Rio Tinto’s completion of the feasibility studies for the giant Simandou South iron ore project in Guinea raises the prospect of another 100 million tonnes of iron ore being poured into an oversupplied market every year. Fortunately, that prospect is a long, long way away.
Rio, on behalf of the Simfer joint venture with China’s Chalco, the International Finance Corporation and the Guinea government, submitted the studies to the government earlier this week in accordance with the investment framework agreement it struck in 2014.
Simandou is the world’s largest undeveloped iron ore resource, with more than two billion tonnes of very high quality ore and initial production envisaged at around 100 Mtpa. When the investment framework agreement was signed in May 2014, it was envisaged that initial production could start as early as 2018.
That’s not going to happen.
Despite the recent relative strength of the iron ore price — it was above $US55 a tonne again overnight — the continuing ramp-up of Gina Rinehart’s 55 Mtpa Roy Hill project and the looming spectre of Vale’s $US16 billion, 90 Mtpa S11D project, which expects to produce its first ore in December and to reach full capacity in 2018, points to a market that will be under continued threat of significant oversupply.
Rio, which has a 46.6 per cent interest in the Simandou project, was obliged to table the mine and infrastructure feasibility studies with the Guinean Government within two years of concluding the investment framework, and it has.
Even though the estimated cost of developing the project and its associated infrastructure has significantly reduced the likely investment requirement — initial estimates of about $US20bn have been reduced to about $US18bn — the project is probably unbankable at current iron ore prices.
That’s because of the cost of building the “associated infrastructure”. The project envisages/requires the building of a 650km railway line across most of Guinea, tunnels, bridges, 128km of new roads and a new deepwater port.
In 2011, Rio, confronted by the reality that the cost of the infrastructure would dwarf the cost of developing the actual mine (the most recent estimates are that the infrastructure component would cost about $US12bn and the mine about $US6 billion), split the project in two, with the infrastructure component to be built and owned by new investors.
Unfortunately for the Guinean Government — the project, the largest ever undertaken in Africa, would transform the Guinean economy — the collapse in commodity prices, the outbreak of the Ebola virus in Guinea and the sheer scale and complexity of the project appears to have scared off prospective investors.
Rio is said to have scoured the world for financiers for the infrastructure but has been unable to pull together the funding, despite the very heavy Chinese presence in the project and more than 100 meetings with potential investors.
Apart from Chalco, which represents a consortium of Chinese state-owned enterprises, China Railway Construction Company and China Harbour Engineering Company were heavily involved in the feasibility studies. It would be in China’s long-term economic interest to add another long-term source of iron ore supply to the market.
Without funding for the infrastructure, Simandou won’t be developed. In the near- to medium-term that is probably a positive for Rio (and the sector), given its status as the world’s lowest cost major seaborne iron ore producer and the quality of its Pilbara iron ore business. Adding tonnes to its Pilbara output would produce far better returns than a massive giant new project in Africa.
Rio effectively wrote off its $US2bn investment in Simandou within its full-year results earlier this year, although it didn’t dismiss the projects chances of being developed. It had long touted Simandou, with its giant Oyu Tolgoi copper mine in Mongolia, as a key “next generation”, tier-one and world-class asset.
Simandou has a long and colourful history, with Rio’s involvement dating back to 1997 when it won its original exploration rights to the entire Simandou deposit.
It then spent nine years investigating the resource before the then-Guinea president, the late President Lansana Conté, expropriated the rights to half the resource and awarded them to a controversial Israeli billionaire, Beny Steinmetz. He in turn sold 51 per cent of “his” interest to Vale, an interest subsequently stripped from Steinmetz and Vale after a new government was elected in 2010 and began reviewing how mining licences had been awarded by the Conté regime.
Rio actually took legal action in the US against Vale and Steinmetz, mounting a case under the US racketeering law to allege that Vale had feigned interest in a joint venture to access Rio’s confidential information and secretly worked with Steinmetz — and paid $US200m of bribes to government ministers — to steal the rights to the northern part of the resource from it. The action failed last year after the US courts decided Rio had waited too long to file it.
Source: The Australian
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