By John Helmer, Moscow
In a series of preemptory dismissals, the head of global alumina operations for United Company Rusal, Yakov Itskov (left image), and his chief executive Oleg Deripaska (right image), have been ordered out of the rooms of Guinea’s two mining ministers, Mahmoud Thiam, and his successor, Mohammed Lamine Fofana, after the ministers told them they had insulted the Guinean government. A Kremlin salvage operation was then despatched to Conakry, the Guinean capital, headed by Russia’s mining minister Yury Trutnev. But that hasn’t stopped the new Guinean president Alpha Conde, ordering his negotiators to demand Rusal surrender half or more of its billion-dollar Dian-Dian bauxite concession, and pay $860 million in compensation for past tax and customs duties avoidance at its two other Guinean mines, Kindia and Friguia.
The deterioration in Rusal’s relationships with the incoming Conde administration follows the collapse of Rio Tinto’s negotiations to save its rights to mine iron-ore at the Simandou concessions in the southeast Forest region of the country, near the Liberian border. They comprise one of the largest unmined deposits of iron-ore in the world.
The Dian-Dian bauxite deposit, one of the largest unmined bauxite deposits in the world, is located in Boke province, in the northwest of the country. With an estimated 1 billion tonnes of resources, and 402 million tonnes of measured reserves, Dian-Dian is counted in Rusal documents as comprising two-thirds of the company’s global bauxite reserves.
The boot for Rusal began in the Conakry office of Mahmoud Thiam, the US and France-trained investment banker, who was Guinea’s revolutionary mining minister from January 2009 until January of 2011. Thiam had been engaged in a war of words (physical threats also) with Rusal for most of his two-year term over his insistence that Rusal honour its bauxite mining and alumina refining concession agreements for Kindia, Friguia and Dian-Dian, and comply with Guinean law. A report by US consultants Alex Stewart of Rusal’s Kindia mining operations – see link 1 and link 2 — has lodged claims for compensation for fraud and mis-accounting of revenues of between $860 million and $1 billion. The 2009 report was recently revived as the basis for a compensation agenda to be negotiated with Rusal.
But Rusal’s head of alumina, Yakov Itskov, met Thiam in his Conakry office a few days before President Alpha Conde appointed Fofana to succeed Thiam. Conde had won election on November 7; Fofana took office on January 4; he had been Thiam’s protégé in the past.
At their last official meeting, Thiam told Itskov and Deripaska’s special troubleshooter, Victor Boyarkin, that their undertakings for Dian-Dian required them to complete a feasibility study, disclose the deposit’s full reserves, set a production date, and build an alumina refinery capable of processing 4 million tonnes of bauxite into 2 million tonnes of alumina per year. For the heavily indebted Rusal, the cost of the Dian-Dian commitments is more than $1.5 billion – much more than Rusal can afford or wants to spend in West Africa. Thiam has provided a detailed record of the meeting; Rusal executives refuse to respond to requests for their version.
According to the Guinean side, Itskov told Thiam that Rusal planned to mine no more than 200,000 tonnes of bauxite at Dian-Dian to start, and eventually reach an annual capacity to produce 1 million tonnes per year. He ignored the refinery promise. Itskov is a veteran of Deripaska’s companies, but a relative newcomer to the alumina sector, to which Rusal appointed him in July 2010.
Thiam told the Rusal executives this plan violated their Dian-Dian concession undertakings, and that it was a waste of a potentially rich asset which other international mining companies could and would develop, if they had the opportunity. Thiam warned that when the new government took office, Rusal should expect to have their agreement revoked for default. He advised Itskov that it would be better for Rusal to relinquish part of the Dian-Dian deposit now voluntarily, and make a commitment to develop the remainder, according to the concession conditions. According to Thiam, Itskov called Thiam “rigid” and made other remarks which were insulting. Thiam replied, he says, that the language was disrespectful towards the Guinean Government, and ordered them out of his office.
Boyarkin, using English (he used Spanish in an earlier meeting with Thiam), apologized to Thiam.
Days later, following Fofana’s elevation to the ministry, Rusal proposed that he meet with chief executive Deripaska in Paris. That meeting followed at a Paris hotel. Again according to Thiam, a detailed record was kept and circulated to the presidential administration, which has taken direct charge of the Rusal negotiations. According to Thiam, Deripaska repeated “the same arrogant attitude towards the Guinean Government.” Fofana told him, Thiam reports, “to deal straight with the Government or lose [Dian-Dian].” Deripaska was told to get out of the hotel room.
The attempt by Deripaska to pressure Fofana has had a boomerang effect, convincing President Conde that he should take charge of the Rusal negotiations directly. Conde continues to ask Thiam for his advice. He has also engaged advisors offered by the American financier, George Soros.
The American role in Guinean resource policy is growing, Thiam said, although he does not believe that US aluminium producer, Alcoa, wants to fight Rusal directly for Dian-Dian. Alcoa is already a 45% shareholder of Halco Mining, a partnership which owns 51% of Compagnie des Bauxites de Guinee (CBG), which is the largest-volume bauxite miner in the country at the Sangaredi Plateau. Alcoa also owns two aluminium rolling-mills in Russia, one in Samara and one in Rostov, which it bought from Rusal in 2005; Alcoa is nervous that Rusal may be behind financial and administrative pressures exerted on its mill operations from time to time .
