who benefits from belinga?

in early february, rumors were circling that gabon was thinking about handing over the belinga iron ore project to bhp billiton after mines and oil minister alexandre barro chambrier met with bhp’s senior management in south africa. now it seems like this transfer may come to fruition, with a number of winners and losers.

in 2007, gabon gave the belinga project to the china national machinery & equipment import and export corporation (cmec) to develop it over a 25 years. cmec promised the government that it would begin mining belinga’s high grade iron ore reserves (64%) by 2011, at a rate of 30 million tons per year under a $3.5 billion investment program. the infrastructure plan included constructing a 500km railway, a hydropower dam and port. ever since china began to drag its feet on the 1 billion ton project, the gabonese government has become increasingly impatient with its suitors from the far east. bhp, who had long been waiting in the wing, had been courting the government in the event that china could not fulfill its obligations.

i am confident that the government will formally approve bhp’s acquisition of belinga, and that a number of winners and losers will emerge. bhp will have to manage expectations with the gabonese government on their ability to quickly build out enabling infrastructure. lower commodities prices have accelerated bhp’s slowdown in earnings growth so far this year, even though the company’s most recent interim earnings before interest and tax are expected to rise to $15.7 billion from $14.8 billion in 2011. the company’s full year earnings are forecast to drop by approximately 10%, but if one were to use spot commodity prices in calculating the company’s profitability, earnings would slump even further. given the company’s challenging financial situation, the question remains whether or not bhp will cut capital expenditure spending, and/or how it will prioritize investing in these new projects. in brief, bhp has to recover from its disastrous $20 billion shale gas plays, and belinga is one important piece of the puzzle.

although belinga is positive for gabon’s macroeconomic outlook, the country’s microeconomic outlook—employment and income distribution—will not improve because the quality of iron ore mined from belinga does not need to be beneficiated. in the absence of targeted social spending programs, gabon—which has a relatively low yielding, $1 billion eurobond—like nigeria, will continue to see growth without development. nevertheless, another indication as to why there is likely to be minimal governmental interference in bhp’s acquisition of belinga is that the australian giant’s investments squares nicely with president ali bongo’s desire to break the commercial ties of françafrique that marked his father’s administration. ali’s grip on the country is stronger than that of his father, as he has further personalized his family rule, divided the political opposition, and has skilfully walked the country’s ethnic tightrope by appointing a diverse group of individuals in his government. the centralization of political power in gabon allows for bongo to fast-track many of his preferred investor’s projects through the corresponding ministries.

belinga is one such project that bongo prioritizes given the profile of investors. bhp is partnering with indian abhijeet infrastructure ltd., who will link the project to the trans-gabon railway at booué. if the railway is quickly constructed, sundance resources, which is waiting for the cameroonian government to approve the terms of sale of its mbalam iron ore project to china’s hanlong mining investment, could choose to connect with the trans-gabon railway. although the cameroonian government recently declared the proposed land in rail corridor from mbalam to lolabé port for public utility, it is possible that hanlong (or sundance) could change its mind and decide that exporting iron ore through gabon. after all, the distance from mbalam to booué is about the same from mbalam to lolabé. in this scenario, whose likelihood increases in the event china abandons or brings in an outside partner to develop mbalam, gabon and cameroon would likely run in to the same squabbles as liberia and guinea are having over exporting iron ore from simandou. similarly, bhp could choose to connect export its iron ore through cameroon, especially given that sundance has recently signed a memorandum of understanding with equatorial resources to share iron ore infrastructure resources.

while bhp, gabon, and possibly cameroon could benefit from belinga, china certainly does not emerge a winner, as losing the mine is a further blow to its plan of diversifying its sources of iron ore. about 85% of china’s iron ore comes from australia, brazil, india, and south africa, and the government does not want to be too dependent on a handful of countries. the chinese government has embarked on a flurry of joint ventures and partnerships across west africa—in guinea (chinalco’s simandou), in sierra leone (shandong iron and steel group’s tonkolili), and in liberia (wisco’s bong mines)—with the intention of providing its own domestic steel producers with a stable and diverse supply of iron ore that would ultimately allow them to be self-sufficient. along with mbalam, belinga was to be completed owned by chinese interests (a first in its african iron ore expansion), giving it license to some of the world’s largest iron ore projects. ownership of projects with high-grade iron ore would permit it to skip the expensive process of beneficiation, which would allow it to bypass much of the local content pressures that would ultimately be demanded by host governments. further, direct access and control to some of the world’s best quality iron ore would allow china to challenge the oligopolistic pricing of iron ore by rio tinto, vale, and bhp. despite the shift from an annual to quarterly system that more accurately reflects global trends, china remains uncomfortable being at the whim of the big three. although west and central african iron ore projects will not be the catalyst for china to lead the change in the structure of global iron ore markets, the setback in gabon will certainly prompt it to look more aggressively for new sources of the strategically important resource.

