AMPLA LIMITED

THIRTY-SEVENTH NATIONAL CONFERENCE

ADELAIDE, SOUTH AUSTRALIA

16 TO 19 OCTOBER 2013

SESSION ONE

INVESTING IN AFRICA – MINING, OIL AND GAS

Philip Edmands

Rio Tinto Iron OrePerth

Case Study of the Simandou Iron Ore Project in GuineaPhilip Edmands1

INTRODUCTION

The Simandou range in the south east of Guinea has one of the largest high-grade iron-ore deposits in the world. The Simandou Project, once developed, will be the largest mining project developed in Africa to date. It will comprise one of the largest mines in the world, 650km of railway, a new port that will accommodate the largest ships to have ever docked in Guinea, and more than 1000km of upgrades to the national road network. Current estimates suggest that the project will more than double Guinea’s current GDP, and annual payments to Government will be more than twice total current Government revenues. The size of the stimulus is unprecedented in most of Africa.

Any project of this magnitude, which is being developed in one of the poorest countries in the world, necessarily raises significant challenges. This paper looks at the history of the project to date, and explains how issues that have arisen have been resolved, or are being dealt with.

However, if the submission of this case study is about anything it is about this – the security and success of projects in Africa is about correct legal protections and an enforceable and stable investment framework, but it is about much more than that. It is about practical realities, and about relationships. Good marriage laws do not necessarily make good marriages. Relationships have to be worked at. No project will be truly secure, and none will reach its potential, unless a relationship of trust exists between investor and State - a relationship that assumes legal norms and enforceable rights but is built on mutual respect, transparency, mutual understanding, and an appreciation that neither is a free agent. Each acts within a wider context – including shareholders, local communities, and relevant centres of political and geopolitical power. The investor’s and State’s relationship with each other, and with these other stakeholders, is fundamentally important.

The submission of this case study is also that it is important never to lose sight of the human element. The people of Guinea are very poor people living in a very rich land, who have a right to expect a better life. For them the orderly development of Simandou is key to realising this ambition.

HISTORY

The Rio Tinto Group (Rio Tinto) has been involved in the exploration and development of Simandou since 1997. Over time other participants have also acquired interests – the International Finance Corporation (IFC), Aluminium Corporation of China Limited (Chalco) and (prospectively) the Government of Guinea.

Superficially the time taken to develop the project has allowed critics and competitors to say that Rio Tinto has been too slow to bring Simandou into production; an allegation used (as referred to below) to strip Rio Tinto of granted tenement rights, and to allocate them to others.

In fact the existence of large quantities of iron ore in the Simandou ranges had been known for decades before Rio Tinto became involved. Initial reconnaissance field work had been carried out at Simandou by the French in the 1950’s and the Japanese in the 1970’s, but this never came to anything - reflecting at least in part the complexity of mining the deposit, and the technical and logistical challenges associated with transportation of the ore. Overcoming these challenges requires high level expertise and very significant capital. In the low price environment for commodities that preceded the boom in demand from China general investor interest in iron ore and other minerals in Guinea was very low – indeed Rio Tinto became involved in Simandou in response to the express invitation of the then Guinean Minister for Mines at a time when Guinea was having difficulty interesting any party in the project.

1 B. Juris LLB MBA (University of Western Australia), General Counsel Rio Tinto Iron Ore. Opinions expressed in this paper are those of the author, and do not necessarily represent the opinions of the Rio Tinto Group.

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POLITICAL BACKDROP

From its independence from France in 1958 until the presidential election of 2010 Guinea was ruled by a series of autocratic leaders2. Ahmed Sékou Touré was the first President after independence, and held that position until his death in 1984. He was succeeded by Lansana Conté, who took over in a military coup d’état a few hours after Touré’s death. When Rio Tinto first became involved in the Simandou project President Lansana Conté was still in power – he continued to hold the Presidency until his death in late December 2008. When Conté died Moussa Dadis Camara took over in another military coup d’état, and established a military junta. Camara’s rule was marked by great instability. A massacre at the main sports stadium in Conakry3 was a particular low point, and resulted in the imposition of European Union (EU) sanctions4. Camara was shot in December 2009, and left the country for medical treatment. His vice president, Sékouba Konaté, became interim leader until Jean-Marie Doré was appointed by the junta as interim leader in January 2010 in the lead up to elections. Ultimately the current President, Alpha Condé, was declared winner of the run off presidential election on 10 November 2010. His election has been broadly accepted as democratic and representative.5

This political backdrop has significantly affected the progress of the Simandou project. In the later period of Conté’s rule he was very unwell, and largely disengaged from any active role in government. Camara’s rule was unpredictable and erratic. There were all manner of rumours about bribes, kickbacks, secret deals and the like during Conté’s final years, and during the Camara junta, and a Human Rights Watch report suggested that Guinea at that time was a kleptocracy, with its leaders presiding over “an increasing criminalisation of the state”6. Guinea was a very difficult place to do business, especially for a major international company with a no tolerance attitude to corruption, and high governance standards. The election of Condé marked a turning point. Guinea moved from being rated not free by Freedom House in the period to 2010, to being partly free under the new administration7. In 2008 Guinea was ranked 174 (tied with Chad and Sudan) out of 180 countries for corruption – slightly better than in 2006 when it was ranked the fourth most corrupt country in the world8. By 2012 it had improved somewhat to stand at 154 out of 176 countries9.

