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Rio Backs $21bn Guinea Play Despite Soaring Costs

June 22, 2013

RIO Tinto appears committed to building the $US20 billion ($21bn) Simandou iron ore project in Guinea if it can iron out some issues with government, despite its pledge to rein in capital spending and pay down debt.

The company is also giving investors the impression it will not be exporting from the project in 2015, which is in line with what Guinea’s Mining Minster said recently but contradicts comments from the country’s President, Alpha Conde.

In a presentation to investors, Rio’s head of minerals and diamonds, Alan Davies, said if an investment framework and financing agreement could be secured, Rio would add to $US3bn already invested in Simandou, where estimated costs are said to have blown out to double previous $US10bn expectations. “Investment will proceed once a robust investment framework is finalised (and) partner and project financing strategy is secured,” Mr Davies told investors this week.

Simandou is a big, high-grade project capable of producing up to 100 million tonnes of ore a year.

But it has a complex infrastructure component, requiring a 650km railway across Guinea to get the iron ore to port, in a politically risky country. Rio is pursuing its development at a time when iron ore demand forecasts are sliding and doubts linger over Chinese steel production.

Presentation slides Rio released with the briefing gave no timeframe for first exports but analysts briefed by Mr Davies in London said 2015 exports looked unlikely. “Rio does not believe that it will breach any conditions by missing the 2015 first production time line,” said RBC analyst Des Kilalea, who was briefed by Mr Davies. “With a delicately balanced iron ore market, delaying a 95 to 100 million tonnes per year project may well be favourable for pricing.”

In London on Monday, Rio chief Sam Walsh met with Mr Conde to discuss the project.

Little was announced from the meeting apart from a commitment to resolve outstanding issues as soon as possible.

Mr Conde reportedly said before the meeting that 2015 was still a reachable target for first production at Simandou, despite his Mines Minister last week saying a report from Rio put costs at $US20bn and that exports would not start in that time.

At the same time Rio is talking up the potential for a big spend in iron ore in Guinea. It is trying to reap up to $US4bn from the sale of its Iron Ore of Canada operations in Newfoundland and Labrador. Yesterday, state-owned Chinese metals giant China Minmetals said it was considering bidding for IOC, seen as the most promising of the assets Rio has for sale.

It joins Glencore-Xstrata and private-equity firm Blackstone Group as potential buyers.

In a separate report, RBC analyst Geoff Breen said Oz Minerals should purchase Rio’s Northparkes copper mine in NSW for about $700 million. “Northparkes fits Oz’s growth strategy perfectly, in our view, and the market should welcome a well-priced purchase,” he said.

Sources say Rio has sought $800m for the mine but that prospective Chinese buyers have baulked at this price.

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