Rio’s African headache

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Fresh on the heels of issues at its Mongolian copper mine, Oyu Tolgoi, giant resources company Rio Tinto (RIO.AX) now seems to have issues with its Simandou iron ore project in Guinea, Africa.

Once touted as the largest integrated iron ore mine and infrastructure project ever developed in Africa once in full production, the Simandou project now appears to be on the back-burner and could be canned altogether. Simandou is expected to produce 95 million tonnes of iron ore by 2015 – more than Fortescue Metals Group (FMG.AX) exports currently.

The Australian Financial Review (AFR) reports that Rio CEO Sam Walsh warned the government of Guinea that if more progress isn’t made on an investment agreement and financing of the US$10 billion project, work on the ground could be scaled back severely.

Reuters earlier reported that the miner had essentially frozen work on the project. Other miners in Guinea including BHP Billiton (BHP.AX), Vale and RUSAL have also cut back on their investments in Guinea, driven in part by a government review of mining contracts and political instability.

Two years ago, Rio was forced to make a US$700 million payment to the government of Guinea retain its stake in the project, and the government has pushed for a larger share in the project for years. Rio also had two tenements stripped from it and sold to Brazilian giant Vale for US2.5 billion in 2010. Vale has also put its project under review, citing issues with project investment and ownership scheme.

BHP’s ex-CEO Marius Kloppers questioned the viability of Rio’s Simandou project in October 2012 and suggested that African iron ore wasn’t needed, with Brazil and Australia able to meet the growth in demand for iron ore.

The Foolish bottom line

With miners looking to cut costs in the face of falling commodities prices, Rio may put Simandou in the “too hard basket” for now. Iron ore prices have now fallen 9% since hitting a 16 month high in mid-February, and are trading around US$144 a tonne, but many analysts and iron ore traders expect prices to fall further. Mr Kloppers may be right – the future of Simandou is likely to come under question.

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The Motley Fool’s purpose is to help the world invest, better. Click here now for your free subscription to Take Stock, The Motley Fool’s free investing newsletter. Packed with stock ideas and investing advice, it is essential reading for anyone looking to build and grow their wealth in the years ahead.  This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson. Motley Fool writer/analyst Mike King owns shares in BHP.

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