Rio Tinto to exit Simandou iron ore project with stake sale to Chinalco

31 Oct 2016

Anglo-Australian mining giant Rio Tinto is exiting the Simandou iron ore project in Guinea by selling its entire stake to China's state-owned Aluminium Corporation of China (Chinalco).

''Rio Tinto will receive payments of $1.1-1.3 billion based on the timing of the development of the project. The initial payment for shares will commence at the time of first commercial production, on a per tonne basis,'' the London-based company said on Friday in a statement.

A binding agreement between the two companies is expected to be agreed within six months.

Rio Tinto holds a 46.57-per cent stake in the mine's operating company, Simfer SA, while Chinalco holds 41.3 per cent and the government of Guinea 7.5 per cent.

The Guinean government could eventually raise its stake to 35 per cent, comprising a 15-per cent no cost stake and a 20-per cent contributing stake in the mine.

Earlier this month, International Finance Corporation, the commercial lending arm of the World Bank, opted to sell its 4.625-per cent stake to either Rio Tinto or Chinalco for a reported $200 million. (The deal is yet to be completed).

The Simandou iron ore project is estimated to hold over 1.8-billion tonnes of 65.5% Fe ore, and if developed, has the potential to become the world's third-largest mining area, after Australia's Pilbara and Brazil's Carajas.

The entire project cost is estimated to be over $10 billion, and can produce 95 mtpa, which is valued at over $110 billion even at today's low prices.

Simandou has the capability of doubling the size of Guinea's $6.5-billion economy and turn it into the third-biggest exporter of iron ore.

Earlier Rio Tinto held the mining license for entire Simandou, but in December 2008 the government of Guinea reallocated and awarded the northern part of Simandou to its lesser known rival, BSG Resources, a privately-held mining company owned by Israeli billionaire, Benny Steinmetz under the so-called "use-it-or-lose-it" principle. (See: Guniea ousts Rio Tinto from ore project) Although Rio Tinto had then spent nearly $500 million in some developmental work in the southern part of Simandou, it had kept the northern area undeveloped.

Rio Tinto had unsuccessfully tried to get its license back from the Guinea government, but later Brazilian mining giant Vale, the world's biggest iron ore miner, acquired a 51-per cent stake in BSG Resources for $2.5 billion along with the developing rights for the northern part of Simandou, with the blessings of the then Guinean government.

The new Guinea government withdrew BSG's mining permit in April last year, accusing it of obtaining its rights by bribing the previous government.

Rio Tinto has to date already spent more than $3 billion on the project after having acquired the project in the late nineties, but the project had been delayed for several reasons, including the fight between Rio and the Guinean government, decline in iron ore prices since 2011, a corruption probe against BSG by the US Department of Justice, an Ebola outbreak in the country, and Rio Tinto's inability to fund the development of the project.

Rio Tinto's newly appointed CEO, Jean-Sebastien Jacques, had in early August said, "there is no obvious way to take Simandou to the next phase," since the company has not been able to find a way to finance it.

But with Chinalco getting complete operational control, the stalled project may start with the backing of the Chinese financial institutions.