Rio Tinto agrees huge iron ore deal

Deal with Chinese group as four employees face bribery trial in Shanghai
  • @AlistairDawber

Rio Tinto yesterday signed a deal with China's state-backed aluminium giant Chinalco to develop a $12bn (£8bn) iron ore project in West Africa, just days before four of its employees go on trial in Shanghai charged with bribery.

The memorandum of understanding represents a soothing of tensions between the two groups after Rio last year spurned an $18.5bn offer from Chinalco, already its biggest shareholder, which would have seen the Chinese group's stake in the company rise to 18 per cent.

Just a month after that deal collapsed, four of Rio's employees in China were detained on suspicion of stealing state secrets. On Monday, they go on trial on the lesser charges of accepting bribes and stealing commercial secrets.

The timing of the trial is embarrassing for Rio Tinto as it tries to improve relations with its Chinese partners. Along with BHP Billiton and Brazil's Vale, Rio is taking part in delicate talks over the annual contract price for iron ore. The miners are looking for a 90 to 100 per cent increase on the last agreed price, from 2008, after increases in the market price. The Chinese believe a 20 per cent increase is more appropriate.

The Anglo-Australian group has refused to say if it is helping the four detainees, including the Australian Stern Hu, with their legal expenses. It is understood that Mr Hu and his three Chinese colleagues, Liu Caikui, Ge Minqiang and Wang Yon are arranging their own defence.

The company has called "for a transparent and expeditious process for its employees," and has said that it is "supporting" the families of the staff involved, but refuses to give details on what kind of support it is offering. The group has also expressed its "respect" for the Chinese legal system.

If the trial, which could last a matter of days, ends in a guilty verdict, the four face up to seven years in prison. Rio Tinto confirmed earlier this week that the part of the hearing relating to the theft of commercial secrets will be held behind closed doors. About 90 per cent of criminal trials in China end in a guilty verdict.

The Australian government has registered its "disappointment" that the Chinese authorities would not allow consular officials to attend the closed session of the trial.

The agreement signed yesterday between Rio Tinto and Chinalco will allow the two groups to develop the Simandou iron ore project in Guinea. Rio shelved plans to develop the Simandou iron ore project in Guinea last year after commodity prices slumped in the wake of the economic downturn.

The group has described the Simandou site as the biggest undeveloped iron ore deposit in the world, and expects the mine to produce 14 million tonnes by the time the mine becomes operational in 2013 or 2014. Two years ago, Rio said that it would cost as much as $6bn to develop the project, although most analysts believe the cost has now probably risen to twice that amount.

"We feel that a joint venture with Chinalco could make sense for Rio Tinto in leveraging China's geopolitical influence in Africa, ability to build and control infrastructure in sensitive regions and the country's appetite for iron ore," said analysts at Liberum Capital in a statement. The analysts also said the deal would help to "mitigate Rio's political tensions in China".

What's in it for Guinea?

If the stars align and Rio Tinto and Chinalco get the Simandou project into operation, it will no doubt prove to be highly lucrative. But what does it mean for the people of Guinea, which boasts a meagre GDP per capita of just $1,014, according to the IMF?

Firstly, the Guinean government has an option to take a 20 per cent stake in the project. A spokesman for Rio Tinto said that talks are yet to start, but the government could choose to sit on the stake and keep the profits.

The project will also require a mine to be built, as well as a railway, port and roads, which will mean a number of local jobs. Rio Tinto says the project already employees 800 people.

There will also be tax revenues. Many mining companies negotiate tax deals with countries, but the project will lead to extra revenues for Guinea.