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INTERVIEW: Rio needs investment agreement to take Simandou forward, says Alan Davies

January 10, 2013 - 09:44 GMT Location: London

KEYWORDS: Rio Tinto , Alan Davies , Simandou

A consortium led by Anglo-Australian mining major Rio Tinto is awaiting the conclusion of investment talks with Guinea’s government before continuing development of the $10 billion-plus Simandou iron ore project.

To date, Rio Tinto and its partners have spent a total of $3.6 billion on Simandou, which is among the biggest and highest-quality untapped reserves of iron ore in the world.

But Alan Davies, the miner’s diamond and minerals ceo, told Metal Bulletin sister title Steel First that Guineau’s government is yet to formally agree the funding for its share: a 51% stake in Simandou’s port and rail infrastructure.

"The top priority is to get an investment agreement," Davies said in an interview at Rio’s towering steel and glass office in London. "The investments we are making are in accordance with the stage of the project and will be ongoing over the next year."

While all the funds are in place for Rio’s consortium to fulfil its side of the project, Davies said Rio and its partners in the Simandou project need the agreement with the government – which will determine how the cost of developing infrastructure to transport ore from Simandou will be funded – to be in place for the project to progress.

Rio Tinto is confident that Guinea’s government will have the necessary funding in place for the investment agreement to be signed by the end of this year.

"We are aligned with the government, they have approved the scope of the project," Davies said.

"We need the investment agreement in place to take this further. There’s no deadline but we believe it will be signed over the course of 2013," he added.

Volatile global iron ore prices over the past year, fluctuating Chinese demand for the steelmaking raw material and changing regulatory goalposts have made investors and fellow miners jittery about the Guinea iron ore story.

And the country’s controversial mining licence review prompted Brazilian iron ore major Vale to halt work on its $2.5 billion share of the Simandou project until it gets the regulatory green light from the government.

BHP Billiton is looking for a buyer for its Nimba iron ore project in the north of Guinea as part of a wider divestment program.

A perceived slow-down in Rio’s work on Simandou, coupled with a reduction of personnel on site has prompted rumours that the Anglo Australian miner could soon follow suit.

On its website, Rio affirms its commitment to Simandou but counters that "as with any project", it is in the interest of all partners to remain "vigilant on spending".

The miner’s capital expenditure for 2013 has not yet been revealed. The likelihood that Simandou’s costs will push significantly higher than the $10 billion mark is likely however, given increasing costs and the possibility of project delays.

Davies says that the miner's spending is in line with the project’s progress to date and that a recent decrease in people on the ground is in-line with the company’s plan to cut contractor spending and concentrate on training local Guineans to work on the mine.

Simandou: the story so far

Tucked away in the remote south-eastern corner of Guinea, the deep red earth of the Simandou deposit is ringed by mountains and tracts of lush, virgin and largely inaccessible jungle.

Rio Tinto and its partners the Aluminium Corporation of China (Chalco) and the World Bank’s International Finance Corporation hold the mining licences to the two southernmost blocks of Simandou.

The consortium faces a similar challenge to the bulk of putative West African iron ore miners: how to get the product on to the seaborne market and ultimately to the world’s largest consumer of the steelmaking raw material, China.

Ravaged by years of military rule, chronic underinvestment and political instability, Guinea does not have the necessary existing infrastructure in place to transport bulk commodities from remote inland mines to the coast, meaning that miners wanting to tap into the country’s rich resources have to start from scratch.

"It is in the interests of Guinea to see the country's assets developed," Davies said.

"There’s a lot of preparatory work which needs to be done to start on the main infrastructure," he added.

Early works have started on the construction of roads, base camps and service docks in eastern Guinea and Rio expects construction work on the port, mine and rail line to begin this year.

Davies stressed the fact that each stage of the project was interdependent and reliant on the investment agreement.

The miner is eager to highlight what progress has been made on the project in the past twelve months.

Rio and Chalco formalised their Simandou jv agreement in April 2012, with the Anglo-Australian miner confirming a further $1 billion investment in the project in June.

In October the Guinean government safeguarded Rio’s infrastructure plans by declaring Simandou a project of national interest for the country, meaning that the areas of land needed to develop rail and ports could not be bought by third parties.

"This infrastructure will be of national significance with all project partners contributing proportional to their shareholding," Davies said. "It will be a multi-user line and will provide access to other industries."

Rio is not yet in talks with other potential users of the line.

Disputed ownership
Rio Tinto was one of the first miners to realise the potential of Guineau’s mineral wealth, and its engagement with the country has spanned the rule of a dictator, two military juntas and Guinea’s first elected government.

Rio Tinto won the rights to mine the entirety of the iron-rich mountain of Simandou in the 1990s under the military dictatorship of Lansana Conté.

The Conté government stripped half the concession from Rio Tinto in 2008 after accusing the miner of 'licence squatting’, and instead awarded the rights for free to Israeli diamond magnate Beny Steinmetz, via his company Beny Steinmetz Group Resources (BSGR) in 2009.

The move prompted accusations of bribery and corruption, fanned by the massive $2.5 billion payout made by Vale for a 51% stake in BSGR’s claim.

As part of its bid to stamp out corruption in Guinea’s mining industry, the government of Alpha Conde, Guinea's president since 2010, is reviewing the licences of every contract awarded by Guinea’s previous leaders. The aim is to determine which licence holders have the capacity and intention to explore and bring projects to production.

Among the licences under review is BSGR’s claim. The Israeli miner has hotly contested allegations of corruption and accuses the government of trying to illegally seize its claim.

Rio Tinto has no such worries. The miner paid $700 million to Guinea in 2011 for the 'resolution of all outstanding issues’ relating to its portion of Simandou, meaning that it will be unaffected by any further changes to the mining code or future reviews.

With mutterings of military unease, strengthening political opposition and upcoming legislative elections on the horizon, Condé’s overhaul of Guinea’s mining industry comes at a sensitive time.

When asked if Rio Tinto would be interested in re-staking its claim over the other half of the Simandou project, Davies is circumspect.

The miner is concentrating on bringing its existing stake in the project into production, he said.

"We don’t play a political game, we deal with the government of the day," he added.

Early production?
Despite the myriad challenges faced, Rio Tinto remains optimistic that Simandou will start production on schedule and indeed, predicts that first test shipments of ore from the project will hit the seaborne market by early 2014.

"[These shipments] will allow us to develop the Simandou brand in the market," Davies said.

The high quality Simandou product has already attracted interest from European and Asian mills, especially those producing high-quality specialty steels.

Davies describes the product as "most similar to a Carajas material ultra high DSO of 66-67% Fe".

Once the financing has been secured for Rio’s route to market for its ore, work can begin apace at Simandou.

Until then, market observers await the results of Guinea’s mining review and the government’s hoped-for infrastructure cash injection.

Michelle Madsen
mmadsen@steelfirst.com
Twitter: @mmadsen_SF

All material subject to strictly enforced copyright laws. © Euromoney Institutional Investor PLC.

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