Situation Report: Guinea’s balancing act in mining

Corruption investigations and constitutional reform are increasing political and stability risk in Guinea.

The U.K.’s fraud office gets serious about Guinea

A seemingly endless corruption scandal took a new turn on 23 July when the United Kingdom’s anti-corruption watchdog, the Serious Fraud Office, announced it had begun formal investigations into a payment in Guinea by Australian-British mining conglomerate Rio Tinto. The transaction of USD10.5 million relates to a payment in 2011 to a French banker who Rio executives deemed instrumental in obtaining the rights to blocks 3 and 4 of the Simandou project, one of the world’s largest untapped iron ore deposits, in east Guinea’s Nzérékoré Region.

The investigation came a little over six months after Rio Tinto fired two senior officials it found had violated the company’s code of conduct based on leaked email correspondence; on 17 November, Rio Tinto announced that it had dismissed Alan Davies and Debra Valentine, head of energy and mineral resources and head of legal affairs, respectively. Leaked emails published by British extractive-industries transparency campaigning organisation Global Witness alleged that Davies and Valentine were aware

A timeline of mining corruption

This was not the first time Rio was entangled in a legal battle over corruption allegations in relation to the Simandou project. The tale of Rio in Simandou began in 1997 when the company began prospecting the area for metals. Yet, hardly a tonne of iron ore has left the pit for international markets. In July 2008, the government suddenly cancelled around half of Rio’s mining rights, accusing it of failing and handed them over to U.K.-based BSG Resources Ltd. six months later. BSGR, in turn, re-sold its stake to Brazilian mining conglomerate Vale S.A. for USD2.5 billion in April 2010. That was double the Guinean government’s budget at the time.

A new government, led by President Alpha Condé, a few months later launched several investigations into past mining deals in the country. The committee presented its findings in April 2014, concluding that BSGR obtained its mining rights through corruption and recommended that they would be annulled. The dispute prompted an international arbitration case between BSGR and Vale, and Rio, which is eventually cancelled due to a technicality.

Corruption allegations are likely to continue to mar the country’s mining sector in coming years

In the meantime, Rio remains the majority-stakeholder in Simandou’s four mining blocks, but is struggling to develop the deposit due to the remoteness of the mine, Guinea’s infrastructure constraints and eventually, poor market prospects. That prompts the company into selling half of its stake to Aluminum Corporation of China Limited, commonly referred to as Chinalco, in September 2014. In October 2016, Rio announced the sale of its remaining 46-per cent stake to Chinalco. Some industry experts saw this as testament to Rio’s admission of defeat surrounding the Simandou mine, which is considered a central feature of the future of the country’s future economic outlook; experts have forecasted that the Simandou project could at least double the country’s GDP.

Challenges remain

While Rio’s exit from Guinea puts an end to a long-running battle between international investors and the government of one of the poorest countries in the world, corruption allegations are likely to continue to mar the country’s mining sector in coming years as further investigations are ongoing. Global Witness has, moreover, accused other junior miners of paying bribes to senior Guinean and Liberian officials to obtain the rights to the Mount Nimba iron ore concession, which sits on the border between Côte d’Ivoire, Guinea and Liberia. That iron ore deposit is also promising, but corruption allegations at the highest levels have marred its progress.

While the government has made it a key issue to fight corruption in its mining sector, progress in this respect has remained low. Guinea continues to suffer from endemic corruption at all levels of civil service, particularly during public tender processes. Guinea scores 8.39 on A2 Global’s Corruption prosecution index, placing it in third place after Angola and the Democratic Republic of the Congo in sub-Saharan Africa. Among the key reasons is poor institutions, poor skills among legal practitioners, as well as a general lack of practitioners. For instance, an overlap of several corruption control, audit, and prevention bodies means that institutional capacity has remained low. While improvements are being made, the corruption prosecution risks facing foreign investors in Guinea remain high, and will do so for a while. Growing civil unrest is also likely to deter investors for the time being.

Brewing civil unrest offsets investor confidence

Although President Condé’s efforts to improve governance and transparency of its mining sector has been recognised by the industry and civil-society organisations (CSOs), his intentions to change the constitution is not as popular among voters. Opposition groups, including the leader of the opposition Union des Forces Démocratiques de Guinée (UFDG), Cellou Dallein Diallo, are accusing Condé of wanting to change the constitution so that he can run for a third term in office. Several demonstrations organise by the UFDG against poor economic management of the government and graft allegations, have been violently dispersed by security forces, who have been quick to use lethal force to disperse protesters. The risk of more violent protests will only increase over the next month, as the UFDG, in co-operation with other CSOs, is planning political gatherings in the capital Conakry, as well as other major urban areas, such as the second-largest town Nzérékoré, at the heart of the country’s iron ore mining region. Several protests there over the poor delivery of public services and power supply have blocked bauxite mining transports in the western town of Boké in June, and further protests are likely in the six-month outlook, as the issues are unlikely to have been fully addressed by local authorities.

As the campaign ahead of a constitutional referendum to vote on the proposed amendments is heating up ahead of the plebiscite on 12 October, CSOs will intensify their public-engagement activities in the coming month. The UFDG has already announced several marches in Conakry in August. Despite the transport and operational disruption that is likely to result from those protests, something more serious could be in the making.

Constitutional changes are balancing acts in sub-Saharan Africa. While some heads of state have manged to do this, by force or through popular will, to change their country’s constitution and expanding their terms in office, others have failed. In December 2016, long-time Gambian president Yahya Jammeh was forced out through international pressure after he tried to remain in power after losing the presidential election. In 2014, Burkinabe president Blaise Compaoré was ousted through a popular uprising after he also tried to expand his term in office. Some crises have been swiftly resolved, but other impasses such as the one in Burundi are dragging on and have significantly exacerbated the security and therefore business outlook there. Although it is unlikely that Condé seeks a similar extension to his time in power, incendiary remarks between political groupings could lead to a more intensified level of civil unrest, which will ultimately affect its stagnant mining sector.

ASSESSMENT

Given the currently intensifying arms race on the international scene, and with China having the fastest-growing military force on the planet, it is likely that demand for Guinean iron ore picks up in the one- to two-year outlook. That would bring immense growth opportunities to the Guinean economy, but its successes are dependent on the ability to speed up infrastructure development in the country, a key sticking point in the Simandou project. The iron deposit is located in south-eastern Guinea, which means that the quickest way to transport the commodities to international markets would be through the port of Monrovia, the capital of Liberia…

Read the full article