Source: The Wall Street Journal                      Date: 27 April, 2011

Agreement shows how Western companies are increasingly pressured to renegotiate contracts.

Rio Tinto has signed an agreement to give the Government of Guinea up to 35% ownership of its Simandou iron-ore project, resolving a dispute that held up more than USD10 billion of investment.

Rio Tinto said its Simfer S.A. subsidiary will pay USD700 million to Guinea to secure the right to mine in two sections of the huge Simandou deposit, and aims to make its first shipment of iron ore by the middle of 2015.

The settlement shows how Western companies like Rio Tinto are increasingly being pressured to renegotiate contracts with governments in less developed regions like Africa, or risk being shut out of lucrative resources developments. Rapid industrialization in Asia, especially China and India, is tightening the market for iron ore, a key ingredient in making steel. That has handed resource-rich countries an advantage in their dealings with miners as they no longer fear critical investment shifting elsewhere.

Guinea, which could export 350 million metric tons of iron ore annually and rank among the world's top exporters of the mineral, said in 2008 that it planned to rescind an agreement with Rio Tinto to develop the entire Simandou deposit because the company had missed deadlines to start mining. Guinea's government split the Simandou concession into four areas, known as blocks. Rio Tinto was left with roughly half its original concession: Blocks Three and Four. Blocks One and Two went to a unit of Switzerland's BSG Group Cos., which later sold down a majority interest in its project to Brazil's Vale SA.

Whereas previously Rio Tinto had agreed to Guinea taking a stake of up to 20% in its concessions, it is now offering the Government an interest of up to 35%. The settlement finalized a tax regime for as long as the mine is operating, including royalties payable at 3.5% free-on-board for all exported iron ore.


Rio also agreed to build a new rail line through Guinea and a port so that iron ore can be loaded on to ships for export, major engineering obstacles that have stymied past efforts by mining companies to develop the deposit. The Government of Guinea has the right to take a stake of up to 51% in the rail track and deep-water port, while other companies will be able to negotiate deals to access the infrastructure for shipping ore from their mines.

Resolution of the dispute with Guinea clears hurdles currently preventing Rio Tinto from completing a USD1.35 billion deal to sell down a 44.65% stake in its Simandou asset to Aluminum Corp. of China Ltd., or Chalco. The deal with Chalco, agreed in July last year, will shrink Rio Tinto's stake to 50.35%, with the remaining 5% continuing to be held by International Finance Corp.