Chinalco and Rio sign $1.35bn Guinea deal

The Business of Mining - thebusinessofmining.com | August 4, 2010 | 3:18 pm

“Aluminum Corp of China and Rio Tinto signed a $1.35bn deal on Thursday that allows the Chinese state-owned miner to buy in to a rich iron ore project in Guinea, in a move that places both mining companies at the centre of multi-billion-dollar scramble for west Africa’s iron ore.

Rio and Chinalco – the common name of the Chinese miner – revealed few changes to the earlier agreement they signed in March over Simandou, the Guinean deposit. Chinalco will pay Rio $1.35bn that will fund project development. In return, Chinalco buys its way up to a 47 per cent stake in the Rio-Chinalco joint venture.”

Source: Financial Times, July 29, 2010

Observations:

  • Rio will mainly use the $1.35bln to finance infrastructure development, including a railway and port. Chinalco gains the access to the iron ore rights.
  • Rio Tinto and Chinalco are hoping the Guinean government will exercise options to get 20% of the project shares. In this way Rio Tinto would be the lead partner and no other international firms will gain from the project.

Implications:

  • Rio Tinto manages to improve the relationship with state-backed Chinalco after the setback of the unsuccessful increase of Chinalco’s share in the company in 2008. This relationship is especially important as China is the largest customer for Rio’s main profit pool: Australian iron ore. Although the size of this specific deal may be rather small, the political significance is ar stretching.
  • Although access to the iron ore is important for Chinalco, the ore will be significantly more expensive than Australian ore, partly because of the larger shipping distance.

©2010 | Wilfred Visser | thebusinessofmining.com