However, the new administration continues to face great challenges. As Condé remarked in an interview with The New Yorker, “I inherited a country but not a state”10.

Ethnic tensions have been a frequent issue in Guinea. There are some 24 ethnic groups, with the three largest being Peuhl (40%), Malinké (30%) and Soussou (20%)11. The Peuhl have traditionally been the dominant commercial class – in particular controlling the rice trade. However, there has never been a Peuhl head of State. The head of State has generally drawn support from a non-Peuhl coalition, with the Peuhl dominating the main opposition party.

For the new administration a significant issue is preventing outbreaks of ethnic tension and violence - added to which are the challenges of rooting out corruption, dealing with the parlous financial and budgetary position they inherited, and, for the President, both holding together a quite disparate coalition whilst guarding against military coup (there has already been an assassination attempt against the President12).

2 See generally “Guinea Profile - Timeline”, 1 October 2013, BBC (http://bbc.co.uk).

3 See for example Claire Soares, “ Horror of Guinea stadium massacre that killed 157”, The Independent, 30 September 2009 (http://www.independent.co.uk)

4 EU Regulation 1284/2009 and the EU Military List.

5 See for example “ Conde sworn in as first democratically elected president” France 24, 21 December 2012, quoting Reuters and reporting that his election had been held up by the United Nations and others as an example of democracy for Guinea’s neighbours (http://www.france24.com).

6 As referred to in Patrick Radden Keefe, “Buried Secrets: How an Israeli billionaire wrested control of one of Africa’s biggest prizes” The New Yorker, 8 July 2013, which also gives background flavour to what Guinea was like at the time (http://www.newyorker.com).

7 http://freedomhouse.org .

8 “Guinea: Reputation for corruption worsens” IRIN Humanitarian News and Analysis, 24, September 2008 (http://www.irinnews.org ).

9 Corruption Perceptions Index, Transparency International, 2012 (http://www.cpi.transparency.org ).

10 Op. cit. at n.6.

11 The World Factbook, Central Intelligence Agency, 2013 (http://www.cia.gov).

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Simandou itself is a politically significant project. There is great ambition within the general population for its development, and for the opening up of other development opportunities along the associated railway line that must be built. This ambition is an impatient one since the presence of significant iron ore deposits in the Simandou range has, as mentioned, been common knowledge for more than a generation, and the technical and financial reasons why it is a challenging and long dated development are difficult to explain to anyone not across the close detail.

With all of the above as backdrop, this case study is a story of a project that started with much promise, had an extremely challenging interregnum when huge problems arose, and when the question for the investor was whether to persist or take legal action, the investor’s (and the State’s) decision to persist, and what further work lies ahead. It is also a story of establishing a practical pathway to move forward that would never have been possible if the State and the investor had not found a way to work together, and had instead sought to enforce legal rights of redress against one another.

TENURE AND PROJECT DIFFICULTIES Rio Tinto’s exploration and development work at Simandou proceeded initially under Exploration Permit, and then under a Concession granted under a Convention (effectively a state/investor agreement). The Convention has been ratified by the Guinean parliament, and so takes effect as law. For a number of years this work proceeded without incident (although there were challenges along the way such as grant of the Concession three years late).

Difficulties started occurring in 2008. Recall that by this stage the head of State, President Conté, was very ill, and it was difficult to determine which factions controlled the balance of power in the Government. The Government wrote to Rio Tinto in May 2008 expressing doubts about the validity of the Concession. Despite representations from Rio Tinto, and from elements within the Government, the Concession was withdrawn by decree in July 2008, and the tenure was converted to exploration tenure. Finally, on 9 December 2008, the government announced that it was terminating Rio Tinto’s rights in relation to the northern half of the Concession area (Blocks I and II). The following day BSGR Resources Limited announced that it had been granted exploration licences over Blocks I and II.13 That was just under two weeks before President Conté’s death and the takeover by the Camara military junta. Formal orders and confirmation of these changes in relation to Blocks I and II occurred in February and May 2009.

Background to Tenure Changes

The general regime established by the mining law (as then applicable) prevented a party obtaining a Concession (which is generally a development title) unless it had first submitted a feasibility study14. Rio Tinto did not submit a Feasibility Study before grant of its Concession – which led to an allegation that the grant was illegal, an allegation used to justify withdrawal of that Concession. Replacement exploration tenure was granted as a “renewal” of the exploration tenure that preceded the Concession, but there was a 50% reduction in area (ie loss of Blocks I and II) as a “renewal” requirement.15

However, this action ignored that here was a legislated exception to the general rule which allowed a Concession to be granted as an exploration and development title pre-feasibility study for minerals of “special interest” (essentially bauxite and iron ore)16.

12 See (including for commentary on ethnic tensions in Guinea) “Guinea’s President survives assassination attempt: Attack on President Alpha Condé reveals tensions remain months after Guinea’s first transparent elections” The Guardian, 20 July 2011 (http://www.theguardian.com).

13 The taking of the title from Rio Tinto and its grant to BSGR Resources Limited was reported by Bloomberg – Jean Chua and Brett Foley, “Rio ordered to give half of Guinea Concession to BSG”, 11 December 2008 (http://www.bloomberg.com).

14 Mining Code, 1995, art. 41.

15 That is the pre-existing Concession was treated as if it was an exploration title - which was then renewed applying the statutory 50% relinquishment requirement under the then Mining Code 1995, art. 30.

