So much for Rio Tinto’s proposed $US1.3 billion sale of its stake in the huge Simandou iron ore prospect in the African country of Guinea – it has lapsed because Rio and the Chinese buyer couldn’t agree on terms.
In fact, a non-deal like this one is just what Rio Tinto wants to see so far as the huge Simandou prospect is concerned – anything to keep it out of production.
In fact talks between Rio and Chinese state-owned enterprise, Chinalco lapsed after almost two years of negotiations that went nowhere.
Rio owns 45% of the project, Chinalco 40% and the Guinea government 15%.
Seven years or so ago Chinalco was the Chinese company that took a big stake in a troubled Rio and for a while fancied its chances of taking over the world’s second-biggest iron ore exporter and a major producer of aluminium, alumina and bauxite (which was brought about by Rio’s over-priced and badly timed $US44 billion takeover of Canadian company, Alcan in 2077, just before the GFC broke).
Rio said on Monday the companies would continue to work with the Guinea government to realise value from the iron ore deposit, which is arguably one of the best-untapped resources in the world but in a difficult location to develop.
The Simandou project has been hampered by a series of corruption allegations and legal battles over a decade. It looked viable when iron ore prices were well over $US100 a tonne, but at around $76 a tonne (at the moment) it is not.
“The non-binding heads of agreement, originally signed on 28 October 2016, for Chinalco to acquire Rio Tinto’s entire interest in the Simandou iron ore project in Guinea has lapsed,” said Rio in a statement to the ASX.
“Rio Tinto and Chinalco… will continue to work with the Government of Guinea to explore other options to realise value from the world-class Simandou iron ore deposit,” Rio said.
Simandou requires a huge investment in infrastructure, including a 650-kilometre railway line and a port, which could push the total investment in the project to more than $US20 billion.
At the same time, the global iron ore industry has settled down to just four companies – BHP, Rio and Fortescue Metals in Australia and Vale from Brazil.
While other countries such as South Africa, India, Iran, and Guinea have significant iron ore reserves, some high grade, but expensive to mine. And they are more expensive to ship to Chinese steel mills, the world’s major buyers, because of the greater distances from the high-grade mines in the Pilbara region of northwestern Australia which is only 10 days away from China.
Lower freight costs and higher quality combine to make Australian iron ore more attractive to Chinese mills (and those in Japan) than elsewhere, especially prospects like Simandou.
The global iron ore market remains oversupplied but Rio, BHP, Vale, and Fortescue are able to dominate because of very low costs and control of their shipping, which help underwrite their competitiveness against other actual and prospective suppliers such as Simandou.
Rio doesn’t really want to develop that project – to do so would impose unwanted costs, nor does it want a major Chinese company (and an eager Guinean government) to get control and try and bring it into production – a move that would dump unwanted tonnes on the market and cause pricing pressures.
As we have reported twice in the past week, Chinese iron ore prices continue to rise to levels not seen since the start of this year because of continuing demand for high-grade ores from Australia and Brazil. That’s despite the softening in the pace of activity in the Chinese economy in the last four months.