the coup will be televised: randgold + mali

referred to as a “soldier of democracy” by many mali watchers, the coup against mali’s president, amadou toumani touré, was certainly a surprise, but not inconceivable. the demise of qaddafi, who arguably was as stablizing as he was destabilizing, created a security vacuum across much of the region. the fall of qaddafi meant that many of the separatist movements and insurgencies across the northern sahel no longer had financial support—thousands of tuaregs who served in qaddafi’s military and worked supporting the country’s hydrocarbon industries were suddenly out of work. in the context of mali, many tuaregs joined with the mouvement national de liberation de l’azawad (mnla), a separatist movement committed to carving out a new country in the far north of mali, which is rumored to be uranium rich. the insurgency had been growing in intensity for a few months now much to the disillusionment of the central malian government. and while the highly nimble and agile mnla seemed to had been gaining ground against the malian army, the army had been doing just enough to contain the violence to the far north.

amidst this backdrop, a storm was brewing. the widows of junior and mid-level soldiers had organized protests over the failure of the malian government to sufficiently arm their husbands in battle. one of the leading presidential candidates, ibrahim boubacar keïta, had been rising in popularity due to his hardline stance on the mnla rebellion in the north. the mnla had been winning strategic battles closer to the capital, bamako. and racial tensions were escalating to an alarming high, particularly in bamako, where black malians and lighter-skinned tuaregs were reported to have been violently clashing in certain neighborhoods across the city. these factors, compounded together, were early warning signals to mali’s political fragility.

and then the coup was televised:

investors don’t like uncertainty, and as was pointed out by beyondbrics, there is nothing more uncertain than a coup in a landlocked, relatively remote sub-saharan african country. nevertheless, the market reaction to news of a military coup in mali—africa’s third largest gold producer at 36,344kg—was less surprising than the actual coup itself. suffering the largest blow to its share price since 2008, randgold tanked from the news of the malian coup. despite the fact that randgold came out and said that the coup did not pose a physical security risk to operations, investors did not believe it. while a company’s official statements should always be taken with a grain of salt in times of crisis, rangold’s loulo and morila mines are 350 and 280 km due west of the capital, respectively. so what gives?

equity investors’ reaction to today’s events in mali sheds important insight on how traders respond to political risk, particularly across relatively shallow and unknown african markets. the principal point of reference among market participants was randgold’s experience in ivory coast, when it suspended operations during the dawn of the political standoff between gbagbo and ouattara in 2010/11. in my opinion, the risk perception for randgold was exaggerated today because of the faulty comparison between ivory coast and mali because many saw the two countries’ political economies as similar. in fact, they are different for three reasons.

first, whereas gbagbo and his political allies had spent ten years developing a strong web of patronage in the countries main revenue generating sectors of cocoa and oil, the malian putschists have not developed strong patronage networks around the country’s gold mining sector, and will thus not have access to similar nodes and levels of financing that enabled gbagbo and his allies to hold on to power for so long. second, the structure of cocoa futures contractually bound sellers and buyers to honoring delivery contracts, even when sanctions were slapped on the country. it’s not surprising that in april—right after the march delivery deadline—gbagbo soon collapsed because he was unable to pay the remaining soldiers still loyal to him. in mali, the mutineers don’t have control of the gold mines, and as it stands right now, will have difficulty financing themselves because they can’t manipulate the formal channels of country’s gold industry. finally, gbagbo had the quiet support from some key players in the region, specifically angola and ghana, which enabled him to profit from his supporters’ informal trade of certain commodities, specifically cocoa. the ghanaian government in practice refused to close its border with ivory coast, and as such, cocoa beans were be smuggled across the border, mixed in with the ghanaian crop, and sold on the international market. when ivorian banks shut down because the bceao shut them off in late january, angola provided a safehaven for gbagbo to stash his cocoa revenues. with mali’s borders closed and its neighbors condemning the coup, i see it highly unlikely for the mutineers to access even an illicit source of financing in a manner similar to gbagbo that will enable them to hold on for an extended period of time.

while the situation is fluid on the ground in mali, i do think that in the long-run, mining operations are safe with mali. during the 2010 coup in niger, and the series of coups in guinea following the death of lansana conté, uranium and bauxite production remained relatively constant. scenarios in which (1) the mutineers go away on their own volition in the short-term, (2) president amadou toumani touré (ATT) is forcefully reinstated by regional or international powers, or (3) hawkish politicians like keita and/or top-level officers were to adopt the mutineers cause to advance their own gains—are more likely than the “worse case.” a worse case scenario—similar to guinea— in which the young, inexperienced mutineers run the country and are corrupted by power, would probably see mining operations uninterrupted. while it’s very possible that the putschistes could gain broader public support, their attempts at holding on to power in mali will be short lived because they cannot finance themselves for long, drawn out battle.

my suspicion is that investors reaction to political risk today have caused randgold, and other companies with mali exposure like avion, rockgate capital, iamgold, cluff, and goldfields, have caused share prices to hit rock bottom. for bullish investors with a high-risk tolerance, this could be an interesting opportunity to buy, if you are willing to ride out the political turmoil within the country—but also are willing to bet on the markets’ misunderstanding of malian political economy.