16 Mining Code, 1995, arts. 84 and 85.

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One of the reasons why this separate regime was applied to those minerals was because of the huge investment required for their development. In the case of Simandou, the costs of full final exploration and feasibility work run into the billions of US dollars. The special regime for iron ore recognised that it is just not feasible to expect expenditure of this magnitude without a development title.

The other reason for the special regime was the lead times involved in exploration and feasibility work before iron ore development can commence. Exploration titles in Guinea at the time allowed for an initial 3 year grant with two possible extensions of 2 years each - but with a 50% ‘drop off’ requirement on each extension. This means if exploration was to entirely proceed under exploration title then the maximum term of that would be 7 years and, if that maximum term were taken, the area would reduce to 25% of the original tenement area. Furthermore, a Concession could then still only be applied for if a full Feasibility Study, that proved the viability of the development, was ready and was lodged with the Concession application.

This regime did not work for iron ore developments, as was specifically recognised in Guinean law by the special minerals regime. Iron ore developments can be huge, and it takes a considerable period of time to prove them up. Furthermore, they are very long term developments (in order to pay back the initial huge capital outlay), and consequently need access to a significant long life deposit rather than one that is required to be ‘cut in half’ twice during the exploration phase.

So Rio Tinto was in fact properly granted a 25 year renewable Concession to undertake exploration and development work at Simandou, which was not required to be reduced in area (rather it was over a fixed area).

That said, on loss of the northern half of its Concession Rio Tinto had to take a decision on whether it would seek to enforce its Convention rights against the Government (leaving aside any rights as against third parties). If it sought to arbitrate this would be against a military junta, members of which were later to be charged for the Conakry sports stadium massacre17, an incident that a United Nations (UN) report had concluded likely involved crimes against humanity, and in which the UN singled out three people as bearing direct responsibility, President Camara, his aide-de-camp and chief of his Presidential Guard, and an officer in charge of the special services18. The junta was presiding over one of the poorest countries in the world, and one that at that time was essentially bankrupt. It is notoriously difficult to have an arbitrator seek to force a government to re-grant a title – and no doubt the military junta would have ignored any such order even if made. So all that would have been in issue in any arbitral proceeding would have been damages. However, the State had precious little by way of assets – and in any event the only assets that could be attached were assets that by rights belonged to the people of Guinea – who as mentioned were desperately poor and victims of bad government, rather than in any way accountable for what had happened.

This situation illustrates a common reality in seeking to enforce state/investor agreement rights. Doubtless the fact that Rio Tinto had a Convention acted as a disincentive to the State from taking even more drastic action, and was a reason for the State not to abrogate Rio Tinto’s rights over the southern part of the Concession (because then there would be no option for Rio Tinto but to bring proceedings). But by the same token Rio Tinto had always seen its investment in Simandou as a long term strategic one. For that ambition to be realised it needed to be able at some stage to work with the Government – something that could have been rendered nigh impossible if it had taken arbitral action against it. This is notwithstanding that the military junta was later to be replaced by a democratically elected President. That President would still have had to take account of the fact that the suit against the State would likely have been very unpopular domestically.

In the end Rio Tinto held its nerve, tried to work as best it could with the Camara regime, and looked to a time when a more reasonable administration in Conakry might work with it to resolve the issues that had arisen. It still had some looming flashpoints – in particular a continuing allegation that development of Simandou had been too slow and had to be sped up, and the fact that its remaining exploration title was due to expire in February 2011. Given that this was in terms a continuation of the original exploration tenure, and as such was on its last renewal and incapable of further renewal, Rio Tinto needed to secure broader resolution if its tenure position.

Failure to Develop in Time/Missed Development Deadlines

17 See for example Saliou Samb, “Guinea charges official over stadium massacre”, Reuters, 9 February 2012 (http;//www.reuters.com).

18 See Neil MacFarquhar, “UN Panel Calls for Court in Guinea Massacre”, New York Times, 22 December 2009 as reported by Global Policy Forum (http://www.globalpolicy.org).

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The other justification used for taking away Rio Tinto’s rights to Blocks I and II was that, in any event, Rio Tinto had taken far too long in developing Simandou, in breach of its Concession obligations, and had effectively frozen the resource. This argument continued after the northern blocks were taken away, and remained a threat in relation to Rio Tinto’s continuing tenure over southern Blocks III and IV.

There were a number of reasons why failure to have the project up and running yet was explicable and to be expected.

The Simandou development, as referred to at the outset of this paper, is simply gigantic. To highlight some of the technical challenges – the shallow waters and mud around the port will require a 24 km channel to be dredged to a depth of 18m (being currently 6m in depth), and the rail will pass through a very mountainous region, requiring 650 km of rail, 29 bridges, 22 km of tunnels and 2 viaducts.

This is all in the context of a difficult operating environment – not only must the technical challenges of the project be overcome, but so too must the compliance and process elements be overcome. For instance, there are detailed requirements that must be met in building the railway over land that traverses third party interests, various terrains and various settlements (it is estimated that over 10,000 people will be required to be relocated within the rail corridor alone). The immense challenges that this process creates are dealt with later in this paper.

More specifically, however, Rio Tinto’s efforts at completing its feasibility work were hampered by many elements outside of its control – it took five years and several delays to obtain the original Convention; it took a further four years to obtain a Concession (which was only granted in 2006); access to areas for the planned rail and port locations were prohibited for a period; and the Concession was withdrawn before the initial due date of a Feasibility Study rendering a large component of the work completed to that date obsolete, and therefore making it impossible to deliver a full Feasibility Study as originally envisaged.

