Rio Tinto Limited (ASX: RIO) has announced plans to sell its Simandou iron ore project to China's Chinalco, the world's largest iron ore consumer.
Simandou, in Africa's Guinea, is estimated to be the world's largest untapped iron ore reserves with 2 billion tonnes of iron ore worth an estimated US$50 billion. Earlier this month, World Bank subsidiary the International Finance Corporation (IFC) announced it was selling its 4.6% stake in Simandou to partners Rio and Chinalco.
At that stage, Rio held a 46.6% stake, Chinalco 41.3% and the Guinea government holds another 7.5% of the project (totalling 95.4%).
According to Reuters, once fully operational, Simandou has the potential to double Guinea's annual GDP. But getting the project to the operational phase will be expensive. Because of its remote location, an estimated US$20 billion in funding will be required to construct the mine, 130 kilometres of roads and more than 600 kilometres of railway. That is because the Guinea government wants to use its own ports to ship the ore rather than using a shorter route to ports in nearby Liberia.
Rio has had trouble finding the finance to fund the project, and CEO Jean-Sebastien Jacques said in August, "There is no obvious way to take Simandou to the next phase."
Rio is expected to receive between US$1.1 and US$1.3 billion for the sale of its stake in the mine.
That outcome appears to be a good one for a number of reasons.
- Rio doesn't have to come up with financing for the mine and can concentrate on its other operations including expanding production at the world's third-largest copper mine, Oyu Tolgoi in Mongolia.
- Simandou has been plagued with allegations of bribery and corruption. Guinea is ranked 139 out of 168 countries and territories by Transparency International on perceived level of corruption.
- The iron ore market depends heavily on the steel market – which is "chronically oversupplied" according to Reuters.
- Iron ore prices have been rising, but many analysts expect prices to fall to more sustainable levels between US$40 and US$50 a tonne. The spot price is currently US$64 a tonne.
- Even at current iron ore prices, funding for the project may be difficult to find.
In early trading, Rio's share price was 1.1% higher at $54.35, while fellow miners BHP Billiton Limited (ASX: BHP) and Fortescue Metals Group Limited (ASX: FMG) were up 0.5% and 1.3% respectively.
