If you want to do business in the west African nation of Guinea it seems there is a good chance you will bump into Francois de Combret.
In the case of Beny Steinmetz, the high-flying Israeli billionaire who made his fortune selling diamonds to the likes of Tiffany & Co, it happened in March and April of 2013, during one of his many visits to the small west African nation.
Steinmetz needed someone to help him with Guinean president Alpha Conde, who was threatening to revoke his rights to the northern half of Simandou, one of the world’s biggest and best undeveloped iron ore deposits in the south-east of the country.
The tycoon had secured the rights five years earlier in sensational circumstances when Conde’s predecessor stripped mining giant Rio Tinto of its exclusive exploration permits because it was deemed to be developing the mine “too slowly” and handed them to Beny Steinmetz Group Resources for nothing. Two years later, after investing just $US160 million on a mining feasibility study, Steinmetz sold 51 per cent of its rights to Brazilian iron ore major Vale for $US2.5 billion.
The deal stunned the mining industry including Rio, which was furious half of Simandou had found its way into the hands of a fierce rival.
In widely reported comments at a conference in Dakar, Mo Ibrahim, an African telecommunications billionaire, asked: “Are the Guineans who did that deal idiots or criminals or both?”
In an apparent attempt to get to the bottom of one of the most controversial deals in African mining history, Conde ordered a two-year government inquiry into the transaction.
BSGR faced the real possibility of losing its remaining rights to Simandou’s massive deposits of iron ore if the investigation uncovered evidence of corruption.
It was under these circumstances that Steinmetz found himself face-to-face with de Combret.
According to Steinmetz, he was introduced to the Frenchman through an unnamed intermediary in order to “explore whether a settlement with President Conde would be possible”.
Steinmetz says he would have happily advised BSGR to pay de Combret a fee had his effort “led to the project getting back on track”.
“It would have been a very valuable contribution,” he adds. “Nothing, however, was properly discussed, let alone agreed. It was acknowledged there would be a discussion if and when there was a solution.”
In the end there was no solution to be found.
The government inquiry declared BSGR had paid bribes to secure the rights to Simandou and promptly revoked them. Steinmetz, who denies any allegations of wrongdoing, responded by launching legal proceedings against the Guinean government, which is where his account of meeting de Combret can be found in a witness statement.
This small episode in the murky history of Simandou may have gone largely unnoticed were it not for Rio’s extraordinary decision this week to reveal it had informed regulators in Australia, Britain and the US of an internal investigation into a $US10.5 million payment to de Combret for helping smooth over its relationship with President Conde.
Steinmetz’s experience suggests Rio’s was not in a unique position. When mining companies fell foul of the Guinean government, Francois Aldebert Gabriel Christian Polge de Combret was the man you called.
An adviser to the former French president Valéry Giscard d’Estaing, de Combret went on to become managing partner at investment banker Lazard, where he worked on a number of high-profile deals, including the privitisation of car maker Renault.
He then set up his own Paris-based advisory firm, FC Finance, in 2004.
The 75-year-old resident of Switzerland has sat on the boards of some of Europe’s biggest companies including defence group Safran and Bouygues Telecom.
But his real value to the likes of Rio is that he is former classmate of Conde, who attended high school and university in Paris.
According to a World Bank analysis of Guinean mining interests, de Combret’s closeness to the president was a concern for some.
The billionaire investor George Soros, who acted as an adviser to Conde, “does not like Francois de Combret and has attempted to sideline him from influencing the President on state or mining matters”, the analysis noted.
A source close to Rio claims de Combret’s bona fides were the subject of an internal review before he was appointed and his contract was prepared by Phil Edmands, who was Rio’s general counsel at the time and now works at the Perth offices of law firm Gilbert + Tobin.
Likening the appointment to Rio’s decision to hire former US secretary of state Henry Kissinger to advise on its dealing with China and one-time British prime minister Tony Blair to help it with the Mongolian government, the source argues de Combret was chosen for his “regional knowledge and contacts”.
The Rio investigation is believed to be conducted with the assistance of legal firm Kirkland & Ellis and is expected to be the main point of discussion at a Rio board meeting on Monday.
It was sparked by a leaked email exchange that took place in 2011 between Rio’s then chief executive Tom Albanese, his successor, Sam Walsh, who was running Rio’s iron ore division at the time, and Alan Davies, a former chief financial officer for Walsh who had been made president of Rio’s international iron ore operations.
Davies has been suspended over the matter, and Rio’s head of legal and regulatory affairs, Debra Valentine, has also stood down. Albanese and Walsh no longer work at Rio.
