(adds comment from Vale)
By Bate Felix and Silvia Antonioli
DAKAR/LONDON, April 9 (Reuters) - A Guinea government report recommended that BSG Resources (BSGR) and its joint venture partner, Brazilian mining giant Vale VALE5.SA, be stripped of two iron ore concessions, saying BSGR obtained the rights by corruption.
The report, released on Wednesday, recommended that Guinea withdraw the mining permit held by VBG, the joint venture between BSGR and Vale, in the giant Simandou iron ore deposit and cancel its Zogota mining concession.
It also called for the government to exclude VBG from any future process toward re-allocating the licenses.
"There is a set of precise and coherent evidence establishing with sufficient certainty the existence of corrupt practices that tarnished the granting of mining rights and mining concession for Simandou and Zogota to BSGR," the report said.
"As such, the corrupt practices also tarnished and voided mining rights and concessions currently held by the VBG joint venture," it said.
BSGR, the mining branch of Israeli billionaire Beny Steinmetz's conglomerate, denied the allegations and said the government was relying on fabricated claims and an illegitimate process to justify a plan to seize the mines and reward political allies.
It said it would seek international arbitration.
"BSGR has sought to cooperate fully with the committee despite the fundamental unfairness, procedural irregularities and false claims inherent in its review process. The next step is international arbitration, where the evidence can be aired in a proper forum and BSGR can establish the truth," a spokesman for the company said.
The report said Vale, the majority shareholder in the VBG venture, did not participate in the corrupt practices.
However, the world's largest iron ore producer, risks losing the rights it acquired through the joint venture.
According to a source close to the Brazilian miner, the company has spent more than $1 billion on its Guinean venture.
"Vale acquired its interest in VBG after the completion of extensive due diligence conducted by outside advisors and on the basis of representations that VBG had obtained its mining rights lawfully and without any improper promises or payments," the Brazilian company said in a statement on March 27 after media reports of the recommendation.
"If ... the government decides to accept the recommendation, Vale may lose its entire investment in the Simandou project subject to any rights to recourse Vale may have."
In the report and documents published on its website, the committee said Frederic Cilins, BSGR's representative in Conakry, had entered into various agreements with Mamadie Toure, the fourth wife of former Guinean President Lansana Conte, to help BSGR obtain the mining rights in exchange for payments.
It said Toure used her influence to organise meetings between the former president and BSGR representatives so that Conte could put pressure on the mines minister to award mining permits and concessions to BSGR.
The report added that Cilins, a French national, and other company officials showered former Guinean officials with gifts.
Cilins, 51, was arrested last April as part of a U.S. probe into payments made to Guinean officials. He pleaded guilty in New York last month to one count of obstructing a criminal investigation in connection with the investigation. (Full Story)
Sources close to the matter last month said the committee drafting the report had recommended stripping the licenses. (Full Story)
The report, which has been submitted to a ministerial-level strategic committee for a final decision, is the latest step in a long-running saga over the future of Simandou, one of the largest untapped iron ore deposits in the world.
BSGR sold 51 percent of its Guinean assets to Vale in 2010, when they created VBG in a $2.5 billion deal. Vale paid an immediate $500 million, with further payments conditional on meeting production targets.
The venture began drilling at Zogota in 2010. It planned to start production at the mine, which has a capacity of 15 million tonnes a year, by 2012, but work was suspended following unrest in August 2012 in the town nearby, during which five people were killed.
Anglo-Australian mining firm Rio Tinto RIO.AX RIO.L spent millions trying to develop Simandou until 2008, when former President Lansana Conte's government revoked its permit on the northern half and transferred it to BSGR, arguing that Rio had moved too slowly.
Rio is now focusing on developing the southern part of Simandou together with Chinese partner Chinalco 3668.HK but has said it is unlikely to start production until at least 2018, since billions of dollars need to be invested in building infrastructure to export the ore.
(Click here for the committee's full report)
(With reporting by David Rohde in New York and Jeb Blount in Rio de Janeiro; Editing by Jane Baird and David Evans)