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Published: 30 March 2010
Joint venture for Simandou
Rio Tinto and Aluminium Corporation of China (Chinalco) have signed a preliminary agreement to develop the Simandou iron ore project in Guinea.
The deal follows Rio Tinto’s decision to reject US$19.5B of investment from the Chinese firm, which is already the mining giant’s biggest shareholder.
Rio ultimately opted for a joint venture with BHP Billiton and a $15.2B rights issue but China remains one of the firm’s most important markets, so the Guinean agreement could be an attempt to repair damaged relations with Beijing in the wake of the Rio Tinto bribery scandal in China.
Much of the Simandou iron ore is expected to be shipped to East Asia, given the resilience of Chinese steel production.
The joint venture could also be designed to spread the risk, given that Guinea had been ruled by a military junta since President Lansana Conte died in December 2008. The military government repeatedly threatened existing mining sector concessions, although a joint civilian-military interim government was unveiled in February.
Rio Tinto currently holds a 95% in the Simandou project, with the remaining equity owed by the World Bank.
Chinalco will now invest US$1.35B over the next three years in return for a 47% stake. Total project costs were estimated at US$6B but this figure could double by the time the first production is shipped out of the country.
A key element of the scheme will be the development of new rail and port infrastructure to enable the export of the iron ore, as the 2.25 bt of iron ore at Simandou lie about 750 km from the coast.
However, details of the new transport projects have not yet been concluded and it is not yet known whether a private sector port operator will be offered the opportunity to manage the new port facility.
Output is expected to peak at 70 mtpa.