Simandou project could screw Rio Tinto and shareholders

Rio Tinto’s Simandou iron ore project in far-off West Africa could potentially give the miner a competitive edge but it’s doubtful the head honchos at rival BHP are losing any sleep over it.

2014: Rio Tinto's Simandou mine project om Guinea provides access to one of the world’s largest untapped high grade iron ore resources in the world. Source: Rio Tinto

Right now, the most interesting and arguably the most important question for the Australian resources industry, and so for Australia’s future prosperity – and indeed our critical economic geopolitics – is this: what exactly is Rio Tinto’s Simandou?

Is it Rio’s Escondida Version 2.0?

That’s to say, a fabulous resource - in Escondida’s case, copper (with Simandou, very high quality; indeed ‘better-than-Pilbara’ iron ore); and which was giving from the get-go; and just keeps on giving, and seemingly decades yet into the future?

Or will it prove to be another Oyu Tolgoi? Yes, a fabulous resource (Oyu: copper) in both geologic and (potentially) business terms; but mired, also seemingly for decades, by being in ‘partnership’ with a third world government?

In Oyu Tolgoi’s case, Mongolia; with Simandou, Guinea in far-off West Africa?

From Rio’s perspective, developing Simandou seems to be a multi-level no-brainer.

It will supplement the Pilbara. It will give Rio a competitive edge over near-rival BHP. It will produce a more 21st century anti-carbon iron ore, with fewer of the impurities of Pilbara ore.

And crucially, casting forward, it will be more ‘China-friendly’; with Rio in a complicated three-way partnership with assorted ‘Chinese interests’ and the Guinean Government. Whatever that last bit quite means.

Indeed one of those ‘interests’ is none other than major Rio shareholder, Chinalco - which in a time of near-death desperation back in 2008, after Rio’s disastrously inept $US40bn ($60bn in today terms) acquisition of Alcan, Rio was prepared to sell both its corporate body and soul to.

Along with selling out the competitive dynamic versus China of the Pilbara and the Australian national interest.

And got duly stamped on by the Australian government saving Rio shareholders from the value-destroying stupidity of their board.

So, is that same London-based modern Rio management and board just doing a Chinalco Version 2.0 sellout? Making up for the failure to complete the sellout a decade-and-a-half ago? Yes. China Inc will be very much ‘inside the tent’ at Simandou in a way it isn’t in the Pilbara – controlling ultimately the money and the operation.

But what makes it worse from a simple Rio interest, is the very messy structure Rio has had to agree. And which is so redolent of Oyu Tolgoi; which took Rio more than a decade to semi-sort out, and required the writing out of several multi-billion dollar cheques.

For starters Simandou is a basic infrastructure nightmare – it’s in the middle of the jungle 600km from the coast and the necessary port; requiring everything to be built from scratch.

The tracks and train lines in the Pilbara are like model railways in a garage in comparison.

Then the resource is split into two. Rio is in partnership with Chinalco and Guinea in half; Guinea is in partnership with a Singapore-China consortium in the other half.

What could go wrong? Apart from Rio and its shareholders getting screwed six ways to Sunday, as they did at Oyu Tolgoi?

My money is on Simandou replaying that story, but far more agonisingly.

I doubt that the boys at BHP will be losing too much sleep at any prospect of Simandou undermining the Pilbara’s pricing power any time soon.

Originally published as Simandou project could screw Rio Tinto and shareholders