BHP `Closely Monitoring' Guinea's Political Situation

By Rebecca Keenan

Aug. 24 (Bloomberg) -- BHP Billiton Ltd., the world's biggest mining company, is ``closely monitoring'' the West African nation of Guinea, where it is developing a $4.8 billion alumina refinery and takeover target Rio Tinto Group is planning an iron ore operation.

``The situation in Guinea is something that we are monitoring very closely,'' Marius Kloppers, chief executive officer of Melbourne-based BHP, said today on Australian Broadcasting Corp. television.

BHP is spending at least $90 billion to increase its output of metals to meet demand led by China. The president of Guinea wrote to Rio on Aug. 1, ``purporting to rescind'' a mining concession for its $6 billion Simandou iron ore project.

``It is getting harder and harder to find world-class deposits, which is why companies are going to these destinations,'' said Gavin Wendt, senior resources analyst at Fat Prophets Funds Management in Sydney. ``Governments have to realize that companies won't invest if the rules are going to get changed on them.''

BHP's project in Guinea, a partnership with New York-based Global Alumina Corp., is ``the world's most wonderful bauxite resource,'' Kloppers has said. ``There is country risk, there is political uncertainty,'' he said on June 5.

The refinery will have an initial annual production capacity of 3.3 million metric tons and will increase to 3.6 million tons within five years. A third processing line at the plant may eventually boost production to more than 5.4 million tons, Global Alumina said March 25.

Refinery Project

BHP and Global Alumina each will own a third of the refinery project, which includes an accompanying bauxite mine. Dubai Aluminum Co. will control 25 percent, and Mubadala Development Co. will hold the remainder.

Global Alumina is building the refinery to take advantage of higher prices for alumina as companies including Rio and Alcoa Inc. boost smelting capacity to keep pace with rising aluminum demand. Alumina prices more than doubled in the past five years on rising demand from China.

Alumina is the base ore used to make aluminum and is refined from bauxite, a rock primarily found in tropical areas. Guinea has one-third of the world's reserves of bauxite, according to the International Monetary Fund.

`More Uncertainty'

``These green-fields projects do carry higher risk, more uncertainty than things in the backyard,'' Kloppers said. BHP and London-based Rio both have about half of their operating assets in Australia.

Rio has rejected BHP's $143 billion takeover bid, which BHP said would allow it to deliver more metals at a faster rate to developing nations.

Guinea's government fired two officials on Aug. 5 that were associated with the office of president over the spat with Rio. The dispute ``is just one of the many vehicles for the competing factions within the Guinean political system to flex their muscles,'' Sebastian Spio-Garbrah, a New York-based analyst at the Eurasia Group, a political risk consultancy, said Aug. 5 in a note to clients.

Should there be political change, ``almost all of the country's pre-existing mining contracts will be re-examined and resource-nationalist pressures for high taxes and royalties will grow,'' Spio-Garbrah said, adding that Rio would probably retain the deposit because of concerns rival investors might have over litigation in the country.

Reviews After Boom

Guinea follows Zambia and the Democratic Republic of Congo in reviewing agreements to mine Africa's natural resources after a seven-year boom in prices.

The Simandou project has resources of 2.25 billion metric tons of iron ore and may produce as much as 170 million tons a year, Rio said in May. The project is the world's ``top undeveloped'' deposit, Rio's Chief Executive Officer Tom Albanese said at the time.

Rio is seeking to triple iron ore output to more than 600 million metric tons and benefit from record prices for the steelmaking raw material. The project will need a 750-kilometer (466-mile) rail line to link the mine with a new port facility, Sam Walsh, chief executive officer of London-based Rio's iron ore unit, said Aug. 4.

Rio owns 95 percent of the project and the World Bank's International Finance Corp. 5 percent, Walsh said. Guinea's government has the right to take 20 percent if approval for the project, expected by end-2009, is confirmed, he said.

To contact the reporter on this story: Rebecca Keenan in Melbourne at rkeenan5@bloomberg.net