Dragon Capital mining project not dead yet

Press reports on September 2 that Vietnamese authorities had pulled the plug on a high-profile mining project have been refuted by Dragon Capital, the private-equity firm that acquired the mining interest.

On September 1, in a message to its investors seen by AsianInvestor, Dragon Capital said: "Nui Phao [the name of the mine] will not now have its investment and mining licenses peremptorily revoked."

The Vietnamese government is now investigating whether the project, to mine tungsten and fluorspar in the northern province of Thai Nguyen, is in breach of compliance.

Behind the carefully couched legalese of Dragon Capital's investor letter, there appears to be a struggle among the Vietnamese authorities that could have repercussions for the climate for foreign investment.

This saga began in late 2006, when Dragon Capital, an asset manager based in Ho Chi Minh City, agreed to acquire Tiberon Minerals for $218 million. Dragon Capital was already a shareholder in the Toronto-listed mining concern, set up to exploit finds in the Nui Phao mine. Tiberon holds 70% of the Nui Phao project, with two Thai Nguyen-based state-owned partners owning the rest.

Tungsten is a prized element used in steel alloys needed to make everything from catalytic converters and fighter aircraft to electric light filaments. Fluorspar is used in refrigerants and aluminium production. China is the biggest producer of both, and the Nui Phao mine is believed to possess among the largest deposits outside China, with 55 million tonnes of proven and probable tungsten reserves. Demand from China is expected to be strong, while US-based Commercial Metals had also agreed to buy all of Nui Phao's projected acid-grade fluorspar output for the first three years of production.

However, the project has yet to get off the ground, despite a first-half 2009 target date to begin mining operations. Mining was originally meant to start last year, but Tiberon recently requested permission to begin operations in 2010, citing the global credit crunch for the delay.

But on September 2, the Vietnamese Ministry of Natural Resources and Environment said it was examining the project and will "terminate its investment and mining licences if any violations are found".

This was widely perceived by local and international media as the end of the project, which has cost $400 million so far.

Officials at the Thai Nguyen province's Department for Planning and Investment were quoted by local media as suggesting the project should be handed over to a big state-owned enterprise.

Letters to shareholders from Dragon Capital suggest the slowdown in work in late 2008 prompted the provincial authorities to seek an end to Tiberon's involvement.

Dragon Capital's shareholder base includes hundreds of institutions, including multilateral organisations and sovereign wealth funds, a fact that helped the firm get the attention of various foreign diplomats in Hanoi. Those diplomats in turn have pointed out the denial of a licence could breach Vietnam's own investment law, which was revised in 2005 to meet the country's obligations for joining the World Trade Organization.

That law stipulates the project's licences can only be withdrawn if there is either a serious breach of the law (which no one has suggested is the case) or if the project is not carried out or is delayed "without proper reasons".

Dragon Capital's strategy has been to suggest that a revocation would be a strategic blunder. In an earlier message to investors dated August 27, it said, "our core view remains that it would clearly be unfortunate for this issue to adversely affect not just Nui Phao but more particularly Vietnam's own carefully won reputation, achieved over recent years, as an excellent destination for foreign investment".

So now, according to Dragon Capital, the licence is to be revoked only if there is proof that Nui Phao is in breach of compliance regarding project implementation.

The message to investors on September 1 says the fact that the Nui Phao licence has not been revoked "also implies grounds for some optimism in that there has been a shift from reported revocation as a done deal to revoking licences if there is non-compliance. This indicates that considerations of due process (and perhaps the enormous consequences of its absence) are playing their required role".

Nonetheless, the fact remains that the mine hasn't begun operations. Dragon Capital says "the delays experienced primarily emanate historically from compensation and resettlement where the central challenge has been that Thai Nguyen province itself sets the rates. These have been viewed by most site residents as simply too low".

This and other factors related to the province's reluctance to pay more for the operation and the costs of resettling people affected by the mine prompt Dragon Capital to argue that "the net result is that this critical element of overall implementation has simply been out of Nui Phao's control".

Dragon Capital was slated to have met last week with senior executives at state-owned Vietnam Coal and Minerals, which develops many of the country's resource assets.

Executives at Dragon Capital declined to comment on these talks. One of its directors, Dominic Scriven, told AsianInvestor the only comment the firm can make right now is: "We should be basing our behaviour and conduct on fact, rather than media suggestion." Those facts have yet to be ascertained.

For Dragon Capital's investors, the situation appears to be improving, but it is not yet over. For the authorities in Hanoi, an acceptable compromise between the desire of the Thai Nguyen province to bring in a cheaper, perhaps more pliant developer, and the need for the country to maintain its reputation among global investors, has yet to be found.