Rio Tinto’s West African bet comes back to haunt it

Massive iron-ore deposits in the Simandou mountain range, in the remote forests of Guinea, promised Rio Tinto PLC riches. Now the undeveloped $20 billion project is the source of a worsening headache for the company—and a cautionary tale for miners venturing into the frontiers.

The untapped deposits were once a coveted prize in the global mining industry. Rio Tinto’s plan to dig up iron ore there would have made the site Africa’s largest mining project, hosting a pit that was to last more than four decades and transform Guinea into one of the top exporters of the steelmaking commodity.

This week, company emails that reference $10.5 million in payments made to a consultant for helping to acquire rights to massive iron-ore deposits in Guinea led to the dismissal of two senior figures at Rio Tinto: energy and minerals Chief Executive Alan Davies, and legal and regulatory affairs group executive Debra Valentine.

Emails reviewed by The Wall Street Journal show other executives— including Tom Albanese, who was chief executive at the time, and Sam Walsh, who succeeded Mr. Albanese as CEO in 2013—discussing payments to a consultant. The consultant was François de Combret, a former Lazard Frères managing director who was close to senior government officials in Guinea.

Rio Tinto has said it has notified authorities in the U.K., U.S. and Australia.

Mining companies have been forced into new frontiers to chase the most valuable deposits of everything from iron ore to copper, or risk losing out on lucrative resources developments.

At Simandou, where Rio Tinto first secured exploration rights in the 1990s, plans for a mine were complicated by a lack of rail and port infrastructure. But its development was bogged down by political upheaval, commodity-price volatility, contractual wrangling and legal issues that included a U.S. grand-jury investigation.

Appetite for iron-ore resources was big early last decade, as rapid industrialization in Asia, especially China and India, bolstered demand for steel.

Although a huge upfront investment was needed in the site—the plan included construction of a 400-mile railway from the mine to Guinea’s Atlantic coast, as well as building a deep-water port to ship the ore abroad—miners from China to Europe, including Glencore PLC, at one time expressed an interest in investing.
The Australian Securities and Investments Commission wouldn’t say Thursday whether it is looking into the matter. “We never comment on what we are or are not investigating,” spokesman Matthew Abbott said.

Meanwhile, the Australian Federal Police said it “has engaged with Rio Tinto in relation to this matter, however, the matter has not been formally referred to the AFP.” It wouldn’t comment further.

It wasn’t Simandou’s first brush with infamy. In 2008, the government of now-dead dictator Lansana Conté stripped Rio Tinto of two of the project’s four blocks, saying the miner had failed to develop Simandou in a timely manner.

The government awarded the rights to BSG Resources Ltd., the mining business of Israeli billionaire Beny Steinmetz, which later struck a deal to sell a 51% stake in its Guinean assets to Brazil’s Vale SA for $2.5 billion.
An investigation carried out by the Guinean government found that BSG Resources obtained the rights through corruption and stripped them from the company while clearing Vale of wrongdoing.

A government committee in 2014 alleged that BSG Resources used local intermediaries to bribe former President Conté’s widow, Mamadie Touré, in a bid to secure mineral rights in the West African nation. BSG denied wrongdoing.

Last year, a U.S. District Court dismissed a lawsuit by Rio Tinto alleging that Vale conspired to take Rio Tinto’s mining concessions in West Africa, with the court finding the events were outside the statute of limitations.

Rio won back the pair of blocks in 2011.

BHP Billiton Ltd. previously held its own rights to iron-ore reserves in Guinea but sold out a few years ago. On Thursday, BHP Chief Executive Andrew Mackenzie denied walking away from Guinean iron ore because of political issues.

It “was an economic decision,” he told reporters on the sidelines of a shareholder meeting in Brisbane, Australia. “It just didn’t stack up versus increasing investment in Australia.” He declined to comment on the situation facing rival Rio Tinto.

On Sunday, in a note to senior leaders, Rio Tinto CEO Jean-Sébastien Jacques acknowledged the miner was facing a challenging situation and said official investigations may take years.

The Anglo-Australian company agreed last month to sell its stake in Simandou to Aluminum Corp. of China for $1.1 billion to $1.3 billion. Earlier this year, Rio had virtually written off Simandou, recording an impairment charge of $1.12 billion, citing uncertainty with securing funding for the project.