It should be no surprise that a development the size of Simandou will take time to bring to production. As alluded to earlier, Rio Tinto became involved and started spending significant sums well before the deposit was generally considered attractive.

More particularly, if one looks at the opening up of other frontier mining or oil areas on this scale the timelines are if anything even longer. Development of the Carajas area of Brazil only saw iron ore production 17 years after initial serious discoveries; the Escondida copper mine in Chile produced its first ore 12 years after exploration commenced in 1979; and the Chad pipeline was only built 35 years after oil was discovered in Chad.

This raises an important lesson from the Simandou experience. Albeit oftentimes difficult it is important for developers to articulate their story in country. There are often (and certainly at that time were) many competitors quick to point to an alleged slow pace of development, and to superficially indicate that they would be much more nimble. However, at Simandou Rio Tinto was not seeking to commence some (low) production of ore, and identify a means for limited export of that, rather the commitment was to a country transforming mine, port, trans-national railway and associated infrastructure.

The other point to bear in mind here is that, once production starts, it is intended to ramp up tonnages to very significant volumes quickly. It took the Carajas region in Brazil 20 years from first production to reach the volumes Rio Tinto is planning to achieve in only a few years. At full production Simandou will be up to ten times as big as the Compagnie des Bauxites de Guinée (CBG) mine – which is currently the biggest mine in Guinea.

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SETTLEMENT AGREEMENT

Decision to Settle and Obtaining an Extension of Time

As mentioned, the exploration title Rio Tinto ended up with over Blocks III and IV was due to expire in February 2011, and under the relevant provisions of the then Mining Code (even though under the Convention they were not intended to apply) it was ostensibly on its last renewal, and so was not capable of being renewed again. Given Rio Tinto’s determination to move forward with the project, and to work with the Government to resolve title issues, some form of accommodation between the parties was required. The State had various issues itself with Rio Tinto, and the sensible outcome for both sides was a complete settlement of all outstanding matters.

Given the timing of the election of the new President19 - in particular how proximate this was to the potential expiry of Rio Tinto’s remaining exploration tenure – more time was needed to conclude any settlement than the expiry date allowed. A hiatus period was not feasible – even if the Government gave assurances, as it was likely prepared to do. No assurance, or purported exploration tenure extension, could at law extend Rio Tinto’s title, and no comfort in the absence of extension would have been adequate. Expiry of title would render Rio Tinto’s employees at site in illegal occupation, and liable to fines and gaol20. Lodging an application for replacement exploration tenure would not have assisted because grant would have been competitive with other applicants21, and because a pending application would have given no rights of occupancy prior to grant.

So the first issue was to obtain more time. The State could always re-grant the Concession. Its doing so would be consistent with the then Mining Code and the Convention, and would be valid. However, without a settlement it was unwilling to do this. There were potentially other ways of obtaining entitlement to remain on the land besides re-grant of a Concession – for example applying under the Land and Domain Code for the granting of an administrative authorisation to occupy the lands, or entering into a land lease with the State, local authorities, or private land owners (depending on the status of the land), or relying simply on rights under the Convention – but these were problematic, uncertain and unsatisfactory.

Ultimately a valid application for a new Concession was lodged by agreement with the State. This automatically extended the underlying exploration tenure until determined22. The State then advised that it would not determine this new application before three months, giving Rio Tinto a three month window to negotiate a settlement23. If the determination had been a refusal Rio Tinto would still have had 6 months from the date of the refusal to quit the land24.

Finally the application for the new Concession was made without prejudice to rights under the Convention so that it could not be subsequently argued that the making of an application under the Mining Code waived amendments to the Mining Code regime made pursuant to the Convention.

Settlement Agreement Terms

Within the ensuing three month period after lodgement of the new Concession application Rio Tinto and the State negotiated a settlement. The Settlement Agreement, which is now published25, settled all outstanding matters between the Government and Rio Tinto, and resulted in re-grant of the Concession, albeit over the southern half of the original area of the initial grant only. Rio Tinto summarised the Settlement Agreement terms in its subsequent market announcement26. Those were essentially as follows:

19 President Condé was confirmed in office on 10 November 2010, and faced a myriad of issues, not least day to day funding of the Government.

20 Mining Code, 1995, art. 177.

21 Mining Code, 1995, art. 28.

22 Mining Code, 1995, art. 50.

23 Rio Tinto media release “Update on Simandou”, 23 February 2011 (http://www.riotinto.com).

24 Mining Code, 1995, art. 50.

25 République de Guinée Comité Technique de Revue des Titres et Conventions Miniers (http://www.contratsminiersguinee.org).

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1. In recognition of the resolution of all outstanding issues and finalisation of new investment agreement terms, Simfer SA (the Guinean development company and Rio Tinto subsidiary) would pay US$700 million to the Guinean Public Treasury upon promulgation of Presidential Decrees granting its mining concession and the approval of the proposed Chalco and Rio Tinto Simandou joint venture.

2. First shipment of ore was to be by mid-2015 subject to extension of time entitlements, but Simfer was to make every reasonable effort to achieve first production by the end of 2014.

3. The terms of the Settlement Agreement would not be affected by any changes introduced by the Government as a result of its (then) current review of the Mining Code, or any future reviews.