derailed: why vale isn’t on track in the west african iron ore scramble

simandou—estimated to contain 2.25 billion tons of high grade iron ore—could possibly be the largest integrated iron ore and infrastructure projects in africa. jp morgan recently estimated that vale-controlled blocks could produce 50 million tons of ore by 2020, a project which would put simandou on the same level of south africa’s kumba iron ore. jp’s optimism, however, overlooks a number of risks investors should consider when looking at vale’s position in simandou.

a brief historical overview. under the autocratic regime of lansana conté, rio tinto acquired all exploration licenses for simandou’s four blocks in 1997, and converted them in to mining concessions in 2006 while conté was still in power. right before conté died in 2008, former mines minister mahmoud thiam, announced that the northern portion of simandou (blocks 1 and 2) would be taken from rio tinto—accused of taking too long to develop the mine—and given to bsg resources ltd. (bsgr), a company whose biggest shareholder, beny steinmetz, has strong links to a number of politically-sensitive mining deals across africa. the military juntas in control of guinea between conté’s death and current president alpha condé’s election in december 2010 refused to grant bsgr complete legal rights to the concession. as a result, bsgr sold its majority stake in blocks 1 and 2 to vale up front for $500 million, with billions more payable as the project reached completion.

condé has brought relative stability to guinea since his election in 2010, and is beginning to overhaul the mining industry. condé has purged the ministry of all vestiges of thiam (who profited from bsgr’s sale to vale), weakened the power of the ministry, and has appointed a new coterie of advisers loyal to him. a new mining code was passed last fall, which states that upon issuance of a mining title, the state is automatically granted at no cost a 15%, non-dilutable interest in the share capital of the title holder, with an option to buy an extra 20% in to projects at market prices. while the new law does not change the ownership or validity of mining titles or agreements that were negotiated prior to the new code’s adoption, the government has closely scrutinized the largest and most lucrative deals opaquely signed during the 2008–2010 political transition. in order to wash their hands of any wrongdoing during the messy political transition, rio tinto paid a $700 million bonus payment to the government and negotiated a series of staged buy-in options over 20 years up to the 35% cap before the passage of the new code. vale pursued no such strategy on the eve of the new code’s passage. as such, vale’s tarnished  image—which the guinean government didn’t believe followed the law through its association with bsgr—in the eyes of the guinean government has put the company on the defensive.

the promise to invest in infrastructure—ports, railroads, and roads—is the variable that could change how the condé regime views rio tinto and vale. the global quest for iron ore has spurred renewed talks on refurbishing west africa’s decrepit rail system. rio tinto has pledged $1.1 billion to conduct feasibility studies to construct a 650 km railway (trans-guinean railway) from their part of the mine to the coast, as well as build four-berth port that could export approximately 100 million tons of ore a year. it has also proposed to begin transporting iron ore on a 900km road from simandou beginning in 2015, while it waits for the construction of a railway so as to honor delivery contracts. further, rio tinto is waiting for final regulatory approval for its joint venture with chinalco from the government, which when finalized, will trigger an earn-in payment of $1.35 billion. i believe this will likely be earmarked for railway construction. due to budget constraints in the government, it is likely that the government will not be able to pay for its proposed 51% stake in the railroad, and thus rio tinto could be forced to construct the line through a build, operate and transfer program.

in order to change how the condé administration views vale, the brazilian mining conglomerate needs to invest much more in infrastructure projects than they already have. an increasingly bullish iron ore market for 2012 that favors larger miners is positive, but rising operational costs and an unresolved commercial dispute with china over the company’s valemaxes, suggests to me that vale’s financial will to invest billions long-term in infrastructure projects in guinea is waning. outside of sharing infrastructure with rio, the most cost-effective way for the company to show its commitment on infrastructure development will be to export their portion of iron ore from simandou through liberia. vale will need to work with bhp billiton (which is eyeing mt. nimba iron ore on the guinea-liberia border) to construct a 15 kilometer spur line to yekepa, liberia, and then rehabilitate the old liberian-american-swedish minerals company, a 275 kilometer railway between yekepa and buchanan. the construction of this line is all contingent on whether the guinean government can  agree with liberia over how much would be lost in taxes and transport fees if a railway runs through liberia. recent negotiations in paris have shown that the guinean government is more open to this idea than previously hinted.

in the event that vale pulls out of simandou—as it has suggested it could possibly do by the end of this year—chinese companies could decide to bid for the vale’s majority stake. china hasn’t been entirely successful in the west african iron ore scramble as evidenced in gabon’s belinga deposit. bsgr was very close to selling vale’s present stake in simandou to chinalco when it was initially on the market, and it is very likely that if vale were to relinquish (or lose) its position, chinalco or another company (such as baosteel or wuhan, already operating in liberia) could easily pick up vale’s pieces. china has already committed to funding four-fifths of guinea’s largest power project (the kaleta dam), in a move that possibly foreshadows a new resource-for-infrastructure deal between guinea and china.