One of Rio Tinto's top iron ore concessions is under threat after the Guinea government revealed it was reviewing the $6bn project in Simandou, stating concerns over its legality.
One broker said the move could "give wind to the sails" of BHP Billiton, the arch-rival that is trying to take it over in a $164bn hostile deal.
Shares in Rio dropped 3.6 per cent at one stage yesterday after the company confirmed to the market that it had received a letter from the President's office in Guinea. It said the office's legal team was reviewing its iron ore concession in Simandou, questioning whether it conformed with Guinea's mining code. No timetable was given for the review.
Rio said in a statement it was assessing the issues with its partner in the project, the International Finance Corporation. It said it was "confident that its convention and concession are in all respects in conformity with Guinean laws in their current form". Rio added it had started talks with officials to resolve the "misinterpretation".
The group announced two weeks ago that it would start production on the Simandou site in 2013. The chief executive, Tom Albanese, called it one of the "top" undeveloped sites in the world.
A source close to Rio said work had not stopped on preparations to launch the operation, and is expecting the results of a feasibility study at the end of the year.
Analysts at Liberum Capital said the news was disappointing despite the project being some way off development. This may give "wind to the sails" of BHP Billiton, who have pointed to the long lead time of Rio Tinto's projects in the relative valuations, Liberum added.
BHP first approached Rio in November last year, but it was rejected as "significantly" undervaluing the group. BHP was in Brussels last week to convince the European Commission that a merger would not damage competition.