4. The Government of Guinea would have the right to take a stake of up to 35 per cent in the project, including 15 per cent at no cost to the Government, as follows:

From the grant of the Presidential Decrees: a 7.5 per cent non-contributing stake and 10 per cent fully contributing stake at historic cost in the mining project;

Five years from the grant of the Presidential Decrees: a further 7.5 per cent non-contributing stake;

15 years from the grant of the Presidential Decrees: a five per cent fully contributing stake at market value; and

20 years from the grant of the Presidential Decrees: a five per cent fully contributing stake at market value.

5. A stabilised fiscal regime was agreed to by the parties to apply for the lifetime of the mine. There would be an income tax holiday of eight years from the first taxable profit, followed by a general tax rate of 30 per cent. Royalties would be payable at 3.5 per cent FOB for all exported ore. Simfer would also be exempt from withholding tax on dividends. All imported goods used for construction and maintenance would be exempt from VAT and Customs duty.

6. A new rail line would be built through Guinea, and a new Guinean port would be constructed to transport ore from mine to ship. The infrastructure would be jointly owned by the Government of Guinea and the other Simfer partners, with the Government able to hold a maximum stake of 51 per cent. Participants in the infrastructure joint venture would be required to fully fund their proportion of the infrastructure capital cost.

7. The new infrastructure joint venture would appoint Simfer as operator for the rail and port. The rail line would be available for passenger and freight trains and Simfer, as operator of the joint venture, might haul other mineral producers’ ore subject to commercial agreement. Simfer would have the status of a foundation customer, and would therefore retain priority use of the infrastructure.

8. The infrastructure would revert to Government ownership once fully amortised, after 25 and before 30 years. Simfer would retain its status as a foundation customer. On transfer of the project infrastructure to the Government, the Government would put the management of the infrastructure to international tender. Simfer would be one of the parties invited to tender. Any user charges for access to Simfer would reflect its status as a foundation customer.

26 Rio Tinto media release “Rio Tinto and Government of Guinea sign new agreement for Simandou iron ore project”, 22 April 2011 (http://www.riotinto.com).

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Some Interesting Features of the Settlement AgreementThe US$700 million paymentThe payment to the State of seven hundred million US dollars as part of the settlement was seen by some as an example of the high risk of investing in emerging jurisdictions27. However, Western Australia similarly altered the ground rules in relation to royalties notwithstanding provisions in State agreements fixing those28. Furthermore, Western Australia negotiated a payment of three hundred and fifty million Australian dollars in exchange for removing restrictions under State agreements to allow for pooled developments29. In fact States – developed or developing – do from time to time seek one off returns for agreeing to particular matters.

A requirement in relation to the payment (from all parties’ points of view, including - very strongly – the Government’s) was that it not offend any of the anti-bribery restrictions in the Criminal Code Act 1995 (Cth), the UK Bribery Act 2010, the US Foreign Corrupt Practices Act 1977 or the US Dodd Frank Wall Street Reform and Consumer Protection Act – or indeed the provisions or sentiment in the OECD Convention on Combating Bribery of Foreign Public Officials. Countries are entitled to seek payments in settlement of disputes and in relation to dispositions of State assets. What is important, in a legal sense, in relation to these payments is that they are indeed to the State, and not to public officials. Even if they are legal in that sense it is still important in a reputational sense that they not be put by the State to colourable use. So, for instance, no investor would want funds paid in this way to be used for weapons then used against the country’s civilian population.In the case of the payment under the Settlement Agreement the following were important features of its legitimacy and appropriateness:

1. The payment was directly to the Guinean Treasury, and not to any public official in his or her individual capacity. (There were exhaustive cross checks to ensure this.)

2. The payment was a legitimate payment to resolve ongoing legal and commercial disputes.3. The payment was completely transparent.4. The intention of the benefits under the Settlement Agreement was to secure Rio Tinto’s rights to

develop the resource, not to influence a public official to make a decision or to act to give Rio Tinto an improper business advantage.

5. The parties committed not only to all applicable laws but to the principles incorporated in Rio Tinto’s general policy document “The Way We Work”30, the Equator Principles31, the IFC’s Performance Standards on Social and Environmental Sustainability32, the Voluntary Principles on Security and Human Rights33, the World Economic Forum Partnering Against Corruption Principles for Countering Bribery34, and Transparency International’s Business Principles for Countering Bribery35.

6. The State gave comprehensive warranties as to the proper use of the monies.

27 For instance David Winning writing for The Wall Street Journal on 25 April 2011 in an article entitled “Rio Tinto agrees to give Guinea Stake in Project” said “the settlement shows how Western companies like Rio Tinto are increasingly being pressured to renegotiate contracts with governments in less developed regions like Africa, or risk being shut out of lucrative resources developments” (http://online.wsj.com).

28 Ministerial Media Statement from the Hon. Colin Barnett “WA benefits from changes to State Agreements”, 10 November 2011 (http://www.mediastatements.wa.gov.au ).

29 Ministerial Media Statement from the Hon. Colin Barnett “Changes to State agreements finalised”, 3 December 2010 (http://www.mediastatements.wa.gov.au ).

30 The December 2009 edition of which is available on http://www.riotinto.com.

31 A credit risk management framework for managing environmental and social risk (http://www.equator-principles.com).

32 The IFC has comprehensive Performance Standards to address environmental and social risk in the private sector, which form part of the IFC’s Sustainability Framework 2012 Edition (http://www.ifc.org ).

