Late last week, an event of potential long-term significance for the iron ore market occurred when Rio Tinto finally and formally abandoned its plans to develop and asset that was once regarded, along with Oyu Tolgoi, as one of the two key assets within its development pipeline.
After 16 years of involvement with the giant Simandou iron ore resource in Guinea, Rio announced it had signed a non-binding agreement to sell its 46.6 per cent stake to China’s Chinalco, which has a pre-existing 41.3 per cent interest in the project. The other equity holders are the Guinean Government (7.5 per cent) and the World Bank’s financing vehicle, International Finance Corp (4.6 per cent).
Rio’s decision to sell out of Simandou may have been prompted by the World Bank’s decision earlier in October to exit the project, triggering a put option that would require the other partners to buy the interest at a price, estimated to be around $US200m, which would enable the IFC to recover its costs.
Having already written off the best part of $US2bn on its Simandou investment earlier this year, and, having essentially concluded that the project couldn’t be economically developed within the foreseeable future, new Rio chief executive Jean-Sébastien Jacques wouldn’t have been enthusiastic about throwing good money after bad.
Should the project ever be developed, Rio would receive payments of between $US1.1bn and $US1.3 bn, depending on the timing of the development. Payments for its shares, which would be made on a “per tonne” basis, don’t start until first commercial production from the resource. That’s if there is any production.
The massive question mark over the likelihood of Rio getting anything for its interest in Simandou doesn’t relate to the quality or scale of the Simandou resource. There’s enough iron ore — more than two billion tonnes — to support a 40-year mine producing about 100 million tonnes of very high-quality ore a year. It’s currently the world’s biggest undeveloped iron ore deposit.
Source: The Australian. Com