Rio Reaches A Significant Milestone In Simandou Project With Signing Of Investment Framework
Rio Tinto (NYSE:RIO) recently announced the signing of the Investment Framework (IF) for the development of Blocks 3 and 4 of the Simandou iron ore deposit with its project partners – the Aluminum Corporation of China (Chinalco), the International Finance Corporation (IFC) and the Government of Guinea. The signing of the IF is a significant step in the development of the $20 billion-project. It provides a strong legal and commercial foundation for it. This is very important considering the allegedly illegal manner in which Rio was stripped of its rights to Blocks 1 and 2 of the Simandou deposit. [1]
The government will submit the IF to the Guinean National Assembly for ratification in the coming days. Once ratified, the project partners will finalize the Bankable Feasibility Study which will confirm all the project parameters, including cost and timeline. This is expected to be completed within a year from ratification.
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The Simandou Project
Simandou is one of the world’s largest untapped high-grade iron ore deposits. The ore is very rich in iron and processing costs are expected to be quite low. The challenge in exploiting the Simandou deposit is its location. Located about 700 km from Guinea’s coast, massive investment in infrastructure is required to transport the ore for export.
The project includes of three components: a high-grade iron ore mine, a new 650 km multi-user railway to transport iron ore to the Guinean coast and a new deep-water, multi-user port in the Forécariah prefecture.
Production is tentatively expected to start by the end of 2018. The project is significant for Rio Tinto as it will produce around 100 million tons per annum (Mt/a) of iron ore at full capacity. This is nearly 35% of Rio’s current iron ore production of 290 Mt/a and around 28% of Rio’s expected iron ore production of 360 Mt/a in 2017. [2]
Simandou Investment Framework
The IF consists of a set of documents that define the financial and commercial relations between the project partners. The Project partners include the Republic of Guinea (7.5%), Rio Tinto (46.57%), Chinalco (41.3%) and the IFC (4.625%), a member of the World Bank Group.
The IF builds on the 2002 Convention de Base (CdB), between Simfer S.A.- the owner of the mine in which Rio Tinto has a 50.35% interest, and the Republic of Guinea. This document spelt out the terms relating to the iron ore mine and the supporting infrastructure. The original terms were modified through the 2011 Settlement Agreement to produce an Amended Convention de Base (ACdB). The ACdB primarily separated the mine and infrastructure projects and committed the project partners to create the IF. Through the Letter of Mutual Intent (LoMI) signed in 2013, the project partners and the Government of Guinea jointly agreed to look for outside investment from a group of international, world-class investors, to build and own the multi-user rail and port infrastructure. Simfer S.A. would be the foundation customer for the rail and port infrastructure. During 2013 and 2014, a working group that brought together all project partners under the aegis of the Republic of Guinea, worked collaboratively to develop the IF. The IF consists of the ACdB, which provides the framework for the creation and operation of the mine, and the Build Operate Transfer (BOT) Convention, which provides the framework for the creation and operation of the rail and port infrastructure. [3]
Rio’s Troubled History In Guinea
Rio has had a tough time with its Guinean iron ore deposits. It was stripped of its mining licenses to Blocks 1 and 2 of the Simandou deposit in 2008, during the regime of President Lasana Conté. These licenses were later held by Vale BSGR (Guinea) Limited (VBG), a joint venture between Vale and Beny Steinmetz Group Resources (BSGR). The reason given for stripping Rio Tinto of its rights was that it had fallen behind on its development schedule. In 2011, the Government of Guinea, under President Alpha Condé, decided to conduct a comprehensive review of all mining licenses. A technical committee constituted for the purpose concluded that the mining concessions had been obtained through corrupt practices by BSGR. It gave Vale a clean chit. The government revoked the mining licenses held by VBG, following the recommendations of the technical committee.((Guinea To Review Mining Licenses, Financial Times))
Rio has initiated legal proceedings against a host of parties including Vale and BSGR, alleging that corrupt practices lead to the revocation of its mining license. ((Rio Tinto Files Complaint In United States District Court In Relation To Mining Concessions In Guinea, Rio Tinto Press Release))
Significance Of The Investment Framework
The signing of the IF marks a significant step in the development of Simandou Blocks 3 and 4 for Rio Tinto. After the ratification of the IF by the Guinean National Assembly, a repeat of Rio’s experience with Blocks 1 and 2 is unlikely.
The IF gives the Republic of Guinea a 7.5% ownership of Simfer S.A., the mine owner, with an option to increase it to 35% over 20 years, including an additional 7.5% for free. When fully operational, the project has the potential to double the country’s current GDP. The project will generate significant employment, stimulating an estimated 45,000 jobs throughout the economy. The multi-user rail and port infrastructure will be accessible to various Guinean commercial and private users and will facilitate cross-country mobility. In return, Rio and its partners will get an eight-year income tax exemption once the mine opens. Following this, the IF spells out a stable tax regime.
The significant potential gains to the Guinean economy, and the government’s direct stake in the project, will ensure its support for successful project completion. The development of the rail and port infrastructure by an external group of investors will lower Rio’s exposure to the project. The rail and port infrastructure accounts for nearly two-thirds of the project’s $20 billion cost estimate. The multi-user nature of the rail and port infrastructure will ensure that a multitude of stakeholders are interested in the successful completion of the project. In addition, the project has the backing of the Chinese government through Chinalco, which is a state-owned enterprise. China is the largest consumer of iron ore in the world and Rio’s largest market.
Taking all these factors into consideration, any major disruptions to Rio’s plans, like in the case of Blocks 1 and 2, are unlikely. Thus, the signing of the IF marks a significant milestone in the development of the Simandou project.
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- Rio Tinto Seals $20bn Iron Ore Development Project With Guinea, Financial Times [↩]
- Rio Tinto’s 2013 20-F, SEC [↩]
- Simandou South: Signature of the Investment Framework Marks a Significant Move Forward, Rio Tinto Press Release [↩]