33 These were established in 2000 through a multi-stakeholder initiative involving governments, companies and non-governmental organisations that promotes implementation of a set of principles that guide oil, gas and mining companies on providing security for their operations in a way that respects human rights.

34 http://www.weform.org.

35 http://www.transparency.org.

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7. The State further agreed to in all respects implement the Principles and Criteria of the Extractive Industries Transparency Initiative (EITI)36, including submission of all monies received to independent audit and publishing the results.

The parties were in close liaison in relation to the payment in any event, which gave additional comfort regarding the fact that the funds were being held for much needed public expenditure by a government facing severe budgetary constraints.

Fiscal arrangements a package

A particular issue in investor/state agreements is to recognise that Governments require money in inflating amounts, and in particular not simply in long dated lump sums. They also need to be able to fund any project requirements without damage to the budget – particularly if there are already budgetary challenges (as there are in Guinea). The assumption by the State of significant liabilities can have implications for that State’s arrangements with, for instance, the International Monetary Fund (IMF), or prejudice that State’s ability to seek debt relief under the Heavily Indebted Poor Countries (HIPC) Initiative of the IMF and World Bank – as Guinea has been seeking to do with some success37. In that context long tax holidays, or State contributory participating interests, can be a significant issue.

However, the fiscal package here has to be seen in its totality. In the case of Simandou the State has received an upfront sum of US$700 million, and will receive mineral royalties from commencement of production. It will also receive progressive interests in the project at sometimes (the effectively heavily discounted price of) historic cost, sometimes for no cost, and sometimes (in the case of long dated interests) at market value – these being a mix of contributing or non-contributory interests. This combination provides the State with assets it can valorise or alternatively fund out of project cash flow, and because of the significant State capital and operating cost contribution forgone, and the heavily discounted State entry price in some cases, this combination represents a significant additional financial benefit to the State which needs to be seen as an alternative to (but no less beneficial than) tax receipts.

There is a separate issue concerning infrastructure – and in particular the State taking up a 51% interest in that infrastructure with attendant liabilities. As referred to below, a railway through Guinea has been a long held national aspiration, and this explains the State’s desire to own a majority stake in that infrastructure. This notwithstanding the Public-Private Infrastructure Advisory Facility (PPIAF) and the IFC have just issued a report38 which examines the financing of mine related infrastructure (including rail and port infrastructure) in Sub-Saharan Africa. As the PPIAF/IFC report observes, public sector ownership of major infrastructure is not realistic in many countries because the relevant States simply do not have the borrowing capacity to support this. In the case of the Simandou project, as reported, the parties have now agreed that a separate infrastructure consortium will construct the infrastructure – rather than the State taking up its share39.

Non-financial aspects

However, the Settlement Agreement was not only about economics. All States must, as mentioned, answer to a complex web of stakeholders, and local politics and regional strategic issues matter. In Guinea the concept of an operational railway through central Guinea has been a popular aspiration since the pre-existing rail network fell into disrepair after independence in the 1950’s. This drives popular views about whether rail infrastructure for iron ore projects in the east of the country should be routed through Guinea, or should take the shorter, less mountainous, and cheaper route through Liberia. Added to this is the fact that the State wishes to see the

36 The Extractive Industries Transparency Initiative is a global coalition of governments, companies and civil society working together to improve openness and accountable management of revenues from natural resources, and has produced a set of principles. Guinea is an EITI Candidate Country – that is Guinea is implementing EITI but is deemed to be not yet meeting all requirements (http://eiti.org).

37 See “IMF and World Bank Announce US$2.1 Billion Debt Relief for Guinea”, International Monetary Fund, Press release No.12/363, September 26, 2012 (http://www.imf.org).

38 “Fostering the development of green-field mining related infrastructure through project financing”, PPIAF/IFC, April 2013 (http://www.ifc.org ).

39 See for example “Simandou’s Infrastructure: Conakry pulls out”, Africa Mining Intelligence, 8 October, 2013. In an earlier report there was reference to agreement on a more realistic production commencement date -“Simandou: Rio Tinto sighs with relief”, Africa Mining Intelligence, 27 August 2013 (http://www.africaintelligence.com).

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hinterland of Guinea opened up by infrastructure – not only in respect of minerals, but for the significant population engaged in agriculture in what is a potentially very productive agricultural area. Finally, Liberia has been in recent times very unstable, and involved in a bitter civil war. Clearly there is a strategic issue for Guinea if its main export artery travels through Liberia - unless it can be sure those troubles will not reoccur.

All of these factors are not picked up by a negotiating position that focusses solely on technical and economic issues, and indeed it is submitted that it is important that any investor’s negotiating position not simply focus on these matters. In Guinea the most economical solution (in a narrow sense, and ignoring social costs and benefits) may well be a railway through Liberia. However this is not a practical or acceptable solution for Guinea. Ultimately a way was found to make a railway through Guinea work for the project.

