Up until this year, Guinea's well established bauxite industry had been on to a good thing, pumping out bauxite and alumina for the European market and planning major expansions.
That picture has since changed dramatically. An overhaul of the Guinea mining code carried out with the input of legendary fund manager Mr George Soros has left the country's bauxite industry contemplating a future of razor thin margins. The expansions that were being considered now look increasingly unlikely and some appear to have been pulled altogether.
The same mining code review appears to have delivered a regime that will allow for handsome profits from the Nation's rich but to date unexploited iron ore resources. But the bauxite producers smarting from the Guinean government's tax overhaul are warning the country's iron ore developers to expect similarly harsh treatment once their projects are up and running.
The new mining code, handed down in September, mandates for the nationalization of 15% stake in mining projects with the government to also hold an option to buy up to another 20%. Royalties have been increased while custom duties have jumped from 5.6% to 10%.
Mr Aleksey Gordymov the director of commercial markets for the world's largest aluminum company, Rusal has provided arguably the most comprehensive breakdown on the impact of the changes in Guinea. Numbers revealed by Mr Gordymov at a recent conference in Singapore suggest a new tax regime that will leave the country's bauxite producers in a very marginal position. Rusal's estimates suggest Guinea's royalties on bauxite will rise to USD 14.45 per tonne up from USD 1 per tonne to USD 3 per tonne.
Based on Rusal's numbers, about 36% of the revenue from each tonne of bauxite will go to the Guinea government. Only an estimated 6% will be profit with the rest being swallowed by production costs. The geographical position of Guinea leaves Europe and US as only real markets for its bauxite. Taking into account the new taxes and freight costs, Guinean bauxite will on Rusal's projections become substantially more expensive than other sources.
Mr Gordymov said that it will even be cheaper to import bauxite from Australia to Europe than it is from Guinea. Due to new taxes, Guinean bauxite becomes totally uncompetitive.
The Guinea government wants to see its resources exploited as quickly as possible but under a taxation regime that provides maximum benefit to its people. Unfortunately with investment in the bauxite industry drying up it may have gone too far with one of its core resources. Rio and Vale will be hoping the government doesn't make the same mistake with iron ore.
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