Rio Tinto forges ahead with Simandou, the world’s largest mining project

Simandou, with over two billion tonnes of reserves and some of the highest grades in the industry (66% – 68% Fe which attracts premium pricing), has a back-of-the-envelope calculation value of around $110 billion at today’s prices of $55.78 a tonne, according to the Metal Bulletin Index. It’s also one of the most easily exploitable iron ore fields outside of Australia’s Pilbara region and top producer Vale’s Brazilian home base.

At full production, the concession would export up to 100 million tonnes per year – that’s a third of Rio’s total capacity at the moment – and would catapult Rio past Vale as world number one iron ore miner. Simandou would by itself be the world’s fifth-largest producer behind Australia’s Fortescue Metals and BHP Billiton.

A producing Simandou mine would add nearly $6 billion to Guinea’s GDP, which means the project has the potential to nearly double the size of the impoverished country’s economy in nominal terms. Guinea relies on exports of bauxite ore for the manufacture of aluminum for 80% of its export earning today.

Simandou, with over two billion tonnes of reserves and some of the highest grades in the industry (66% – 68% Fe which attracts premium pricing), has a back-of-the-envelope calculation value of around $110 billion at today’s prices. (Image courtesy of Rio Tinto Simandou)

Rio acquired the rights for the vast mountain deposit more than 15 years ago and has already spent more than $3 billion on the project. In February, the company swung into the red primarily due to a $1.1 billion writedown in the value of its investment in this project.

A feasibility study was due to be completed by July last year, but the Ebola outbreak halted work at the site for months with hundreds of contract workers pulling out of the country.

In May 2014, the Guinea government and Rio Tinto (LON:RIO) and its partners – China’s Chalco together with the World Bank – inked a $20 billion deal for the southern section of the Simandou iron deposit in Guinea.

The agreement calls for a new 650km railway across the West African country to Conakry, Guinea’s capital in the north, plus a new deep water port at a conservatively estimated cost of $7 billion; infrastructure investments that will transform the economy of the impoverished country.

Analysts, however, warn that the world already has a surplus of iron ore for the foreseeable future, so bringing a giant mine such as Simandou into production would just add more stress to an already battered sector.

Simandou’s real cost of the project has yet to be revealed, but it is tipped to reach $20 billion, Ecofin Agency reports (in French).

Simandou’s chequered history

Rio Tinto held the licence for the entire deposit since the early 1990s, but was stripped of the northern blocks in 2008 by a former dictator of the country.

The studies outline details around the development of the mine, as well as related infrastructure, including a new 650km railway across the West African country to Conakry, Guinea’s capital in the north, plus a new deep water port.

BSG Resources, a company associated with Israeli diamond billionaire Beny Steinmetz acquired the concession later that year after spending $160 million exploring the property.

In 2010 BSGR sold 51% to Vale (NYSE:VALE) for $2.5 billion. The Rio de Janeiro-based company stopped paying after the first $500 million after missing a number of development milestones. Then, the new Guinean government under Alpha Conde launched a review of all mining contracts awarded under previous regimes and launched an investigation into the Vale-BSGR joint venture.

The Guinea government withdrew the mining permit in April, accusing BSGR of obtaining its rights through corruption. BSGR has denied wrongdoing and filed an arbitration request in an attempt to win compensation from the Western African nation.

Shortly after BSGR’s rights were stripped Rio filed a lawsuit for billions of dollars against both Vale and BSGR in New York courts for what it called a “steal” of its previously-owned concession. Rio alleged BSGR paid a $200 million bribe to Guinea’s former minister using funds from Vale’s initial payment.

The US district court threw out the case in November saying Rio “had waited too long to file the lawsuit” under the Racketeer Influence and Corrupt Organizations Act, which calls for a four year time limit.

Rio Tinto held the licence for the entire deposit since the early 1990s, but was stripped of the northern blocks in 2008 by Guinea’s former dictator. (Image courtesy of Rio Tinto Simandou)