In April, to try to patch up the worsening atmosphere between Rusal executive and Guinean officials, the Russian government sent an official mission to Conakry headed by Fofana’s counterpart in Moscow, Trutnev. Trutnev was last in Guinea in 2008. His ministry of natural resources has issued no communiqué on the discussions that took place except to confirm that meetings took place in Conakry and that participating on the Russian side were “representatives of the [Natural Resources] Ministry, the Russian Foreign Ministry and the business community.” A Guinea press report refers to a cooperation agreement signed for fishing. Rusal, however, has posted a detailed announcement, confirming that Deripaska was in Trutnev’s delegation when it met Conde. Rusal’s communiqué did not refer the disputes over its three concessions, nor the danger of revocation of the Dian-Dian project. Instead, Deripaska was quoted by his company as claiming: “Being one of the largest foreign investors and employers in Guinea, RUSAL enjoys constant open dialogue with representatives of the government of the Republic. Russia and Guinea have a 50-year history of cooperation in the development of bauxite and we are fully aware of strategic importance of our projects for the country. . Thus, despite the difficult situation that the whole aluminum industry faced in 2009-2010 and despite the forced reduction of output by many aluminium producers all over the world, we have not cut and do not intend to reduce the bauxite mining and alumina production at our Guinean enterprises. Here in Guinea we have long-term projects that will be implemented in full.”
“The [Russians’] April meeting had zero effect on Conde,” Thiam said. “During the election campaign last year, Rusal thought they could wait for the new government to take over from us. That was a tactical misjudgement. Trutnev was received cordially by [the President] but no offer came from Rusal on the issues in dispute.”
The Anglo-American war against Libya has also disrupted one of the cornerstone Libyan investors in Rusal, and the source of money Rusal had been counting on to meet its Dian-Dian promises, including the refinery. “I know that Said al-Qaddafi was close to Oleg Deripaska,” comments Thiam, “and they had joint plans”. The Rusal prospectus, issued to the Hong Kong Stock Exchange in December of 2009, reveals that Rusal’s planning remains at an early study stage. According to Rusal documents, “the expected volume of bauxite mined, subject to confirmation by additional studies is 13.1 Mtpa (for alumina production) and 10 Mtpa (for export). A feasibility study has been prepared by international consultants. The capital expenditure of the mining aspects of the project has been estimated at US$425 m, which would include the development of the mine and mine related infrastructure.”
The Rusal prospectus suggests that Dian-Dian’s bauxite is also vitally linked to Libyan government plans to build a gas-fired aluminium smelter in Libya. Rusal reveals in its prospectus that if and when it starts to mine bauxite at Dian-Dian, it would supply from this mine 13 million tonnes of bauxite annually for refining in Guinea into alumina. This would then be exported for an “approximately 600 thousand tonnes per annum aluminium smelter in Libya.”
According to Thiam, “the Libyans talked a lot [in Conakry] about their plans, but actually finalized and closed [deals] on nothing. This caused frustration in Conakry with the lack of follow-up.”
Without the Qaddafi connexion and money, Deripaska faces international rivalry for Dian-Dian. “The game is open,” according to Thiam, “A lot of people are interested. Few believe Rusal will lose [its concession]. They thought the same of Rio Tinto at Simandou.” Among the prospective bidders to show their hand in Conakry recently, there are a number of Indian companies and ENRC, the London-listed Kazakh mining company.
They are asking the Guinean Government to confirm whether competing new bids will be called for bauxite concession following the precedent set by the negotiations with Rio Tinto over Simandou iron-ore. The official announcement by Rio Tinto on April 21, 2011, reveals that the Anglo-Australian mining company has agreed to pay $700 million to the Guinean treasury in order to hold its concession rights at the third and fourth blocs of the Simandou concession. Sam Walsh was the Australian executive in charge of the Simandou project when Thiam revoked Rio Tinto’s rights to blocs 1 and 2, awarding them to Israeli Beny Steinmetz and Vale of Brazil. He claims the latest deal “gives us the certainty we need to allow us to invest and move forward quickly so we can bring this great resource into production… I would like to extend my personal thanks to the Government of Guinea for engaging so constructively with us to reach this agreement. We look forward to working with them on the project and welcome their aspiration to develop a State mining enterprise that capitalises on the value of Guinea’s resources for all of Guinea.”
According to Thiam, before he left office last December Rio Tinto had been ordered to provide a plan for giving up 50% of its remaining concession rights at Simandou, and officialy told that the company’s expiring rights agreement was in default, with a revocation and retrocession deadline of February 2011. He claims he had recommended to Conde and Fofana that the incoming government allow Rio Tinto to retain partial rights. But Conde told him he wanted a tougher line. “I will not renew [blocs] 3 and 4”, Conde reportedly told Thiam.
Rio Tinto then asked for an extension of time, hoping that Thiam’s demands would be softened by his successors. In fact, Thiam now says, the agreement terms disclosed by Walsh last month “gave us everything we had asked for, plus $700 million in cash retainer, plus 15% equity in the project for the government for free.” Rio Tinto’s negotiating tactics gained nothing the company had insisted it wanted during Thiam’s tenure, and cost more than the London management of Rio Tinto had ever expected to pay. “They destroyed shareholder value,” Thiam now says of Rio Tinto.
Rio Tinto’s defeat has also encouraged the Conde administration to get tough with Rusal.