ONGOING CHALLENGES

EU Sanctions

Following the sports stadium massacre referred to earlier in this paper, sanctions were imposed by the European Union on Guinea40. The sanctions prevent explosives and related equipment being sourced from an EU member state, and contain wide ranging prohibitions on any EU national being involved in widely defined “Prohibited Activities” in relation to the sourcing of those explosives or related equipment. Issues have arisen regarding the sourcing of explosives and related equipment necessary for mining and infrastructure projects. On application the EU has reviewed the Council Decision imposing these sanctions and determined that exceptions should be made to the blanket prohibition to allow the Prohibited Activities - provided the explosives and related equipment are intended solely for the use in mining and infrastructure developments, the storage and use of the explosives and related equipment and services are controlled and verified by an independent body, and the Prohibited Activities have been approved by the relevant EU member State prior to them occurring. This sanctions issue, however, is an illustration of the need for investors to check in relation to target states that there are no applicable investment or other restrictions, breach of which could be quite inadvertent but potentially carry very onerous penalties.

Infrastructure: Multi-use; a Catalyst for Growth

The railway infrastructure for Simandou will be multi-use for minerals, and potentially for passengers and agricultural product. This is in contra-distinction to railway infrastructure in, for instance, the Pilbara region of Western Australia. It is useful to make a few brief points about some of the distinctions that apply. First, the Simandou ore is very high quality, and will not be blended before shipment from Guinea. Consequently, the scheduling disruption that multi-use could cause to blending operations (where there is real time switching of schedules to allow tweaking of the blend depending on constantly changing ore characteristics at multiple mine sources) will not occur in Guinea. Secondly, the question of whether the railway can be economically duplicated as an alternative to multi-use is a much more challenging proposition in Guinea. Thirdly, the railway in Guinea will pass through a heavily populated hinterland that desperately needs better transport routes, and in respect of which the State as a matter of policy requires multi-use infrastructure.

An issue created by the sheer extent of the railway is the rail corridor requirements. As mentioned, it is expected that over 10,000 people will need to be resettled to make way for that corridor. This resettlement will require great care. An illustration of unintended consequences that can arise with resettlement is the situation of coal mining in Mozambique. Human Rights Watch has recently issued a publication entitled “What is a House without Food?”41. That publication describes how mining companies in collaboration with the State have been involved in the resettlement of river communities to an inland area of Mozambique. The area chosen was endorsed by the State. However, it is quite different to the area in which those communities originally lived – it is not along the river, and there is poorer access to water for growing crops and poorer transport access (which affects the ability to trade). The ways in which those communities fed themselves on their original land are not available to them in the resettled area. So, whilst they have much better accommodation, they are reliant on food aid, and their way of life is altered. The question then arises of the extent to which, on the one hand, the companies involved in resettling them (to enable those companies to mine the original land) and, on the other

40 EU Regulation 1284/2009 and the EU Military List.

41 Human Rights Watch, May, 2013 (http://www.hrw.org ).

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hand, the State must assist with ongoing food aid - or indeed other assistance so that those resettled can establish a viable way of life.

Given compensation entitlements in relation to those displaced, or in relation to acquisition of necessary tenure, the further question arises of how to prevent new interests being created within the corridor (and the port area). This has been dealt with by creating a Projet d’Intérêt National (Project of National Interest or PIN)42. This, in its application to the relevant rail corridor (and port area), has the effect of preventing further acquisition of interests. It does not of itself confer title, which will need to be separately and individually acquired for the myriad of interests that currently exist.

These challenges notwithstanding, there is huge potential for Simandou’s infrastructure investments to underpin a corridor of growth and development in southern Guinea, as shown by the map below. At the moment there is a patchwork of poor quality roads but no proper arterial transport route across southern Guinea, and the Simandou railway will open up a huge hinterland.

Port Mine

42 Rio Tinto media release “Simandou infrastructure declared a Project of National Interest for Guinea by presidential decree”, 15 October, 2012 (http://www.riotinto.com).

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Co-participants; Financing Issues

Equity co-participants with Rio Tinto in the Simandou project are, as mentioned, Chalco, the IFC and (prospectively) the Government of Guinea. The important point about this is that each brings separate strengths to the project. For a country such as Guinea, and an investment as significant as Simandou, it is submitted that the imperative is to achieve balance in the equity investment group, and in the lending consortium. This fits best with the strategic interests of the country in opening up investment broadly whilst ensuring that no single investor is unduly dominant, and with the interests of the investors in spreading risk and allowing them to leverage off each other’s separate strengths.

Chalco, as a subsidiary of a Chinese State Owned Enterprise (SOE), is in one sense representative of a sovereign investor. However, Chalco is very much a commercial investor in the project – SOE’s frequently compete aggressively against one another, and are expected to act commercially, notwithstanding the regulatory constraints in their home jurisdiction (for instance approvals from the State Owned Assets Supervision and Administration Commission of the State Council - SASAC, the National Development and Reform Commission – NDRC, and the Department of Outward Investment and Economic Cooperation of the Ministry of Commerce). Chalco, however, also has links with Chinese lending institutions and construction companies, many of whom have significant presence and experience in Africa, and is a significant mining company in its own right.

Rio Tinto is an experienced iron ore miner – one of the largest in the world – and has obviously not only developed significant iron ore mines, but also very significant associated rail and port infrastructure. Furthermore the ability of a leading international mining group to develop a project such as Simandou obviously has great reputational significance for Guinea as an investment destination.

The IFC is a small equity investor but its significance should not be underestimated. It will typically only take a small equity position in any single project, and will also want to avoid being overly exposed to a relationship with any single third party investor. Whilst the IFC will apply its deep relationships with governments to advancing the objectives of its charter, it can be expected to act as a voice of reason with governments (not least because one of its primary objectives is to advance economic development by promoting investment in strictly for-profit and commercial projects43). Furthermore, it will have its own requirements in terms of governance, environmental and social standards44 . There is (correctly) an expectation that the IFC takes a very strong line on proper governance and standards, which enhances the reputational standing of projects in which it is involved.

