A milestone step for Rio, and Guinea

After years of wrangling, Rio Tinto and its investment partners have moved a step closer to evaluating the costs of Africa’s biggest mining project, including a massive infrastructure build, which could top $20 billion.

The signing of an investment framework for the Rio Tinto-led Simandou iron ore project in Guinea is an important milestone in the colourful and lengthening history of one of the world’s largest and richest undeveloped iron ore resources. There’s still a very long way to go, however, before Simandou actually produces any ore.

The signing of the framework by Rio, China’s state-owned Chinalco, the World Bank’s IFC and the government of Guinea create the legal framework for the project as well as the commercial path towards that first production.

The sheer scale and complexity of the project -- a 100 million tonne per annum mine, a 650-kilometre railway that will cross most of Guinea, tunnels, bridges, 128 kilometres of new roads and a new deepwater port -- partly explains why it has taken nearly two decades to even reach this point.

It didn’t help that Israeli billionaire Beny Steinmetz somehow emerged with half Rio’s resource in 2008 in a transaction that an inquiry established by the new Guinean government has said involved corruption.

The government has stripped him and Vale -- which acquired a 51 per cent interest in the tenements for $US2.5 billion in 2010 -- of the rights and both Steinmetz’s BSGR group and Vale are being sued by Rio in the US.

With the investment framework established and agreed, the project partners can get started on the next step: a “bankable” feasibility study they hope to complete within about a year.

That will provide a better sense of the project's costs -- Simandou and the associated port and rail infrastructure are estimated as costing roughly $US20bn to develop -- and the timeline to first production.

In 2011, the various parties in Simandou separated the mine and infrastructure developments requirements to break the project’s funding requirements down into more manageable chunks. The infrastructure component would be built and owned by new investors, with ownership transferring to Guinea after 30 years.

Rio currently has a 46.57 per cent interest in the mining elements of the project, Chinalco a 41.3 per cent interest and IFC a 4.625 per cent interest.

The Guinean government will own 7.5 per cent of the mine, with an option to increase its interest to 35 per cent over 20 years. It would get an extra 7.5 per cent without cost and would be able to acquire another 10 per cent at historical cost and the final 10 per cent at market value. It will also get a 3.5 per cent royalty on exported ore.

The project, the largest of its type ever contemplated in Africa, is of enormous consequence for Guinea. Between the government’s exposures to the project and the impact of the multi-user railway and port on the wider economy it would transform Guinea, so one could expect Guinea to push to bring the mine into production as early as possible.

At the moment the tentative date for initial production is given as 2018, but that appears unrealistically ambitious for such a big and difficult project.

Despite Chinalco’s involvement, which will give the project access to financing from China’s state-owned banks as well as probably ensuring it has a market in China for its output, Rio probably won’t be unhappy if the timelines stretch out a little.

If some of the more pessimistic forecasts for the iron ore market are borne out, by 2018 there could be a surplus of seaborne iron ore over demand approaching 300 million tonnes a year.

Bringing another 100 Mtpa of high-quality production into a heavily over-supplied market at that point would do a lot of damage to existing producers -- and Rio is one of the biggest, with expansion plans that would lift its Pilbara output top 360 million Mtpa.