Cape Town - Kumba Iron Ore has withdrawn from Senegal's Faleme iron ore project on the orders of the west African nation's government, but says it will contest the directive through "all legal means available".
Kumba made the announcement yesterday, barely two months after the JSE-listed group was taken by surprise by news that Arcelor Mittal, the world's largest steel group, planned to inject $2.2 billion (R15 billion) into developing the Faleme project.
Kumba is understood to have spent a significant amount of money exploring at the Faleme deposit, but it would not divulge the sum.
Shares of Kumba, which is a subsidiary of Anglo American, gained 0.07 percent to R148.10 yesterday. The general mining index shed 2.2 percent.
Henk Groenewald, an investment analyst at Coronation Fund Managers, said the legal route had been "a last resort" to avoid souring relations with Senegal.
"But it is the only course available, and they should pursue it for the benefit of shareholders," he said.
Kumba signed a deal with Senegalese parastatal Miferso in 2004 to jointly explore the potential for an export-oriented iron ore mine at Faleme.
A prefeasibility study was completed in 2005, about the same time that Kumba exercised an option to acquire an 80 percent stake in the deposit.
According to Kumba, Senegal disputed this interest.
Kumba was miffed when Arcelor Mittal disclosed details of its investment plans at Faleme in February as it had been involved in negotiations with Senegal to find a solution only a fortnight before.
Reuters reported that a source close to Arcelor Mittal said the company had agreed to pay Senegal a 5 percent royalty for the Faleme project, well above the 3 percent stipulated in the country's mining code.
Arcelor Mittal, which owns a majority stake in Mittal Steel South Africa, has indicated that the mine was expected to start output in 2011, producing between 15 million and 25 million tons of ore a year to supply European steel mills. The project would involve 750km of rail infrastructure linking the mine to a new port near Dakar.
Kumba - which was spun out of Iscor, now Mittal Steel South Africa - has a contractual relationship with Mittal in terms of which it supplies iron ore to the steel maker at cost plus 3 percent, enabling Mittal to cut costs substantially.
Kumba said yesterday it had been advised that Senegal had entered into agreements with a third party in relation to the Faleme project.
"Kumba considers that the government's conduct violates contractual rights and accordingly has instituted summary proceedings in Senegal and will continue to enforce its rights by all legal means including by way of international arbitration," it said.
The agreement with Senegal is understood to allow for dispute resolution at the International Chamber of Commerce in Brussels.
Kumba plans to more than double production of iron ore to 82 million tons a year by 2015.