Rio's African iron ore venture slides towards backburner
Investment bankers have been amused by recent company briefings that have listed the once high-profile project below Dampier Salt in the order of discussion.
Dampier Salt is the little toe on the Rio Tinto giant - an industrial salt-exporting business in Western Australia that raised just $23 million in earnings before interest and tax at the most recent set of results.
Simandou was never expected to keep that sort of company on Rio's balance sheet, with the ambitious project previously seen as one of Rio's most high-risk, high-reward projects in the developing world.
Spruiked as Africa's biggest private infrastructure project, Simandou was planned as an iron ore joint venture with the World Bank's International Finance Corporation and a Chinese state-owned enterprise that would ship about as much iron ore each year as Fortescue Metals Group does in the Pilbara today.
But predictably, doing business in Guinea has proved difficult.
The local government has pushed for larger stakes in the project over the years, and in 2011 it forced Rio into a controversial $US700 million payment to retain the project.
Reports about a "freeze" on the project and Rio cutting staff numbers in Guinea are linked to ongoing delays in approving the investment framework: a long overdue agreement that sets out how much funding each party is expected to secure for a project tipped to cost more than $US10 billion.
Rio has long expected the Guinean government to secure financing to support a 51 per cent stake in the port and rail costs, but has found progress slow.
A similar impasse has frozen development of a neighbouring iron ore project being run by Brazilian miner Vale. Rio's man in charge of Simandou, Alan Davies, said in January that Rio couldn't push ahead with further work until it was clear who was paying for what.
Similar sentiments came through in Rio's official response to the Reuters report, which confirmed that discussions with the government had been held in recent days.
"The Simandou project is definitely not frozen and Rio Tinto continues to progress the project and is committed to its development. The current priority is finalising the investment framework and for the government of Guinea to secure its financing," a company spokesman said.
Rio's new chief executive, Sam Walsh, has said he is committed to keeping the Simandou project on Rio's books and taking it through to development, despite a pressing need to prune assets and cut costs.
Perhaps that commitment is more rooted in expectations that, under a more moderate future for iron ore prices, it will be hard to find buyers for a massive green-field iron ore project in an unpredictable jurisdiction.
Rio shares were down more than 1 per cent on Tuesday to $62.05, outpacing losses of rival BHP Billiton, which was steady.
But is any of that linked to the Simandou struggle? Probably not. Concerns over the direction of Rio's other joint venture with the World Bank in an unpredictable developing nation - Mongolia's Oyu Tolgoi copper and gold mine - is more likely to be the source of Tuesday's share price declines.
Revelations over the past 24 hours that the United States did not support a decision by the World Bank's International Finance Corporation to help fund Oyu Tolgoi's development do not threaten the actual funding.
That was finalised on February 28 when the IFC approved a loan of up to $US400 million and committed to help with a further $US1 billion syndicated loan.
But the US stance is a political blow to Rio in a year when politics will reign in Mongolia.
A presidential election is due within three months, and the size of Mongolia's stake in Oyu Tolgoi has been the biggest political issue in the country for several years now.
Rio and the Mongolian government are currently at odds over the investment agreement that governs the project, and with first commercial production from the mine due in June, any delays will have far more serious ramifications than the ongoing struggles with Simandou.
Frequently Asked Questions about this Article…
Simandou is a massive iron‑ore development in Guinea touted as Africa's biggest private infrastructure project. It was planned as a joint venture involving Rio Tinto, the World Bank's International Finance Corporation (IFC) and a Chinese state‑owned enterprise, and could produce roughly the same annual iron ore volume as Fortescue does in the Pilbara. For investors, Simandou represents a high‑risk, high‑reward greenfield asset in an unpredictable jurisdiction with potentially very large future returns — but also significant political, financing and execution risks.
There have been signs for some time: company briefings have reportedly relegated Simandou below small assets like Dampier Salt, and recent reports mention a 'freeze' on the project and cuts to staff in Guinea. The main reason is ongoing delays in finalising the investment framework that sets out who pays for what, and slow progress by the Guinean government in securing financing for its stake in port and rail infrastructure — issues that have stalled further development.
The investment framework is the long‑overdue agreement that defines funding responsibilities and how much each party must secure for the project. It is critical because Simandou requires more than US$10 billion, including major port and rail costs. Rio has long expected the Guinean government to secure financing to support a 51% stake in those infrastructure costs, and without clarity on who pays for what Rio says it cannot proceed with further work.
No. Rio has stated the Simandou project is 'definitely not frozen' and that the company continues to progress the project. The firm says the current priority is finalising the investment framework and for the government of Guinea to secure its financing, indicating activity continues even if development is delayed.
The article suggests selling a massive greenfield iron‑ore project in an unpredictable jurisdiction could be difficult, particularly if future iron ore prices are more moderate. Rio's new CEO Sam Walsh has said he is committed to keeping Simandou on Rio's books and taking it through to development, which may reflect the challenge of finding buyers for such a complex asset.
On the day referenced, Rio shares were down more than 1% to $62.05, outpacing rival BHP Billiton which was steady. However, the article notes the share decline was probably not primarily linked to Simandou; investor concerns were more likely driven by issues around Rio's other World Bank joint venture, the Oyu Tolgoi copper and gold project in Mongolia.
Investors are also watching Oyu Tolgoi in Mongolia, another major joint venture with the World Bank's IFC. There are political tensions in Mongolia — including disagreement over the investment agreement that governs the project — and while the IFC approved a loan of up to US$400 million and committed to help arrange a further US$1 billion syndicated loan (finalised on February 28), revelations that the United States did not support the IFC decision are described as a political blow that could affect sentiment.
The Guinean government has repeatedly pushed for larger stakes in Simandou and in 2011 forced Rio into a controversial US$700 million payment to retain the project. More recently, the government is expected to secure financing for a 51% stake in port and rail costs, and slow progress on that financing and on finalising the investment framework has delayed development. A similar financing impasse has also frozen a neighbouring iron‑ore project run by Vale.
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