Kumba sues Senegal for $667m

Kumba sues Senegal for $667m
Dec 27 2007 02:51 PM
Sherilee Bridge

Johannesburg - Mining giant Anglo American's Kumba Iron Ore is suing the Senegalese government for US$667m, or as much as R4.7bn, after tearing up an iron ore extraction contract, Dow Jones Business News reported on Wednesday.

Kumba is accusing Senegalese authorities of "culpable behavior" after its contract to explore the resources with a view to creating and operating an export-orientated iron ore mine at Falémé was severed in favour of an agreement with the world's largest steel maker ArcelorMittal in February this year.

Quoting the firm's lawyer Boucounta Diallo, the report said the warring parties had agreed to submit their dispute to the International Court of Arbitration.

Kumba accuses the West African country of "breaking the contract in ... an unorthodox fashion" since it had already started exploration when it was ordered to withdraw from the Falémé area, in the southeastern region of Senegal.

Senegal's state-owned development company Miferso, which owns the exploration rights to the Falémé iron ore resources, and Kumba concluded an agreement to explore and develop the resources in July 2004.

Kumba planned to spend an estimated US$2bn on the project, including the development of a 20m tons-a-year mine, installation of 340km of rail and the refurbishment of another 400km of rail as well as the development of port export facilities at Dakar.

In terms of the 2004 agreement, Kumba was given the right to conduct a pre-feasibility study and an option to acquire an 80% interest in the project from Miferso before embarking on a bankable feasibility study.

The option to acquire an 80% interest in the project was exercised in November 2005 but following receipt of notice of such exercise, the government of Senegal and Miferso informed Kumba that they disputed the validity of such a right.

ArcelorMittal

Exploration of the 750m ton resource has now been delayed for two years after negotiations over an amicable solution were stopped short by an ArcelorMittal announcement that it had concluded an agreement with Senegal.

ArcelorMittal is investing around US$2.2bn into what is the largest ever industrial project in Senegal and aims to extract 25m tons of iron ore from 2011.

The steel giant also agreed to pay the Senegalese government a five percent royalty on iron ore from the Falémé mine despite Senegal's mining code dictating a royalty of only three percent.

Senegal has argued that it was within its rights to rescind the contract for extracting iron ore in the Falémé because Kumba missed certain deadlines.

Kumba is 64% owned by Anglo American and produces 32m tonnes of iron ore a year from its principal operating assets at Sishen and Thabazimbi in SA.

The company intended to more than double its current capacity to 70m tonnes by 2015 by exploiting the full potential of the Northern Cape iron ore resources under its control and other opportunities, including those in West Africa.

Falémé alone had the potential to take Kumba's production to around 80m tonnes per annum.

ArcelorMittal has in the meantime indicated that it plans to push ahead with the iron ore project after the Senegalese government officially handed over the concessions in July.

It is ironic that Kumba and the SA arm of ArcelorMittal were both born out of the unbundling of Iscor, the largest SA steel producer, in 2001.

As a result of Mittal's buyout of Iscor, it still benefits from a supply agreement with Kumba where it is entitled to buy between eight and nine million tons of iron ore a year from at cost plus three percent.

This agreement still stands today.

At 13:50 Kumba's shares were trading 50c lower at R299.50 and ArcelorMittal's shares were one rand firmer at R141 on the JSE.

- I-Net Bridge