World number two miner Rio Tinto is exiting the world’s largest mining project, by selling its stake in Guinea’s Simandou iron ore to partner Chinalco, potentially opening up a new path to development for the $20 billion project.
According to a statement by Melbourne-based Rio the deal is worth between $1.1 billion and $1.3 billion payable when Simandou starts commercial production and based on output. Rio says a final agreement could be inked within six months. In February this year Rio wrote down the value of Simandou by $1.1 billion, before deciding to shelve the project.
Rio owns 46.6% of Simandou south; Chinalco’s stake is 41.3% and the Guinea government holds 7.5%. Earlier this month the World Bank’s financing arm – the International Finance Corporation – sold its its 4.6% interest.
Rio has already spent more than $3 billion on the project having first acquired the property in the late nineties. With complete control, Beijing-based Chinalco may revive the stalled project, no doubt with the backing of the central government. In September Chinalco took private its Hong Kong listed mining arm, primarily focused on copper.
China consumes more than 70% of the world’s seaborne iron ore and is on track to import one billion tonnes of the steelmaking raw material this year. Imports have gradually displaced domestic production, pushing dozens of Chinese iron ore mines into bankruptcy.
The shelving of the project has been devastating news for Guinea. Simandou by itself would’ve been the world’s fifth-largest producer at 95 million tonnes per year.
Simandou with over two billion tonnes of reserves and some of the highest grades for direct-shipping-ore in the industry (66% – 68% Fe which attracts premium pricing) has a back-of-the-envelope calculation value of more than $110 billion at today’s prices.
The initial agreement signed in May 2014 called for a new 650km railway across the West African country to Conakry, Guinea’s capital in the north, plus a new deep water port at a conservatively estimated cost of $7 billion; infrastructure investments that would double the economy of the impoverished country.
The impoverished nation, which was one of the worst affected country’s by the recent Ebolo epidemic, and is in dire need of infrastructure to develop other parts of the industry, particularly the export of bauxite, the primary ore used to manufacture aluminum. Bauxite represents some 80% of the country’s export earnings. Chinalco is primarily an aluminum manufacturer.
Simandou’s chequered history
Rio Tinto held the licence for the entire deposit since the early 1990s, but was stripped of the northern blocks in 2008 by a former dictator of the country.
BSG Resources, a company associated with Israeli diamond billionaire Beny Steinmetz acquired the concession later that year after spending $160 million exploring the property.
In 2010 BSGR sold 51% to Vale for $2.5 billion. The Rio de Janeiro-based company stopped paying after the first $500 million after missing a number of development milestones. Then the new Guinean government under Conde launched a review of all mining contracts awarded under previous regimes and launched an investigation into the Vale-BSGR joint venture.
The Guinea government withdrew the mining permit in April last year, accusing BSGR of obtaining its rights through corruption. BSGR has denied wrongdoing and filed an arbitration request in an attempt to win compensation from the Western African nation.
Shortly after BSGR’s rights were stripped Rio filed a lawsuit for billions of dollars against both Vale and BSGR in New York courts for what it called a “steal” of its previously-owned concession. Rio alleged BSGR paid a $200 million bribe to Guinea’s former minister using funds from Vale’s initial payment.
The US district court threw out the case in November last year saying Rio “had waited too long to file the lawsuit” under the Racketeer Influence and Corrupt Organizations Act, which calls for a four year time limit.