Walsh, de Combret and Davies did not respond to attempts to contact them.
Albanese declined to comment. Published briefly on a public file-sharing website and brought to the attention of Rio in August, the emails show Davies requested the payment be made to de Combret just days after Rio announced it would pay the government of Guinea $US700 million to resolve an outstanding dispute over the southern half of the Simandou project known as blocks 3 and 4.In his opening email to Walsh, Davies wrote “the result we achieved was significantly improved by Francois’ contribution and his very unique and unreplaceable services and closeness to the President”.
“He vouched for our integrity when it was needed and helped bring us together when things were looking extremely difficult,” Davies continued.
“These services were of the most unique nature and we will never fully be able to judge the potential outcome if he was not assisting us.”
Walsh was also warned that Davies had been left in “absolutely no doubt that Francois will not act as a friend of Rio Tinto” should the payment not be made.
Viewed in the context of today’s commodities market, which is only just recovering from the worst slump in decades, the tone of the emails is unsettling.
Why are three of the most senior executives at one of the world’s largest mining houses so eager to make a payment that, at first glance, does not appear to past the sniff test? Why was their only concern the viability of the project rather than the appropriateness of the fee? And what exactly was it about de Combret’s “very unique and unreplaceable services and closeness to the President” that made him so important?
To answer these questions it is important to remember the mining industry was at a very different point in the cycle five years ago.
Iron ore, which accounts for the bulk of Rio’s earnings, was trading at a near-record high of $US177 a tonne compared with about $US74 a tonne today. Low-cost producers such as Rio, BHP Billiton and Brazil’s Vale couldn’t dig it out of the ground fast enough and new players such as Andrew Forrest’s Fortescue Metals and Gina Rinehart’s Roy Hill were entering the Pilbara.
Rio was also ramping up production in WA, but for a company that prides itself on being the world’s leading iron ore producer, simply keeping up was never going to be enough.
Just a month before Davies hit “send” on his email to Walsh, Rio had expanded its interests through the $US3.7 billion acquisition of two large projects in Mozambique owned by Australia’s Riversdale Mining.
Riversdale would turn out to be a complete disaster and cost Albanese his job but this was long before the deal came to symbolise the lax international processes and inadequate due diligence that plagued Rio during the mining boom.
Against this backdrop it is easier to understand why Davies was so eager to keep de Combret onside.
Resources projects of the size and quality that interest a major such as Rio are rare, which made the Simandou mountains in Guinea’s southern highlands a very attractive proposition indeed. Not only did Simandou have enough reserves to sustain a mine for at least 40 years but the ore was of a sufficiently “high grade” to be fed into a blast furnace with little processing.
For Davies, Simandou was his professional life and he made countless trips from his base in London to the Guinean capital of Conakry to negotiate with government officials.
Yet Davies had little reason to be confident the discussions would go smoothly.
The decision to strip Rio of the northern blocks in 2008 and pass them on to Beny Steinmetz Group Resources had unsettled Rio management.
And now the company was paying $US700 million to secure its remaining stake in Simandou – assets Rio believed it already fully owned. The subtext of the emails is that Davies was worried about losing the project for good. Little wonder he likens de Combret to “insurance”.
The obvious concern among Rio’s current management is that the fee amounts to facilitation payment where a government official (or an intermediary) is given money to perform (or speed up the performance of) an existing duty. Facilitation payments are considered a form of bribery. The rules in the UK are particularly strict.
Given regulators on three continents are only just sinking their teeth into Rio’s dealings with de Combret, it promises to be a very uncomfortable few months for Albanese, Walsh, Davies and Valentine. It is likely the emails that found their way into the public domain do not tell the full story.
Some sources close to Rio claim the appointment of de Combret was done properly with the consultancy agreement containing an obligation for de Combret to follow Rio’s “The Way We Work” code of conduct. Others argue the company would not have revealed the existence of the internal investigation this week unless Kirkland & Ellis’ review had uncovered genuine reasons for concern.
Rio executives are also trying to figure out how the emails were leaked in the first place. Among the theories doing the rounds in the company’s London headquarters are the suggestion Chinese hackers accessed Rio’s email servers or the emails found their way into the hands of hostile parties during a discovery process linked to the many legal actions involving Simandou.
Earlier this year Rio’s new chief executive Jean-Sébastien Jacques admitted defeat in Guinea by announcing the sale of its Simandou interests to China’s Chinalco for up to $US1.3 billion.
Rio put the decision down to the massive cost of developing the project in a weaker commodities environment. But there is also a sense that repeated legal and political challenges made the project just too difficult.
