Coups and sovereign risk silence Rio’s trumpets of growth

    Since then, Rio Tinto’s trumpeters have laid down their instruments as sovereign risks and coups d'etat threaten the company’s hold on these engines of growth.
    Simandou, in Guinea in Africa, was touted as an enormous new iron ore province that would, in time, rival the Pilbara and Brazil’s Carajas mines. Rio talked up vast reserves of 65% ore across Northern and Southern concessions, with production to begin in 2013 and set to rise to 170 million tonnes per annum. Located on the west coast of Africa, Rio said that the province was perfectly situated to serve customers in the Middle East, Europe and America.
    Unfortunately, Rio kept mum on the hurly burly of Guinea politics, the latest installment of which saw a military coup install junta leader Captain Moussa Dadis Camara as president just before Christmas 2008, following the death of long time strongman General Lansana Cont.
    In the aftermath of the coup, the new administration announced that it would compulsorily acquire the Northern half of Rio’s concession, handing the leases to Israeli businessman Beny Steinmetz’s BSG Resources.
    This unilateral excision of concessions on which Rio has spent around US$500m is alarming in itself and clearly threatens the project's economics. But it also begs the bigger question: is Rio Tinto, either with or without the “assistance” of assured African door-opener Chinalco, prepared to pump up to $10bn dollars into a country with such a volatile political and administrative system?
    Moving to a rather chillier clime, Oyu Tolgoy in southern Mongolia has been billed by Rio Tinto as one of the largest undeveloped copper gold deposits in the world, and a key plank of the company’s copper growth strategy. The huge deposit, on leases originally held by BHP Billiton, subsequently explored by Robert Friedland’s Ivanhoe Mines, and now joint ventured by Rio and Ivanhoe, is perfectly situated only 80kms from the Chinese border. Early plans call for a mine producing around 440,000 tonnes of copper and 320,000 ounces of gold per year, at a cost of around US$3.5bn.
    However, the pace of Oyu Tolgoy’s development is being dictated by a fractious Mongolian Parliament which has proved repeatedly incapable of finalising an investment and tax deal for the giant mine.
    While Mongolian lawmakers look to be moderating their mining boom-time ambit claims of windfall profit taxes and ownership stakes of up to 50%, Oyu Tolgoy’s development looks to be receding into a distant future.
    Back in Africa, Rio’s 80%-owned Madagascar mineral sands subsidiary QMM is at least entering production, after an exhaustive community-relations and environment effort that has stretched over more than a decade.
    A proud Paul Skinner, recently departed chairman of Rio, said in the build-up to the mine’s opening in January that, “Madagascar (mineral sands) is a model for further projects which are likely to follow in Africa and the developing world."
    The US$1bn project, the largest in the island paradise’s history, will initially supply around 750,000 tpa of ilmenite to a Rio smelter in Quebec in Canada, with the first shipment sailing in April 2009. Bold expansion plans posit growth in capacity to 2 million tonnes per annum, and later to 3mtpa.
    However, a military coup in March has set alarm bells ringing in Rio’s headquarters. Transitional leader and former disc jockey Andry Rajoelina seized power from Marc Ravalomanana, who himself wrested control from Didier Ratsiraka is 2002. The latter was signatory to Rio’s mining agreements for the Fort-Dauphin mining project.
    Rajoelina, who cleverly exploited locals’ discontent at endemic poverty and corruption to seize power, has reportedly said that he will seek higher royalties from foreign companies, with a review to follow into the state’s take from projects.
    While Rio’s operational staff in Madagascar maintain that it’s business as usual, headquarters can’t help but worry at another potential sovereign risk threat to one of its major growth projects.

By Charles Macdonald
charles.macdonald@informa.com.au