Rio Tinto Limited (ASX: RIO) last week revealed about signing a non-binding agreement with Chinalco to sell Rio Tinto’s entire stake of about 46.6% in the Simandou iron ore project in Guinea to Chinalco. The group aims to sign a binding agreement within six months while the heads of agreement sets out the proposed principal terms of the sale. As per the deal, Rio Tinto will receive payments of $1.1-1.3 billion based on the timing of the development of the project. The first commercial production, on a per tonne basis, will kick off the initial payment for shares. The deal is said to activate the development of the world’s largest unexploited iron ore reserves. Key things to note:
Project Prospects in China: As China is the world’s largest iron ore consumer, the above move will be beneficial in terms of economic growth prospects for Guinea. Simandou is being considered to double Guinea’s GDP. The deal has thus been welcomed by Guinea’s Minister of Mines and Geology, Abdoulaye Magassouba. The Guinean government is having a 7.5 per cent stake in Simandou while the World Bank is proposing to sell its 4.6 per cent stake.
Take on RIO’s position: Rio has been indicating the challenges related to financing the project and uncertainty about production commencement, over the course of its engagement in the project. So far, the group has spent about $1.4 billion from the project’s total investment of about $3.5 billion. Further, the scenario for steel market has downplayed the performance till sometime back. Then legal and political challenges also played a crucial role against the group. Meanwhile, Simandou has been said to be requiring enormous investment in infrastructure. This entails a 650km railway line and a port. On the other hand, Rio has been trying to manage costs at the wake of commodity prices’ decline. Collectively, all of the above have been putting a pressure on the group given the fact that project development was estimated at $20 billion. Overall, the move is indicative of a rebalancing strategy for the group and bringing the focus towards copper instead of iron ore.
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