Commodity Investing

The Pros and Cons of Mining in West Africa

Western Africa seems like the place to be for large mining and steel businesses, such as:

  • Vale ADR (NYSE: VALE)
  • Rio Tinto ADR (NYSE: RTP)
  • BHP Billiton ADR (NYSE: BHP)
  • ArcelorMittal ADR (NYSE: MT)
  • Aluminum Corp of China or Chinalco ADR (NYSE: ACH)
  • Russian steel company, Severstal

These six companies plan to spend billions of dollars in Guinea, Liberia and Sierra Leone – where some of the world’s richest deposits of iron ore and bauxite have been found.

Yet despite the promises of profits the area holds, those companies need to tread carefully. Because they could strike it rich… or step on much more dangerous mines while they search.

Vale Gets in on West Africa

Vale got in through the Beny Steinmetz Group, a veteran of African mining. It paid the conglomerate $2.5 billion for exploration rights in Guinea’s Simandou Mountains.

And just in April, Vale agreed to spend $5-$8 billion on mines, ports and railways in Guinea and Liberia over the next decade. It may lay $1 billion down to build a port at Didia, a Liberian town, to ship the iron ore from Guinean mines.

To put that all into perspective, Liberia’s GDP currently rests under $1 billion.

It may also spend another $5 billion on infrastructure to run the Simandou mines, including two rail lines, one for iron ore and one for passengers.

With all of that said however, it’s important to note that Vale’s exploration claim is very controversial. Rio Tinto still disputes the Guinean government’s decision in 2008 to remove half of its Simandou exploration rights and give them to Beny Steinmetz.

Rio Tinto Goes Digging

Rio Tinto has a few problems of its own.

In June, Guinea’s outgoing government gave it a 60-day deadline to produce a feasibility study for a mine at Simandou. If Rio fails to meet that requirement, it could lose rights to one of the world’s biggest untapped iron deposits with 2.25 billion tons of ore.

That demand only happened after it dragged its feet on building non-mining related infrastructure there. It had promised to spend billions on such items as a railway through the country’s mountainous terrain.

Chinese-backed firms, on the other hand, have had no such qualms.

China International Fund, for one, finalized plans in June to spend $2.75 billion building a port on the Guinean coast and a railway to a planned iron ore mine. It staked its claim there last year with plans to spend $7 billion on infrastructure and mining.

That’s when Rio Tinto leapt into the fray. It signed a memorandum of understanding in March with the Chinese state-owned metals company, Chinalco – its largest shareholder – to develop the Simandou deposit together.

And Rio just formalized the deal. Chinalco will contribute $1.35 billion towards the project and buy its way up to a 47% stake in the venture.

It also has ties to Chinese infrastructure companies that could allow Rio Tinto to keep its claim on the southern part of the Simandou, where most of the iron ore reserves lie.

Incidentally, Chinalco has every reason to fight for that to happen. The mines represent its largest overseas investment and its first move away from aluminum into iron ore.

It also gives it a first handhold on Guinea, the world’s leader in bauxite exports, a key ingredient in aluminum manufacturing.

The Biggest Obstacle: African Politics

Sadly, the companies vying for those African assets face the same obstacle: politics.

Liberia and Sierra Leone only recently emerged from civil wars. And Guinea has flirted with conflict since 2008.

It now faces a runoff election later this year in its first free vote since it broke with France in 1958. Whoever wins will likely take a fresh look at the mining deals made in the past.

That means $30-$40 billion in promised investments are at stake, ten times the equivalent of Guinea’s annual economic output. And some politicians there are already calling the interim government out on signing the deal with Vale.

In addition, rivalries between the companies themselves complicate matters more.

For instance, China International Fund loaned the interim government $3.3 million to fund an audit of mining operations. It then conveniently found Russian aluminum company Rusal’s bauxite mine and refinery had caused environmental damage.

So the government sued Rusal for damages. Funny how things worked out that way, considering that it hadn’t liked the Russian business from the start.

But despite those problems, mining companies will continue wrangling over the area. After all, some of the richest iron ore and bauxite deposits lie in western Africa.

They see it as a risk worth taking. But that doesn’t mean they won’t change their mind sometime down the line.

Only time will tell.

Good investing,

Tony Daltorio

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