Guinea: A New Battle to Control the Mines

The collapse of an opaque scheme to set up a multi-billion dollar national mining company prompts recriminations in Conakry and South Africa.

The Guinean government’s decision this week to shut down a bid by South African businessmen who wield high-level political connections, to run its national mining company follows growing pressure from international financial institutions and multinational mining companies.

The scheme would have put the group in a privileged position to take a stake in some of the most valuable mining assets in the country and up to 50% of the equity in the planned national mining company. Its first target appeared to be the Simandou iron-ore mine, whose development has been wracked by contractual disputes in the past decade (AC Vol 53 No 4, The gamble for Siandou).

Two of the key South African figures linked to the plan are Walter Hennig and Mark Willcox. Both have worked on oil deals with mining magnate Dan Gertler in Congo-Kinshasa and Khulubuse Zuma, nephew of South African President Jacob Zuma.

Conakry’s move comes just as President Alpha Condé’s government launches a wide-ranging review of mining contracts, promising the process will be transparent, accountable and improve the investment climate. Industry experts said that Walter Hennig’s plan, based on companies registered in the British Virgin Islands, satisfied none of these criteria. The US$25 million start-up capital for the national mining company was not even recorded in the national accounts, according to Finance Ministry sources.

The idea for a strong national mining entity emerged from discussions between President Condé and financier George Soros. First, Soros advised Condé on a new mining code, which was passed in September 2011, by the Conseil national de transition, which operates as an interim Parliament until legislative elections are held later this year. Soros also suggested that the Guinean state take a 15% free-carried interest in mining projects, with an option to buy a further 20% stake at market prices. Yet Soros’s associates insist that his proposal for a national mining company would have to meet the highest international standards of accountability and corporate disclosure. No details of Hennig’s plan were released publicly and it was never discussed by the CNT.

A $25 million ticket

In March 2011, Hennig and his associates signed several contracts with Guinean officials. The first was an oddly-worded agreement under which Palladino Capital 2, controlled by Hennig, would lend $25 mn. to set up a national mining company, the Société de patrimoine du secteur minier (SPSM). Hennig’s representative Samuel Mebiane signed for the company, and Mines Minister Mohamed Lamine Fofana and Finance Minister Kerfalla Yansané signed for the government.

he contract provided for Palladino to take an equity stake worth up to 30% of a subsidiary of the national mining company, should the government default on the loan. Oddly, there were no provisions in the agreement on how that stake could be valued. One mining company operating in Guinea described it as a ‘ticket’ into the local mining business. Finance Minister Yansané told Africa Confidential that the loan contract didn’t provide any ‘automatic convertibility’ to an equity stake in the event of a default. He added that the probability of Conakry defaulting on the loan was minimal.

However, an associate of Hennig’s in Palladino Capital, Andre Cilliers, issued a statement on 20 June claiming: ‘We have for some time been pursuing action against the government of Guinea for having defaulted on the terms of the loan agreement.’ Cilliers’s statement went on to claim that the government had ‘failed to demonstrate that the advance had been used to fund the Guinean national mining company as per the terms of the loan agreement.’ The implicit accusation of corruption coming from a company such as Palladino has incensed officials in Conakry, we hear.

The second element of the proposed joint venture between Palladino and the national mining company was a framework agreement under which Palladino would undertake to bring in private investors for equity stakes in mining operations. Hennig signed a framework on behalf of his Floras Bell company with Fofana on 13 March 2011, which set out the terms of the exclusive options to be offered to Floras Bell and Palladino for stakes in national mining company ventures. The agreement made no reference to valuation procedures or competitive bidding; rather, it suggested that any decision on asset prices would be a matter between the Mines Ministry and Palladino.

There is no doubt that the deal offered lucrative opportunities to Hennig and associates. Hennig’s Palladino Holdings, registered in the British Virgin Islands, has a substantial stake (at least $20 mn.) in an investment company called Africa Global Capital (ACG) with the United States’ Och-Ziff hedge fund (with a $100 mn. stake) and Mvelaphanda Holdings ($5 mn. stake), founded by South African presidential contender Tokyo Sexwale. Willcox is Chief Executive of both Mvelaphanda and ACG.

When Cilliers sent out an invitation to companies to join Palladino’s venture on 30 March 2011, those contacted said they had been given the impression that a group of ‘cash-rich outfits’ such as Och-Ziff and Mvelaphanda Holdings had already signed up to the arrangement. ‘Why would Guinea establish a state-owned mining business to hand it to a South African company?’ asked one.

In an interview with AC, Willcox insisted that neither Sexwale nor Mvelaphanda Holdings was directly involved in the Guinean venture. He said that it was a ‘great opportunity’ and that he had no problems with the probity of the structures set up by Palladino. Willcox and Hennig are longstanding business associates. Willcox’s associates report that he has been enthusing about the massive opportunities in Guinea.

However, we hear some of the big mining companies in Guinea, such as Brazil’s Vale and Anglo-Australian companies Rio Tinto and BHP Billiton, had launched their own investigations into the Palladino plan and raised great concerns about its accountability. ‘We’re looking at the same people and the same model that enabled Zuma’s nephew to pick up Tullow’s oil block in the Congo and flip it to Dan Gertler – so there are big forebodings out there,’ said one mining expert who preferred to remain anonymous.

Last week, Condé chaired a cabinet meeting at which it was decided to end the arrangement with Palladino. It appears he was convinced that the opacity of the deal could undermine his government’s efforts to restructure the mining sector with safeguards for big investors. Specifically, we hear he was worried that Palladino would compromise Guinea’s debt reduction agreement with the World Bank and International Monetary Fund, and jeopardise a $200 mn. credit it was negotiating with the Fund.

It was, though, the government’s intention to deal with the matter quietly by repaying the loan in full and informing Hennig that his services were no longer required. However, news of the break with Palladino emerged by accident at an IMF seminar in Conakry on 18 June. Finance Minister Yansané told the gathering of business people and bankers that on the eve of Condé’s official trip to Brazil, Malaysia, Thailand and France, an extraordinary cabinet meeting had decided to cancel the deal with Palladino and repay the $25 mn. loan immediately.

That set Palladino and Hennig on the offensive, claiming Conakry had already defaulted on the loan and could not offer a satisfactory response to requests for information about how it was being used. ‘Our impression is that the government didn’t seem to have the willingness to structure the national mining company in a transparent manner.’

The Palladino affair is fast turning into a political row for the government a few months ahead of parliamentary elections. Opposition parties, backed by civil society organisations, criticise the secretive structure of the contract, which they say contradicts the ethos of the new mining code. Some opposition politicians claim the Palladino money could have gone into an election fund.

So far, ministers have declined to counterattack or respond to Palladino’s insinuations of corruption. On 20 June, Yansané said the government had contracted the $25 mn. loan last year when its credit rating was very low and there were no alternatives but given the success of Guinea’s ‘rapid restructuring programme’, it made sense to end the arrangement with Palladino and ‘repay a loan whose conditions we no longer deem favourable’. But that it is unlikely to be the last word on the matter.

Posted by admin on Jun 25 2012. Filed under African News. You can follow any responses to this entry through the RSS 2.0. You can leave a response or trackback to this entry