Following at least 2 years of discussions and after having, in 2013, excluded the project from its portfolio of investments, Vale began to officially admit the possibility of losing $507 million invested in the purchase of mining rights at an operation at Simandou in Guiné, on the west coast of Africa.

The possibility was confirmed by the company itself in a document filed with the US Securities and Exchange Commission (SEC) on Thursday. “If the technical committee (created by the local government) recommends the revocation (of the mining rights) and that the government of Guiné decides to accept this recommendation, Vale could lose all of its investment in the Simandou project, depending on the outcome of any appeals to which Vale may have rights,” said the document, known as 20F, which was sent to the SEC. Vale also sent a notification on the document to BM&FBovespa.

Despite this acknowledgement, Vale determined that the outlook for Vale remains undecided, meaning that the Brazilian mining company could remain or may have to give up Simandou. The uncertainty derives from the fact that the moment the government of President of Guiné, Alpha Condé, still hasn’t made a final decision regarding the process of contract review that seeks to harmonize current mining contracts with the new mining code adopted in 2011 and altered in 2013. The contract review has rules that foresee the cancellation or renegotiation of mining rights, depending on the findings and technical recommendations of the technical committee created by the government.   

Vale entered Simandou in 2010, still during the administration of former CEO Roger Agnelli considering it one of the best unexploited iron-ore deposits in the world. On the occasion, Vale agreed to pay $2.5 billion to acquire 51% of BSG Resources, controlled by Israeli entrepreneur Beny Steinmetz, owner of concessions in South Simandou (Zogota) and exploration licenses in Simandou North (Blocks 1 and 2).  Zogota has nominal capacity estimated at 15 million tons of iron ore annually.  Both companies were associated to VBG, a partnership in which Vale has 51% and BSGR 49%.  

After paying $507 million to BSGR at the closing of the transaction, Vale would disburse the remaining amount when some production targets were met, including a payment of $180 million by December 2012 which was never made. The partners disagreed in relation to this payment because Vale understood that the conditions for making this disbursement weren’t met and that a force majeure event occurred according to the terms of the contract. 

After president Alpha Condé took up, at the end of 2010, the presidency of Guiné, a country that spent years under dictatorships and authoritarian regimes – and the government had determined the review of mining contracts, allegations surfaced regarding alleged corruption practices involving BSGR. BSGR in fact, together with the former government of Guiné, became target of a lawsuit opened in the US to investigate allegations of corruption surrounding the Simandou project.  

In the document sent to the SEC last week, Vale informed that a the technical committee, following a review of mining deeds, notified VBG that it planned to recommend that the government of Guiné revoke the mining rights held by the company. 

“We don’t have access to the full report of the technical committee, but we understand that this decision is based on corruption practices in relation to the concession of mining rights to VBG, before Vale’s acquisition of a stake in VBG.   As far as we know, the technical committee didn’t allege wrongdoing on the part of Vale. Vale acquired its share in VBG after the end of a comprehensive due diligence carried out by external consultants with basis in the declaration that VBG had legally obtained its mining rights without undue promises or payments,” according to a section of the document. 

If the mining right held by VBG is cancelled, Vale could lose its entire investment made in Guiné. But, according to a source familiar with the matter, it’s not possible to say whether Vale will write down the $507 million invested in Simandou as a loss. Market sources say that BSGR could be excluded unilaterally from the project. In this case, Vale could remain at Simandou. But the cancellation of VBG’s mining rights as a whole can’t be ruled out, including Vale’s stake, or possibly the transference of the concession to a third-party company.   

According to conclusions of one source, the 20F report addressed the Simandou case from a legal perspective. In the political sphere, Vale has good relations with president Alpha Condé. Vale CEO Murilo Ferreira was in Guiné in January and held a meeting with Mr. Condé. Although there is information that the committee report is ready to be delivered to the president, it’s uncertain whether Mr. Condé will accept it partially, or totally, nor when this might occur.  What’s important for Vale will be to understand all the points in the report and, after that, understand president Condé´s decision when it is made.