Chinalco to spend US$1.35B to earn into Rio’s Simandou

VANCOUVER– The Simandou iron ore project in Guinea is set for a major influx of spending after 95%-owner Rio Tinto (RTP-N, RIO-L) inked a US$1.35-billion earn-in deal with Chinalco to start developing the project.

A non-binding memorandum of understanding could allow the Chinese major to earn a 44.65% interest in the project by spending US$1.35 billion to solely fund development work for the next two to three years. If Chinalco completes its earn-in, Rio would hold 50.35% of the project and Rio’s current partner, the World Bank’s International Finance Corp., would retain its 5% stake.

“We have long believed that Rio Tinto and Chinalco could work together on major projects for mutual benefit,” said Tom Albanese, Rio’s chief executive, in a statement. “Chinalco is an excellent partner for us in Simandou. Chinalco brings its own skills and capabilities in major projects and access to the infrastructure expertise of other Chinese organizations.”

Rio has already invested US$600 million in exploration and development work at Simandou and the company believes the Guinean project represents the single best-undeveloped source of high-grade iron ore. Rio will continue to manage the project through the Chinalco earn-in period and beyond.

Even though US$1.35 billion is a lot in cash, Rio expects the partners will need to secure significant additional development funding to see the Simandou project through to full operations. Simandou is a feasibility-stage iron ore project in southeast Guinea that already employs 1,000 people in the West African country. To develop the asset will be challenging because Guinea lacks essentially all of the infrastructure needed to support a major iron ore mine.

That is why the Chinalco earn-in is so large — the scope of the deal is meant to include development of a cross-country railroad and a port. Once operational, the mine is expected to employ 4,000 people and produce more than 70 million tonnes of iron ore annually.

The Guinean government holds an option to buy up to 20% of the Simandou project. Any interest the government acquires would proportionally reduce the interests of all three current partners.