What Should Rio Tinto Shareholders Expect From the Simandou Project?

The Simandou iron ore project could hamper Rio Tinto's ability to boost shareholder returns.

Jun 3, 2014 at 9:14AM

Last week was a big one for Rio Tinto (NYSE:RIO) as the Anglo-Australian miner sealed a major iron ore development project in Africa. While the outlook for iron ore prices isn't bullish, the addition of a low-cost, high-quality mine will certainly boost Rio's portfolio.

Rio plans to bring in outside investors to build the required infrastructure related to the project. Even after that, however, the company will have to make substantial investments to develop the mine. While the mine will create value for shareholders in the long term, it will hamper Rio's ability to boost shareholder returns in the medium term.

Rio seals the deal
Rio Tinto announced last week that it signed the investment framework for Blocks 3 and 4 of Simandou iron ore project in Guinea. The investment framework was signed by Rio Tinto, Chinese state metals company Chinalco, the Government of Guinea, and the International Finance Corporation (IFC). Rio said in a press release that the signing marks a major milestone and provides the legal and commercial foundation for the project.

This came after a major delay. In 2008, then-President of Guinea Lansana Conte had rather controversially awarded half of the mining rights to the Simandou iron ore deposit to BSG Resources, which later sold a 51% stake in the venture to Vale (NYSE:VALE). The Guinean government had accused Rio of moving too slowly on the project in 2008. However, in 2011, Rio settled its differences and is now looking to develop the southern half of the iron ore project.

The Guinean government has also cancelled BSG Resources and Vale's mining rights to the northern half of the project, which was confiscated from Rio. As I had discussed in a previous article, the Guinean government decided to cancel the mining rights based on the recommendations of a technical committee that accused BSG Resources of obtaining the mining rights through alleged corruption. Rio is also seeking compensation from Vale and BSG Resources for the billions it says it lost due to the actions of the two companies.

Meanwhile, the company has taken a major step forward with regards to the southern half of the project. The Guinean government is expected to submit the investment framework signed by the concerned parties for consideration of the Guinean National Assembly. Once the framework is ratified by the National Assembly, Rio and its partners in the project will finalize a Bankable Feasibility Study. The study, which is expected to be finalized within one year of the ratification from the Guinean National Assembly, will have all the details on the cost related to the project as well as the development timeline.

Rio could struggle to boost shareholder returns
The Simandou iron ore project will be huge for the economy of Guinea. The project will not only require the development of the mine but also the building of the necessary infrastructure to bring the iron ore to the seaborne market. The infrastructure that is required to be built includes a 650 km railway and deepwater port infrastructure.

The investment required to develop the mine and build the infrastructure is expected to be around $20 billion. Mining giants such as Rio and its Australian rival BHP Billiton (NYSE:BHP) have plans to cut their capital expenditures in the coming years, but Rio is still moving forward with a major project like Simandou. The company is also moving forward with the project despite the bearish outlook for seaborne iron ore market due to an expected supply glut in the coming years.

The main reason that Rio Tinto is pushing forward with such a huge project is the fact that Simandou is one of the world's largest untapped, high-grade resources of iron ore. Even in a low price environment, such a project will be of huge value to Rio Tinto. The main challenge will be securing funding.

Rio said that it is looking for investors who will finance, build, and own the required infrastructure for the project. By bringing in outside investors, Rio Tinto will be able to reduce its exposure to the project. The company could see interest from private equity firms, which have lately been looking at the mining sector for possible investment. Private equity firms are also awash with cash at the moment and could be ideal partner for such a project.

Even after bringing in outside investors, Rio Tinto will still have to make significant investment to develop the mine. While Rio is targeting commercial production by 2018, the project could be delayed further. Given the weak outlook for iron ore prices, Rio Tinto is likely to face challenges in boosting returns to shareholders if such a scenario comes to pass, at least in the medium term. 

Do you know this energy tax "loophole"?
You already know record oil and natural production is changing the lives of millions of Americans. But what you probably haven’t heard is that the IRS is encouraging investors to support our growing energy renaissance, offering you a tax loophole to invest in some of America’s greatest energy companies. Take advantage of this profitable opportunity by grabbing your brand-new special report, “The IRS Is Daring You to Make This Investment Now!,” and you'll learn about the simple strategy to take advantage of a little-known IRS rule. Don't miss out on advice that could help you cut taxes for decades to come. Click here to learn more.

Varun Chandan Arora has no position in any stocks mentioned. The Motley Fool owns shares of Companhia Vale Ads. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Money to your ears - A great FREE investing resource for you

The best way to get your regular dose of market and money insights is our suite of free podcasts ... what we like to think of as “binge-worthy finance.”

Feb 1, 2016 at 5:03PM

Whether we're in the midst of earnings season or riding out the market's lulls, you want to know the best strategies for your money.

And you'll want to go beyond the hype of screaming TV personalities, fear-mongering ads, and "analysis" from people who might have your email address ... but no track record of success.

In short, you want a voice of reason you can count on.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich," rated The Motley Fool as the #1 place online to get smarter about investing.

And one of the easiest, most enjoyable, most valuable ways to get your regular dose of market and money insights is our suite of free podcasts ... what we like to think of as "binge-worthy finance."

Whether you make it part of your daily commute or you save up and listen to a handful of episodes for your 50-mile bike rides or long soaks in a bubble bath (or both!), the podcasts make sense of your money.

And unlike so many who want to make the subjects of personal finance and investing complicated and scary, our podcasts are clear, insightful, and (yes, it's true) fun.

Our free suite of podcasts

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. The show is also heard weekly on dozens of radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable. Rule Breaker Investing and Answers are timeless, so it's worth going back to and listening from the very start; the other three are focused more on today's events, so listen to the most recent first.

All are available for free at www.fool.com/podcasts.

If you're looking for a friendly voice ... with great advice on how to make the most of your money ... from a business with a lengthy track record of success ... in clear, compelling language ... I encourage you to give a listen to our free podcasts.

Head to www.fool.com/podcasts, give them a spin, and you can subscribe there (at iTunes, Stitcher, or our other partners) if you want to receive them regularly.

It's money to your ears.


Compare Brokers