Mining Giants Are Forced To Lessen Global Ambitions

SIMANDOU, Guinea -- In a sunbaked field carved into a patch of lush forest here stand a half-dozen hulking mining machines that were shut down earlier this year. Nearby, military barrack-style housing for 200 workers sits abandoned.

"We were building a country-changing project," says David Smith, head of Guinea operations for mining giant Rio Tinto PLC.

But that was before the global commodity boom went bust. Late last year, the Guinean government stunned the mining industry by telling Rio Tinto that it wasn't moving quickly enough on its $6 billion project to develop the world's largest iron-ore reserve in the west African nation. It stripped Rio Tinto of the rights to develop 50% of the mine and gave them to another company.

It's just one example of the fight breaking out for control of the world's mineral riches in the wake of the economic downturn. Mining companies that were scouring the globe 18 months ago to satisfy China's hunger for metals and minerals are now in retreat. That has set the stage for growing conflict as resource-rich countries, complaining of slowing revenue streams, pressure companies to maintain production. In some cases, countries are seeking to rewrite mining contracts and reclaim property.

In addition to its Guinea troubles, Rio Tinto faces a growing diplomatic battle in China, where authorities arrested four Rio employees on espionage charges earlier this month. The move came in the middle of negotiations with Chinese steelmakers over the price of iron ore.

Last Friday, Russian government officials threatened to revoke the coal licenses of ArcelorMittal, a steel and mining company, after it warned of job cuts.

On July 2 in Zimbabwe, an increasingly impatient government said it will review all mining contracts and impose strict "use it or lose it" deadlines for companies to produce minerals and generate revenues for local communities.

In South Africa, the country's largest trade union called for nationalization of the nation's mines to maintain greater control over its resources. Zambia wants to boost its stakes in existing and new foreign-owned copper mines to 35% from between 10% and 20% to give it more say in protecting mining jobs during the downturn.

The flashpoints come as both mining companies and countries rich with minerals struggle with a bottoming commodity market. Companies are less interested in investing in risky projects. Countries, desperate for revenues, are exacerbating the situation by imposing additional taxes and covenants on existing mining ventures.

Such actions are expected to accelerate the quiet shift of the mining industry, already unnerved by the global downturn, away from the most promising but politically risky countries. This realignment will reduce the industry's global reach and diminish its role in helping prop up some of the poorest nations. Those nations rely on private mining investment to transform their buried riches into productive revenues and also build roads, hospitals and schools.

The mining companies fear that the millions, and sometimes billions, of dollars that they have invested in exploration, production, equipment, personnel and logistics could be lost if governments decide to nationalize their assets or drastically change contract terms.

Some in the mining business concede that the industry helped create its bind by negotiating contracts that sometimes shortchanged poor countries.

Duncan Sloan, Accenture's senior executive of the global mining industry group, said that sweetheart deals were hallmarks of smaller mining operations, often called junior miners. In Africa, in particular, many small mining companies set up shop and then left abruptly when the commodities market began to cave, leaving hundreds of workers without jobs and a sudden cutoff in tax dollars and royalties that the governments were counting on. "There were some bad miners out there," he said.

The governments, too, often painted a rosy picture of the amount of royalties and tax money that would come as a result of mining operations. When the commodity downturn hit, those financial promises vanished, leaving them to answer to angry local constituent and suddenly unemployed workers, adding to social unrest.

With the drop in commodity prices, mining companies are even more reluctant to take on the risk. They are concerned about the government granting permission and then rescinding it after the roads are built and the infrastructure is in place to get ore out of the ground, processed and to ports.

BHP Billiton, the world's largest miner, is scaling back aluminum operations in Africa, turning attention away from Russia and beefing up copper, uranium and gold mines in South Australia. In June, it entered into a joint iron-ore project agreement with Rio Tinto in the Pilbara region of Australia, valued at $10 billion.

