Guinea to partner with China-backed consortium at Simandou

The Republic of Guinea has selected a China-backed consortium to develop blocks 1 and 2 of the Simandou deposit, which holds estimated reserves of more than 2 billion tonnes of high-grade iron ore.

The SMB-Winning consortium includes Singapore-based owner Winning Shipping, Chinese aluminum producer Shandong Weiqiao, China’s Yantai Port Group, and Guinea-based transport and logistics firm United Mining Supply. SMB is already active in Guinea as a major bauxite producer.

SMB-Winning won the rights to Simandou blocks 1 and 2 in November 2019, with a US$14 billion project bid that included construction of a 650-km railway and a deep-water port to export the product to foreign markets, including China.

The infrastructure commitment was key to beating a US$9 billion bid by Australia’s Fortescue Metals Group’s (ASX: FMG), which did not include the railway construction, according to media reports. SMB-Winning said in a statement that the mine will produce up to 72 million tonnes of high-grade iron ore annually.

Industry experts widely consider Simandou to be the largest high-grade iron ore deposit in the world, but it has struggled to enter production for years. Rio Tinto (NYSE: RIO; LSE: RIO) had previously held rights to develop all four blocks of Simandou before being stripped of the rights to blocks 1 and 2 in 2008 by a previous government, which gave those rights to a joint venture between Israeli billionaire Beny Steinmetz’s BSG Resources and Brazilian developer Vale (NYSE: VALE).

Guinea’s president, Alpha Conde, revoked BSGR’s rights in 2014 amid corruption accusations, which BSGR denied and spent several years fighting in court. Guinea’s Ministry of Mines and Geology announced in July 2019 that it had settled its dispute with BSGR a few months earlier, and that blocks 1 and 2 were again available for tender.

The US$14 billion project planned by SMB-Winning could finally move blocks 1 and 2 into production, while also lightening the economic burden on Rio Tinto and partner Aluminum Corporation of China (Chinalco) for blocks 3 and 4, which development rights Rio Tinto retained in 2008.

Rio Tinto had announced plans in 2014 for a US$20 billion project at Simandou’s blocks 3 and 4 that also included the 650-km railway and deep-water seaport on Guinea’s coast. However, a series of challenges have prevented Rio Tinto from starting meaningful production at the site, where it estimates it could produce 91 million tonnes of high-grade iron ore annually once at full production.

Bloomberg reported in June 2019 that Rio Tinto had hired consultants to investigate alternative means of shipping iron ore from Simandou. Now, a nearby infrastructure partner in SMB-Winning could help address Rio Tinto’s concerns about moving iron ore produced in its portion of Simandou. S&P Global Platts reported that the rail line planned by SMB-Winning is expected to provide up to 200 million tonnes of freight capacity per year, which it said would be sufficient to serve all four blocks of Simandou, as well as smaller operations in the area.

For example, Vancouver-based High Power Exploration purchased rights to Guinea’s Nimba iron ore deposit in September 2019. HPX, a privately-held company founded my mining mogul Robert Friedland, said the United States Geological Survey (USGS) estimated in a 2015 survey that Nimba holds roughly one billion tonnes of high-grade iron ore. HPX said in a statement late last year that it is conducting feasibility studies that it hopes will enable production of up to 20 million tonnes annually.

The high-grade iron ore at Simandou and Nimba has become increasingly valuable to steelmakers, and China in particular, as it is more environmentally friendly in production and use than lower-grade iron ore. S&P said in its November 2019 report that, because of this increased demand for high-grade iron ore, new production from Simandou “is not expected to unduly affect world prices.”

Iron ore prices had been at a five-year high of US$109 per tonne in July 2019, when Guinea announced the tender of blocks 1 and 2, and dropped to US$82 per tonne the following month, but prices began to recover in November 2019, when SMB-Winning’s selection to develop the project was announced. Prices climbed back up to US$87 per tonne in January 2020, according to S&P Global Platts, but have begun falling again, partly to due market fears over Covid-19, and despite weather events limiting production in Australia and Brazil.

Guinea’s potential boom in iron ore production is just the latest in the country’s efforts to maximize its mining industry potential. The country has large reserves of a variety of metals and other resources, but political and infrastructure challenges have inhibited resource extraction.

As Guinea works to address political uncertainty and corruption issues, including through membership in organizations such as the Extractive Industries Transparency Initiative, which is funded by supporting countries and extraction industries, and aims to help ensure sector transparency and investor confidence in developing countries, Guinea’s attractiveness to major international partners may provide the support necessary to address its infrastructure needs.

Guinea is home to the world’s largest bauxite reserves (which is required to produce aluminum) at an estimated 7.4 billion tonnes, according to the United States Geological Survey. The country has rapidly expanded its production from 17.7 million tonnes of bauxite in 2015 to more than 50 million tonnes in 2018. Major alumina and bauxite producer Alumina Ltd. said in a March 2019 presentation that it expected Guinea’s production will reach almost 90 million tonnes in 2020, via ramp-up in production at mines that started production in recent years, backed by China and other foreign investors.

The surge in bauxite production has largely been due to investment from China and Chinese-based consortiums like SMB, which reported on its website that it exported 42 million tonnes of bauxite in 2018. Prior to January 2016, Guinea exported almost no bauxite to China but had become its largest single supplier by 2019, providing almost six million tonnes per month by mid-2019, according to Alumina Ltd.

China is investing in more than the mines. In addition to the 650-km railway SMB-Winning has planned, China has invested in roads and several hydroelectric projects in Guinea, which boasts some of the best hydropower resources in West Africa, according to the International Hydropower Association (IHA). The country currently has 368 MW of installed hydropower capacity, including the 240 MW Kaleta, which was commissioned in 2015 by China International Water and Electric Corporation (CWE) in partnership with the Gambia River Basin Development Authority.

Guinea said in a United Nations report that it plans to commission a further 1,410 megawatts of hydro capacity by 2030, including the US$1.18 billion Souapati hydropower project to be developed by CWE and financed by the Export-Import Bank of China, which will add up to 500 megawatts of power capacity. A portion of the power generated is expected to be provided to the grid for local consumption in Guinea and neighbouring countries, but the bulk of the power will be used to power mining projects, according to the IHA.

At the same time, other mining sectors that have long constituted a core part of Guinea’s economy are continuing to see new investment.

South African gold producer AngloGold Ashanti (NYSE: AU) commissioned a combination plant conversion at the Siguiri gold mine in the remote northeast of Guinea in March 2019. AngloGold said in its 2018 Operational Profiles Report that the plant will process roughly six million tonnes of oxide ore and six million tonnes of sulphide ore from Siguiri when fully operational — the first material was fed through the plant in March 2019. AngloGold holds an 85% stake in the gold mine and the government of Guinea holds 15%. As part of the Siguiri combination plant project, AngloGold also commissioned a 30-megawatt power plant in October 2018 that is now providing power to the Siguiri mine.