Rio's chairman can't tell whole story of Guinea chat

THERE is just a hint of the Neville Chamberlains in the proclamation generated by the summit meeting between Rio Tinto's imposing chairman Paul Skinner and the often bed-bound hard man of Guinea, President Lausana Conte. Having chatted for the first time with Guinea's toughest guy, Chairman Skinner emerged to declare a "positive engagement" and the construction of a "framework" for progress on Rio's plans to invest $US6 billion ($7.6 billion), and much, much more, on the Simandou iron ore project. Peace in our time, then? Well, barely. The real story here is told by what Chairman Skinner could not say after he and Rio Tinto iron ore boss Sam Walsh spent time with President Conte, along with Guinea's recently appointed Prime Minister Tidiane Souare and a team of senior ministers and members of the National Assembly. In August, President Conte's staff dropped Rio a note announcing the Government's intention to rescind the company's rights over Simandou. And, whatever the progress today, that threat still stands. Simandou is a 2.2 billion tonne, seriously high-grade iron ore deposit that has the potential to make both Rio Tinto and Guinea an awful lot of money. It is the best of three big iron ore discoveries in the Simandou Ranges which creep along Guinea's border with Liberia. The other two concessions are owned by BHP Billiton and ArcelorMittal. There is no doubt that, at some point over the next 20 years, Guinea will be the world's third-biggest seaborne trader in iron ore after Brazil and Australia. In the shorter term, though, Simandou is also an integral element in Rio's promise to outperform its $US160 billion suitor, BHP Billiton. Rio has committed itself to a compound annual growth rate of 8.6 per cent up to 2015 on the back of the expansion of a collection of brownfields operations in aluminium, copper and iron ore and a fleet of greenfields projects. In May, Rio delivered a list of five tier-one growth projects which would form the new foundations of growth. That list was headed by Simandou, which is planned to begin production in 2013 and to be producing 33 million tonnes of premium grade product by 2015, on the way to 70mtpa by 2018. So far Rio has spent $US300 million on pre-feasibility work at Simandou and it is burning cash at about $US20 million a month on drilling and the design of the rail and port facilities. Back in May that all sounded almost achievable. But, just weeks later, came the presidential curve ball. President Conte's August letter confirmed a threat made in a similarly bizarre and totally unexpected note from the President's office in June which challenged Rio's concession. If Rio was gently shaken by the June correspondence, it was well and truly stirred into action by the second, confidence sapping missive. Hence the mission from head office in London and iron ore central in Perth. Team Rio left the Guinea capital Conakry with plans for further discussions with a special Inter-Ministerial Committee formed to address some publicly unspecified "issues of concern to both parties". The idea, according to Rio's press release, is to "establish an aligned basis" for the project. What does that all mean? Well, let's play code-breaker. As things stand, Guinea will, at some point in Simandou's progress, own 20 per cent of the project. Now there is absolutely no way Guinea can afford to either pay for that stake or, more importantly, carry anything like a 20 per cent share of the spend on what is going to cost much, much more than the $US6 billion figure Rio talks about publicly. Simandou will require the construction of 700km railway, a 20km wharf and mining infrastructure that will eventually support a 170mtpa operation. No one in mining reckons Rio will get away with much change out of $20 billion. Given recent precedent -- like the evolving deal between the Mongolian Government and the partners in the giant Olu Tolgoi copper mine (which include Rio) -- the government's carry would be funded from its share of future cash flows. The likelihood then is President Conte's people have seized on the suddenly extremely strategic nature of their resource by attempting to extract a greater ownership share of Simandou or a fundamental change in the financial terms that underpin the state's ownership. The problem here for Rio could well be that it has been party to a Mongolian deal that seems to promise 51 per cent of the ownership of Olu Tolgoi to the host state. Law games INSCRUTABLE to the end, Dato David Law has retired from the board of Midwest Corporation but left neither it nor its new owner, Sinosteel, any the wiser about whether he is of a mind to accept China Inc's offer for the emerging iron ore miner. With two days left to deliver acceptances, Midwest's failed merger partner, Murchison, cashed in its chips last night, selling its once strategic 9.2 per into Sinosteel's gob-smacking $6.38 offer. That leaves Sinosteel with 70 per cent of Sinosteel, but with the Dato and a New York hedge fund still standing between it and total victory. The Dato controls nearly 13 per cent, while the indomitably Philip A. Falcone of Harbinger Capital owns 15 per cent. . Given Falcone has paid up to $7 a share for Midwest scrip and topped up through July when prices were closer but still higher than Sinosteel's offer, it would seem he is unlikely to blink here. But what about the Dato? One understandable and quite logical view is that Law's departure from the Midwest board signals his intent to accept into the offer. After all, the sale will generate $180 million, with most of that representing a profit, given the Dato's began his Midwest adventure when the stock was trading at nearer to 30c a share. Ah, but as ever with the Dato, there is another theory doing the rounds and it flows from a firm belief that he is not exactly keen to deliver 25 per cent of his gain to the federal Government in the form of capital gains tax. Crucially, the only reason the Dato has to pay capital gains tax, given he is a foreign investor, is that he owns over 10 per cent of Midwest. Clearly then, the Malaysian's interests would be well served if Midwest were to pursue a capital raising in the form of, say, a renounceable rights issue. Given the Dato then politely refuses to take up his entitlement, he would be diluted to under 10 per cent and be able to sell his stake without paying capital gains tax. Neat stuff. But why would the likes of Sinosteel help the Dato out with a rapid-fire Midwest capital raising to finance plans to mine the Weld Range and Jack Hills iron ore mines? Well, that is surely what you do when you have a shareholder like Falcone standing between you and 100 per cent ownership of Midwest. Given Falcone does not bail on Monday, he would have to take up his entitlement to 15 per cent of any issue or face leverage eroding dilution. The more Sinosteel attempts to raise, the more pressure it puts on Harbinger and the faster it does it the easier it becomes for the Dato to accept the offer and bring the 12- month war over Midwest to its endgame. It is a win, lose, win, if you like. Source: The Australian