Rocky road for Rio in developing world

When Rio Tinto's top brass reflect on June 2013, they're likely to see a month where they took one step forward and one step back in their mission to create a foothold in the developing world.

When Rio Tinto's top brass reflect on June 2013, they're likely to see a month where they took one step forward and one step back in their mission to create a foothold in the developing world.

As the company prepares to cut the ribbon on a massive new money-maker in the middle of Mongolia's Gobi Desert, its dream of replicating its Australian iron ore business in the wilds of West Africa looks further away than ever.

The Simandou iron ore project in Guinea has been sliding from prominence for some time within Rio's portfolio, and on Wednesday its development was revealed to be even more unlikely when Guinean Mining Minister Lamine Fofana revealed costs could be double previous estimates.

The $US20 billion price tag he implied remains a guesstimate; studies are continuing and further talks between the government and Rio are due to take place next week.

But Mr Fofana was certain of one thing: Rio's 2011 vow to start exporting from Simandou by 2015 will not be met.

On the surface, the major problem at Simandou is the disagreement between Rio and the government over how much financing Guinea should bring to the table.

In reality, Simandou would struggle to win approval from Rio's board even if all its ducks were in a row. Rio is in money-saving mode, and is already over-reliant on

iron ore.

If there was money to spare on further iron ore developments, it would surely be spent on the long-planned expansions to the Pilbara iron ore division, which was described by former Rio boss Tom Albanese as the second-best business on earth behind Apple's iPad.

With the peak of the iron ore boom almost certainly behind us, Simandou is starting to look like the sort of project that won't happen - not this decade anyway.

All the more reason for Rio executives to savour the ribbon-cutting ceremony that is expected to be held in Mongolia in the next fortnight.

First sales from Mongolia's Oyu Tolgoi copper and gold mine were expected to be celebrated on Friday, after Rio staff sent out invitations to guests - including the Mongolian Prime Minister - to attend a ceremony for the milestone.

Rio has had to fight all the way for Oyu Tolgoi, through a bitter takeover of Robert Friedland's Ivanhoe Mines, shortages of infrastructure and water, and numerous attempts by the Mongolian government to nationalise more of the mine's wealth.

Apart from the first sales, the ceremony was seen as a proxy for demonstrating improved relations between Rio and the government, as Rio had previously warned that strained relations could delay first shipments beyond the June target.

By Wednesday the ceremony had been cancelled, with Rio refusing to explain why. But sources close to Oyu Tolgoi suggest a ceremony is still likely before June 30.

Some believe the delay has more to do with public relations than any rising geopolitical tensions.

Rio's performance in developing nations carries extra importance given it is one of several differentiators between it and BHP Billiton.

While Rio has played major hands in Mongolia and Guinea, BHP's operations in northern Africa and Asia are trivial to its bottom line.

BHP's most important operations are found in wealthy, developed countries such as the US and Chile, while its best growth prospects are in Canada and Australia.

Rio needs success in places such as Mongolia to balance its failures in Mozambique and, in all likelihood, Guinea.

But bringing Oyu Tolgoi into production this month will not be the end of the road for Rio in Mongolia.

A bigger prize looms in the $US5.1 billion second stage of the project, which would turn the mine into the third-biggest copper producer on earth.

That goal has been another source of tension between Rio and the Mongolian government, with the latter recently commissioning an audit into major cost blowouts in the plan.

As a partner in the project, Mongolia is increasingly worried about the cost it might have to bear to make the project go ahead.

Rio responded by scaling down the design for stage two, which will see the mine costing more to operate, producing less copper each year, and duly creating lower dividends for the government.

Logic suggests Rio will prevail and Oyu Tolgoi eventually will be expanded to its full potential. Despite concerns over the environment and its impact on local herders, the mine will be just too big a part of the Mongolian economy for the government to stymie it forever.

But shareholders can be sure there will be a few more backward steps before the day is won.

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