Rio Tinto plans to sell 46.6% stake in Simandou to Chinalco

The Simandou iron ore project in Guinea

RIO Tinto is to sell its 46.6% stake in Guinea iron ore project, Simandou, to Chinalco for between $1.1bn and $1.3bn, the Anglo-Australian group said in an announcement today.

The sale, currently contained in a heads of agreement, would add to Chinalco’s 41.3% stake in the project which it shares through a consortium of companies.

The Guinea government has the option to lift its ownership in Simandou to about 30% from its current 7.5% stake which has handed to it on a free carry basis.

“The heads of agreement sets out the proposed principal terms of the sale with the aim of signing a binding agreement within six months,” Rio Tinto said.

“Rio Tinto will receive payments of $1.1-1.3bn based on the timing of the development of the project,” it said. “The initial payment for shares will commence at the time of first commercial production, on a per tonne basis.”

The cost of developing Simandou, which is estimated to produce 100 million tonnes/year of iron ore for up to 40 years, has been estimated at $20bn – an outlay that also pays for a 650km railway and a deep water harbour.

Rio Tinto signed a framework agreement with the Guinea government in 2014 which provided guarantees on timing of the project in which a year is given for completion of a feasibility study and 36 months for the finance to be place.

It duly delivered a bankable feasibility study but then weeks later said it planned to shelve the project following a decision by newly appointed CEO, Jean-Sebastien Jacques, that it could not be justified against then iron ore price.

The iron ore price has since improved, roughly $5 per tonne, to settle at a six month high of $62.30/t before correcting slightly.

In early October, another nail was driven in the coffin of Simandou when the World Bank’s International Finance Corporation exercised a put option in terms of which Rio Tinto was to buy its 4.5% stake.

Even with a higher iron ore price, Simandou proved a political headache for Rio Tinto amid accusations of bribery and fraud by the Guinea government involving mining entrepreneur, Beny Steinmetz.