"We want to focus, principally, in our backyard," said Marius Kloppers, BHP's chief executive officer.

Not long ago, Xstrata PLC was trying to take over a palladium producer in Africa and several gold companies flooded Tanzania, Zimbabwe and Madagascar looking for riches. Now most of those plans have been dropped or put on hold as governments there begin tacking on new contract terms.

"Mining companies are no longer willing to take the risks," said Claire Divver, of Xstrata, which abandoned its plans for its African palladium venture. Others are also pulling back.

Xstrata's new strategy is to grow through acquisitions, rather than expensive and risky new mines. Last month, it sent a letter to its larger competitor Anglo American PLC proposing a merger of equals. Anglo has been lukewarm to the idea. Brazil's Vale SA, the world's second-largest miner, is likewise considering Anglo as a possible acquisition target and more conservative way to grow.

Rio Tinto's debacle in Guinea serves as another warning to the mining industry. It shows how promising projects in the developing world can fall apart through shifting political currents and economic pressure.

In 1996, Rio Tinto's exploration team was invited to Guinea by the mining minister to perform initial work to find iron ore. By 2006, Rio won the rights to mine 300 square miles of what promised to be the world's largest reserve of unexplored iron ore.

It was considered a huge coup in the mining world. Rio's winning bid included $3 million in advanced taxes, an option for the government to acquire a 20% equity interest in the project, royalties of 3.5% and annual contributions to the local community. In all, the company expected to pump $6 billion into the country's economy and begin producing ore by 2013.

"We will succeed here," Tom Albanese, Rio Tinto's chief executive officer, told investors at a mining conference in Perth, Australia, in early 2008. "Rio Tinto knows how to operate in a difficult environment."

Still, the hurdles were huge. With a gross domestic product of just $4.8 billion, Guinea has few skilled workers and woeful infrastructure. The main university in the capital city, Conakry, has no electricity or working plumbing, and residents are forced to burn trash in the streets. In addition to exploring for ore, Rio Tinto had to plan and start building a cross-country rail line and also construct a brand new shipping port. Meanwhile, the mining ministry was in turmoil, going through a series of ministers, two of whom were forced to make restitution to the government after facing embezzlement accusations.

Rio Tinto also had its own problems. The company ran into financial troubles last year, brought on by the commodity bust. Rio had shaken off takeover advances from its rival BHP Billiton, but in the wake, it was left with heavy debt from its earlier acquisition of Alcan, an aluminum maker. To conserve money, Rio was forced to slow down some development at its nascent Guinea operations.

In June 2008, Sam Mamady Moumah, the general secretary of the Guinean president, sent Rio a letter, admonishing the company about the mines' development progress. By December, a new president was in place and the government rescinded half of Rio's mining area and transferred the rights to U.K.-based BSG Resources Ltd., which already had bauxite interests in Guinea.

Rio said that since then, Guinea has treated the decision as final and has refused to meet with Rio officials to discuss any changes.

"I think we misjudged the legal contract," said Mr. Smith. "We misjudged the level of certainty and how quickly things could turn around."

The government's action made the project unfeasible in Rio Tinto's view because the reduced output wouldn't support the investment needed. Rio Tinto, which had been spending $30 million a month, began pulling up stakes this year.

Still hoping that the government will change its mind and in an effort to demonstrate its commitment to the country, the mining company continues building roads, schools and hospitals. It estimates it is spending $10 million a month there, but isn't sure how long it can keep it up. Mr. Smith says Rio has actually spent more in Guinea than required under its contract.

"For us, there is no question that this is a real opportunity to work with Guinea on its economic development," Rio's Mr. Smith said. "Many of us were motivated by doing social good."

Rio Tinto isn't without allies. Local villagers miss the work the company was providing and some village leaders have appealed to the government to settle. Says Amara Konate, a chief of the Kankoru village, of Rio Tinto's time there: "Everyone had jobs, everyone was happier."