegations of bribery against BSG Resources. The committee accused BSG Resources of obtaining mining rights to Simandou iron ore deposit through corruption. BSG Resources sold a 51% stake in the Simandou project to Vale in 2010. The committee recommended that the Guinean government strip both Vale and BSG Resources of their rights to the project.
The government of Guinea acted as per the recommendations of the technical committee and canceled BSG Resources and Vale's mining permits. While the committee has not accused Vale of any wrongdoing, Rio Tinto has claimed that the Brazilian mining giant colluded with BSG Resources to steal its mining rights.
Rio Tinto held the rights to the Simandou iron ore project, before the Guinean government in 2008 rather controversially awarded half of the mining rights to the Simandou deposit to BSG Resources. The decision was made by the then Guinea President Lansana Conte. Rio still controls half of the mining rights to Simandou deposit along with Aluminum Corp of China.
Rio is now seeking compensation from Vale and BSG Resources for the billions of dollars it says it lost because of the actions of the two companies.
Rio has filed a complaint in the U.S. District Court for the Southern District of New York. The Anglo-Australian company has alleged that Vale, BSG Resources, Israeli billionaire Benny Steinmetz, former Guinean mining minister Mahmoud Thiam, and one of the then President's wives colluded to steal half of the company's Simandou concession.
Lawsuit brings fresh trouble for Vale
Rio claimed that Vale began talks with it in August of 2008 about acquiring some or all of Simandou concession. Rio says that it gave Vale access to confidential and proprietary information related to the project. However, Vale then passed the information to BSG Resources. Rio further alleges that the information was used by BSG Resources as it tried to persuade Guinean government it had the technical knowledge required to develop the mine.
The lawsuit brings fresh trouble for Vale as Rio has asked for compensation, which could be worth billions of dollars. The lawsuit comes at a time when the company is already grappling with weaker iron ore prices. Vale recently reported a sharp decline in its first-quarter profit due to weaker iron ore prices.
In addition, the Brazilian mining giant could potentially lose its entire investment in Guinea. Vale had already warned about this in a filing with the SEC, although earlier this week the company's CEO said that the funds could be recovered. But if Vale fails to do so, the company will have to take a significant impairment charge.
Importance of Simandou project
The lawsuit also highlights the importance of the Simandou project to miners, especially in the present environment where iron ore prices have fallen sharply amid a supply glut as Rio Tinto, BHP Billiton (NYSE:BHP), and Vale ramp up production. Simandou is one of the world's largest untapped, high-grade resources of iron ore. More importantly, Simandou's high-quality iron ore can be extracted easily.
This means lower processing costs, which is crucial for miners given the weak outlook for iron ore prices. Rio Tinto already controls half of the mining concession. The company would be interested in acquiring the remaining concession now that it is available once again.
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Varun Chandan Arora 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.