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Fortescue, SMB head to head in race for Simandou’s northern blocks

Simandou in Guinea. (Image: Google Earth.)

Australia’s Fortescue Metals Group (ASX:FMG) and Guinea’s Société Miniere de Boke (SMB) are the two companies shortlisted to win mining rights to the northern blocks of the giant Simandou iron ore deposit, given up by Israeli tycoon Beny Steinmetz earlier this year.

While the West African nation, which launched an international tender for blocks 1 and 2 in mid-July, confirmed the two miners as finalists this week, it has kept under wraps the amount of the bids.

Analysts think that China-backed SMB, which operates one of the Guinea’s largest bauxite mines, will be the likely winner of the tender

For some analysts, such as Eric Humphery-Smith from Verisk Maplecroft, the disclosure of the two competing offers is a step towards transparency, but remains far from international best practices standards.

“Although the transparency of the Simandou North tendering process is questionable, the high threshold $300,000 fee for participation has meant the Guinean government reduced the risk of non-development,” Humphery-Smith writes. “We expect that the small number of bidders is the result of government efforts to ward off speculators, who would sit on the deposit before selling it on.”

The expert notes that the government’s failure to disclose the reason for rejecting a third offer weakens further Guinea’s claims of running a process open to scrutiny.

Regardless of the financial offer, Guinea is likely to choose the company that can commit to build a 650km trans-Guinean railway (TGR), to connect the mine to ports. President Alpha Condé has insisted on the need for a railway, saying that the two Simandou concessions (North and South) must use it.

“The reason for the Guinean authorities’ intransigence on the TGR is the potential for additional rent-seeking, as development of the TGR would make smaller mineral deposits lying along the route more viable,” Humphery-Smith says. “There would also be ancillary benefits, such as a passenger transport service and spare capacity for general cargo.”

Battle for riches

At two billion tonnes of iron ore with some of the highest grades in the industry, Simandou is one of the world’s biggest and richest reserves of the steelmaking material, but it has a controversial past.

For more than a decade, Simandou was the centre of a bitter dispute involving Rio Tinto, Vale SA and Israeli diamond mining tycoon Beny Steinmetz.

In 2008, one of Guinea’s former dictators stripped Rio’s rights over two of the four blocks the deposit had been divided on and handed them BSG Resources, Steinmetz’s mining arm. Rio was able keep to the two southern blocks, but only after paying $700 million to the government in 2011. That guaranteed the miner tenure for the lifetime of the Simandou mine.

For more than a decade, Simandou was the centre of a bitter dispute that involved Rio Tinto, Brazil’s Vale and BSG Resources

That deal came under scrutiny in 2016, forcing Rio to fire two senior managers over a questionable $10.5 million payment made to a consultant who helped the company secure the two blocks and alerted authorities, including the US Department of Justice and the UK’s Serious Fraud Office.

BSG Resources and Steinmetz were also subject of several investigations over bribery and corruption accusations, but it was able to put an end to all that in February this year, through a deal with President Conde.

As part of the agreement with Guinea, BSGR agreed to walk away from blocks 1 and 2 of the Simandou project, but retained the right to mine the smaller Zogota deposit.

A few weeks later, a London arbitral court told BSGR to pay $1.2 billion to Vale, its former partner Guinea, due to “fraud and breaches of warranty” in inducing the Brazilian miner to enter the joint venture. The tribunal based its decision partly on the fact that the government revoked the concession in 2014 after finding that BSGR had obtained it by bribing officials.

New Blood

Strong iron ore prices and the resolution of Steinmetz-related issues increased Guinea’s chances of finding companies interested in acquiring the rights for the vacant blocks.

Fortescue, the world’s fourth largest iron ore miner, has a fair chance at Simandou, and the acquisition would allow the miner to expand its global footprint.

Analysts, however, think that China-backed SMB, which already operates one of Guinea’s largest bauxite mines, will be the likely winner of the tender.

Fortescue, Guinea’s SMB head to head in race for Simandou’s northern blocks

“The company not only has access to Chinese state financing, but its shareholders also have established shipping capabilities and buyer networks in China,” writes Humphery-Smith.

More importantly, SMB is said to have strong political ties in Guinea. “The company’s chairman Fadi Wazni is rumoured to be close to the president’s son Mohamed Alpha Condé. In a country where business and politics all too often overlap, more than one tender is needed to change a deep-rooted culture,” Humphery-Smith says.

Rio Tinto holds a 45% stake in blocks three and four of Simandou, which it is actively planning to develop. State-controlled Chinalco owns 40% and the Guinea government 15%. 

Both companies are said to be trying to persuade authorities to let them use ArcelorMittal’s railway to a port in neighbouring Liberia.