The above of course focusses on the IFC as an equity participant. It is also able to marshal loan funds, but for any major single development these are likely to be relatively modest (although the IFC tends to carry influence within lender groups disproportionate to its lending commitment).

Finally, it is fundamental to bear front of mind that the State is also a partner in this project – ultimately in equity terms, but also very much in a general sense.

Whilst, as mentioned above, mine and infrastructure will be split (with an infrastructure consortium likely developing the infrastructure), there will obviously be a mutually interdependent relationship between the mine and infrastructure, both operationally but also for financing purposes. Notwithstanding that the infrastructure will be multi-use, the Simandou mine will underpin it. Lenders are likely to require relevant sponsors to assume the risk of successful and timely construction to required specifications, and relevant ramp up of the mine to appropriate levels to support infrastructure payments necessary to meet debt repayment requirements. Some form of take or pay in relation to infrastructure capacity will also be required. Consequently the mine, as foundation customer and in a sense key to these investments, will need to be protected for the risk it will be assuming.

An optimum financing outcome, it is submitted, is again one that displays balance between participants – so a mix of export credit agencies (their mix depending on procurement strategy), commercial banks and development banks, supported by insurance providers. The incidence of a commercial financing of a project has

43 Article 1 of the IFC’s Articles of Agreement describes the purpose of the IFC as being to “further development by encouraging the growth of productive private enterprise in member countries, particularly in the less developed areas” (http://www.ifc.org ).

44 As referred to at n.32.

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the potential to enormously enhance Guinea’s reputation as a rehabilitating State, and as a destination for investment.

As a separate point in relation to participants more broadly, there are agencies that seek to promote good governance and development of natural resources in emerging jurisdictions. One particularly active example is the Revenue Watch Institute (RWI), which has a keen interest in Guinea. Whilst these agencies are focussed on assisting countries realise the development benefits of their natural resource wealth – in other words cannot simply be expected to be the advocates of the investors’ interests – they seek to do this on the basis of sound economic and investment fundamentals, capacity building and advice. So they can be expected to be a voice of reason, and they also support governments in themselves obtaining expert advice.

Finally, it is worth mentioning that, to facilitate working together, the Government and the other participants have set up technical committees for technical construction and infrastructure corridor issues, and a very high level working group for strategic issues. For technically complex developments such as this one it is submitted that these forms of “clearing house” for issues are, if not vital, to be highly recommended.

CONCLUSION

This paper has focussed on practical experience and realities on the ground in relation to the Simandou project to hopefully illustrate how legal theory and practice sometimes need to diverge. The central thesis has been that parties should focus, not just on legal protections, but on relationships (including in a very respectful way with the population of the host state), and on the strategic long term. If they wish to remain in the project for that long term they will need to be able to work with the Government, and ultimately there will need to be trust between the investors, the Government, and the population.

There is also a human element. These investments are about ordinary people’s lives, and decisions should not be taken in a legal vacuum that ignores the profound responsibility that this imposes. As Patrick Keefe has said in an article in The New Yorker45, the Western world has thought of Africa as a place to take things from – whether it be slaves, diamonds or rubber – and indeed named some African States after the things that could be taken from them (Côte d’Ivoire and the Gold Coast, as Ghana was formerly called). It is submitted that an approach that assumes a set of legal rules for taking things, and some payment for doing this, as an operating model for investment in Africa is not only wrong, but increasingly will not work. Competition for resources is becoming more intense, the countries of Africa have more options available to them, and there are an increasing number of organisations that are supporting Africa in capacity building and in formulating good policy. Investment in Africa, it is submitted, is centrally about balanced partnerships. Balanced partnerships endure.

So in conclusion it is useful to quote some comments by the former Secretary General of the United Nations, Kofi Annan in the context specifically of Australian mining company investment in Africa46. These related in particular to tax issues, but their sentiments are more generally applicable:

“Australian investments in Africa must be seen to be transparent to create long-term partnerships needed for generating the best returns … Managed correctly, foreign expertise and investment … represents enormous opportunity to improve the lives of millions in Africa. Long-term partnership will be key to generating the best returns. Australian investments in Africa must be seen to be fair … meanwhile, increasing internet access and the return of many well-educated Africans from overseas are helping to boost awareness of tax avoidance issues. And Africa’s tolerance is declining. For companies, this will likely emerge as a hot reputational issue that may ultimately impact access to mining resources ... Some companies, such as Rio Tinto, have shown impressive effort to become more transparent with their tax payments. Other Australian companies, including the small and medium-sized, may wish to enhance their reputations and long-term relationships in Africa, their “social licence to operate”, by taking the initiative on tax and transparency issues … Africa and Australia have common interest in creating a predictable and fair global business environment. This is particularly important to the people of Africa, who expect their fair share of the wealth beneath their soils and waters. What Australian companies may lose by accepting to pay fair taxes and investing in their host

45 Referred to at n.6.

46 “Rewards for mining companies that play fair on tax in Africa”, Kofi Annan, Australian Financial Review, 30 August 2013 (http://www.afr.com ).

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countries’ economies, they will regain many times over through the benefits of a predictable, rule-based and transparent business environment and positive long-term partnerships.”

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