Naveen Jindal promoted Jindal Steel and Power (JSPL) has backed out of talks on investing in a Cameroon iron ore mine owned by Afferro Mining Inc, after finding that the project was not financially viable.
"There is major spending in billions of dollars required to create the required infrastructure and consequently the project may not be financially viable," the New Delhi-based company said in a statement.
It also said that the future potential of the mining licenses are unclear.
Afferro Mining said that although talks have ended with JSPL it is continuing discussions with other parties.
Giving reasons for ending talks, Afferro Mining said, ''Negotiations with JSPL have been terminated as the company believes the indicative offer fundamentally undervalued the company's assets.''
Afferro said it is continuing discussions with AIM-listed International Mining and Infrastructure Corporation (IMIC), which already holds 6.8 per cent stake in the company and with other potential strategic partners.
"Whilst the company has received approaches from a number of interested parties, there can be no certainty that a formal offer will be forthcoming," Afferro Mining added.
AIM and Toronto Stock Exchange-listed Afferro Mining holds 100 per cent ownership in three exploration permits and 70 per cent in one.
The Cameroon government issues exploratory permits for a period of 7 years and may renew them subject to permit holder handing over 50 per cent of the concession area.
Two of Afferro Mining's biggest and explored permits are due for renewal in 2013, and there is uncertainty whether the Cameroon government will renew the same unconditionally or under the 50 per cent take back policy.
The mines currently do not have the required transport and power infrastructure, but they are located 30 km from a proposed rail corridor and an upcoming deepwater port located 330 km away.
The government, which is aiming to triple grid capacity to 3,000MW by 2020, has also promised to supply power to the mines.
But, with uncertainty both with the exploration leases and infrastructure that may be built, it would be extremely difficult for a company to come with a right valuation.
Mining giant Rio Tinto was last month forced to write off $3 billion on a highly flawed 2011 acquisition of Mozambique-focused coking and thermal coal explorer Riversdale Mining for $4.1 billion.
Post acquisition, Rio Tinto had to spend upwards of $1 billion on major infrastructure works, including power, water, rail, sealed roads and upgrading a port since the mines have direct access to the Zambezi River.
While conducting due diligence, Rio Tinto was told that it could ferry the iron ore from the Zambezi River, but post acquisition the Mozambique government rejected Rio Tinto's plan to use barges on the Zambezi but instead asked the miner to use a proposed long railway route to the port.
The company was also shocked to find out that the recoverable coal reserves and the quality were lower than they had earlier assumed. This made the building of rail infrastructure to get the coal to the port unviable.
Naveen Jindal had, in June 2012, said that the company was looking at coal and iron ore projects in South America, Africa and Australia as part of a plan to increase its self-sufficiency in raw materials required to make steel.
JSPL, which is seeking to raise its self-reliance on raw materials from the current 70 per cent to 90 per cent by 2015, has already burnt its fingers in Bolivia, (See: Jindal Steel starts arbitration proceedings against Bolivia over mining project)
JSPL is India's third-largest steel producer with a significant presence in other sectors like mining, power generation and infrastructure.
In November 2012, JSPL's executive director Manish Kharbanda had said in an interview that the company was planning to acquire an iron ore mine in West Africa, which would secure JSPL at least 1 billion tonnes of iron ore – a key raw material required in steel making.