Rio Tinto earmarks further $170 million for massive Simandou iron ore project

Transnational miner Rio Tinto (LON:RIO, NYSE:LON, ASX:RIO), the world's No 2 name in seaborne iron ore, has upped the ante in West Africa's iron ore race, the biggest in global mining, by announcing a further USD 170m investment in Guinea's Simandou, following USD 650m investment to date. After discovering Simandou in 2004, the iron ore system, 95% claimed by Rio Tinto, rapidly developed into one of the world's biggest mining hits.

Rio Tinto faced setbacks after portions of Simandou were apparently moved from its control when a military junta took control of the country in December 2008. On 30 April 2010, Brazilian supergroup Vale, the world's No 2 miner by value, and the global leader in seaborne iron ore, agreed to pay USD 2.5bn for a 51% stake in BSG Resources Guinea, which apparently holds rights to blocks 1 and 2 in Simandou.

This meant that the three names dominating about 60% of global seaborne iron ore, Vale, Rio Tinto, and BHP Billiton, were firmly pegged out across West African iron ore. On 19 January ArcelorMittal, an integrated global steelmaker, announced it had entered into initial discussions with BHP Billiton to potentially combine its respective iron ore mining and infrastructure interests in Liberia and Guinea within a joint venture.
On 19 March 2010 Rio Tinto announced a non-binding MOU with China's Chinalco, Rio Tinto's largest shareholder, to establish a Simandou joint venture, where the new partner would acquire a 47% interest by providing a USD 1.35bn earn-in over the next two to three years. 

The agreement progressed to binding agreement last week; once Chalco has paid its USD 1.35bn, the effective interests of Rio Tinto and Chalco in the Simandou JV will be 50.35% and 44.65%; the remaining 5% will be owned by the International Finance Corporation. While a new government is yet to settle down in Guinea, Rio Tinto appears to be asserting rights to all of Simandou: "Rio Tinto's 95 per cent interest in the Simandou project will be held in the new JV", the group asserted today.

Rio Tinto has also indicated the potential size of its Simandou operation. While it may consider an export route through Liberia, the current plan anticipates the construction of a mine at Simandou with annual capacity of 95m tonnes, a 650km dedicated industrial railroad passing through 21km of tunnels traversing Guinea to the coast, a rail car-dumping facility, and a four-berth wharf located 11km offshore from Matakang.

The envisaged scale is titanic. A handy benchmark in iron ore investment can be cited in the Vale stable, which in 2007 flagged Serra Sul, a new mine, within its Carajás system in Brazil, as "the largest greenfield site in our history and the largest iron ore project in the world". Project completion was initially slated for the first half of 2012; this has now been pushed forward to the second half of 2013.

At least part of the reason is the massive budget required to build Serra Sul: USD 11.3bn (revised up from the original USD 10.1bn).  Production at Serra Sul is targeted at 90m tonnes a year (a little less than Simandou), implying more than USD 1bn of investment for each 10m tonnes of output.

Even this cost is heavily discounted, given that Serra Sul has relatively near-access to Vale's existing infrastructure in its Northern System, including loading, rail, and port facilities, and even ships. Serra Sul is yet to be approved by the Vale board, which has, however, been attracted, or perhaps distracted, by West Africa's riches.

The building of the full blown Rio Tinto JV Simandou complex, to ship loading, could well cost USD 20bn or more, when rail, handling and port infrastructure is included. Rio Tinto has some advantages in this terrain, given its 1997 takeover of Alcan. Rio Tinto Alcan has long been holder of 45% of Halco Mining, a partnership which owns 51% of Compagnie des Bauxites de Guinee (CBG), one of Guinea's biggest miners, in operation since 1973, and today the single biggest supplier of bauxite to the Western world.

US aluminium giant Alcoa also holds 45% of Halco Mining; the Guinea government holds 49% of the parent company, CBG, which, overall, has annual capacity of 13m tonnes of bauxite, the raw material for aluminum. Guinea, which may hold close to half the world's reserves of bauxite, hosts other bauxite mines and developments.

Seaborne iron ore arguably ranks as the world's most lucrative franchise. A recent report by the UNCTAD Trust Fund on Iron Ore Information, in cooperation with the Sweden-based Raw Materials Group, put world production of iron ore at 1.588bn tonnes in 2009.

Chinese production figures -- re-evaluated and reduced in the latest study -- came to 234mt, on a "comparable grade" basis, by "upgrading" Chinese grades to the same magnitude as the world average of 63-64%. China has in recent years fallen to fourth globally, after Australia (394mt), Brazil (300mt), and India (257mt).

Despite the global recession, iron ore trade climbed to a record level of 955mt, in 2009, up 7.4% from the previous year. Australia ranks as biggest exporter: in 2009 it sent 363mt overseas, a 17 % increase; Brazil fell by 3% to 266mt; India was at 116mt.

China is by far the largest importer of iron ore, accounting for two-thirds of world imports

. Despite the recession, its intake of ore climbed by 41% in 2009, to 628mt. The three largest iron ore companies, Vale, Rio Tinto, and BHP Billiton, together controlled 35% of total iron ore production and 61% of total seaborne trade in iron ore in 2009.