The talks between the world's second-largest iron ore miner, Rio Tinto and China's top aluminum producer Chinalco for its participation in developing Rio's 12-billion Simandou iron ore-project in Guinea have ended with the Anglo-Australian miner signing a $1.35-billion joint venture with the Chinese state-owned company (See: Chinalco, RioTinto in $12-billion Simandou iron ore project talks).

London-based Rio Tinto and Beijing-based Chinalco have signed a non-binding memorandum of understanding (MoU) to establish a joint venture to develop and operate the Simandou project covering rail, port infrastructure and the mine.

Rio owns 95 per cent of the Simandou project with the International Finance Corporation (IFC), the commercial lending arm of the World Bank, owning the remaining 5 per cent.

Rio will bring its entire 95-per cent stake in the Simandou project for a majority 53-per cent stake in the proposed joint venture and Chinalco will take a 47-per cent stake in exchange for its $1.35 billion investment on an earn-in basis.

Chinalco will fund the ongoing development work over the next two to three years.

Once Chinalco has invested its $1.35 billion, the effective stakes owned by Rio Tinto and Chinalco in the entire Simandou project will be 50.35 per cent and 44.65 per cent respectively with the IFC retaining its original 5 per cent.

Rio Tinto has revealed that the Guinean government holds an option to buy up to 20 per cent of the project. Any interest acquired by the Guinean government would proportionally reduce the effective interests of Rio Tinto, Chinalco and the World Bank in Simandou.

Global media had widely reported this week about the impending deal, which comes nearly a year after the Chinese industrial giant's $19.5-billion investment plan in Rio Tinto for an 18-per cent stake, were torpedoed by Rio's shareholders. (See: Rio terminates Chinalco deal; to raise $15.2 billion through rights issue)

Rio Tinto said that along with Chinalco it will now work on finalising definitive and binding transaction documentation. It also added that in addition to the sole funding provided by Chinalco, the project will require significant additional development expenditure before it becomes fully operational.

Rio Tinto chief executive Tom Albanese had said in December 2008 that the Simandou project was "without doubt, the top undeveloped tier-one iron ore asset in the world" and had estimated the development cost at approximately $6 billion, which analysts now say is likely to cost almost double that amount to $12 billion.

The Simandou iron ore project is estimated to hold 2.25 billion tonnes of ore, and if developed, has the potential to become the world's third-largest mining area, after Australia's Pilbara and Brazil's Carajas.

Behind the scenes of Rio's-Chinalco deal
According to observers, the deal had the blessings from the Chinese government, which is in a position to bail out Rio Tinto from its problems at Simandou with the Guinean government for having held back its investment commitments in the project during the global economic slowdown in 2008.

Rio Tinto had only been actively involved in drilling in the southern part of the Simandou project, while it has not made any worthwhile investments or carried drilling in the northern part.

Accordingly, the late President Lansana Conté's government terminated its decade-old license for the northern part of the Simandou project on 27 December 2008 since the company had not undertaken any drilling or exploration and awarded it to BSG Resources, a privately owned mining company owned by Israeli billionaire diamond merchant Beny Steinmetz under the so-called "use-it-or-lose-it" principle. (See: Guinea ousts Rio Tinto from ore project)

The termination of the license was triggered immediately after Rio announced on 10 December 2008 that it would delay investment of more than $25 billion on 16 projects including the Simandou project as part of its aggressive cost cutting campaign. (See: Major shake up at Rio Tinto to reduce debt)

A Rio Tinto spokesperson said that the joint venture with Chinalco was only for the undisputed southern part of the Simandou project.

Although Rio Tinto has been trying to get the license back, it has been unsuccessful so far. It now hopes that China would use its soft diplomacy in restoring the license from the current military junta that came to power in a military coup on the death of President Conté, which it backed with a $7-billion development loan in the face of global economic sanctions against the country.

Last year, a shadowy and unheard of company called the China International Fund (CIF) signed multi-billion dollar oil and mining deals with the governments of Angola, Zimbabwe and Guinea, without having to go through the process of a single tender in exchange for infrastructure development works.

Guinea, holding the largest bauxite reserves in the world, signed a $7-billion deal with CIF, under which all the bauxite mining rights would be held by CIF in return for infrastructure development.

This deal was signed despite world governments having imposed sanctions on the ruling junta for the cold-blooded massacre of over a hundred civilians, who had assembled to protest against the regime.

It is believed that CIF gets its massive funds and geopolitical clout from the Chinese intelligence agencies, which are negotiating billion-dollar energy and mining deals with repressive regimes in Africa, where legitimate Chinese companies would find it difficult to make deals under international competition.

Since China has a hold over the present regime in Guinea, Rio Tinto is likely to have been assured by China of getting its license back for the northern part of Simandou project.

There is no other explanation for Rio Tinto taking a partner for the Simandou project with a hefty 47-per cent stake for a mere $1.35 billion, as the project is estimated to have the potential to generate approximately $10 billion in annual revenues from the very first year of operations, analysts say.

Rio Tinto chief executive Tom Albanese today issued a statement saying, "Chinalco is an excellent partner for us in Simandou. Chinalco brings its own skills and capabilities in major projects and access to the infrastructure expertise of other Chinese organisations."

Observers are baffled at this statement since Rio Tinto is the world's second-largest mining company after Vale of Brazil, with iron ore operations across the globe and has built infrastructure on its own, even in the massive Pilbara region of Western Australia, while Chinalco does not posses any expertise in iron ore operations apart from a 9-per cent stake in Rio Tinto; its strength lies in aluminum, copper and titanium.