Vast Simandou Iron-Ore Project Has Miners Jockeying for Position

Vast riches require significant investments, but the payoff could be worth it.

Jul 7, 2014 at 1:14PM

Simandou

Simandou operations. Source: Rio Tinto.

As the government of Guinea prepares to announce how it will proceed with an auction for rights to develop the northern half of the vast iron-ore deposit in the Simandou mountains, the mining community is sharpening its collective elbows to position itself for individual advantage. 

Already some of the biggest names in mining -- including ArcelorMittal (NYSE:MT), BHP Billiton (NYSE:BHP), Glencore (NASDAQOTH:GLNCY), and Vale (NYSE:VALE) -- have expressed more than passing interest in being part of the process, and with billions of dollars at stake, it could get nasty. The Wall Street Journal reported that Vale has threatened to resign its membership in a clubby industry organization after being sued by Rio Tinto (NYSE:RIO), which alleged that Vale played a role in Rio Tinto's partial loss of rights to the iron-ore asset in a process allegedly riddled with corruption.

Although Guinea is home to one of the world's largest reserves of bauxite, as well as significant quantities of diamonds, gold, uranium, and even oil in offshore waters, the iron-ore deposits in the Simandou mountains have long been seen as one of the country's crown jewels. They are believed worth $50 billion or more. It's a juxtaposition of Dickensian proportions because Guinea is also one of the world's poorest countries; the current government sees the development of the iron-ore project as the clearest path to injecting billions of dollars into its coffers and its economy.

Simandou, however, has been steeped in controversy since then-dictator Lansana Conte took the rights to the northern half of the project away from Rio Tinto, even though it had been on the scene since 1997. He awarded those rights to BSG Resources in 2008, alleging Rio was taking too long to develop the iron-ore deposit. Two years later, BSG partnered with Vale on the project, but that unraveled following the dictator's death and the new democratically elected government charging that the awards process was rife with scandal. It then stripped BSG and Vale of their rights to Simandou and made ready for the pending auction, setting the stage for Rio to sue the usurpers over its investment loss and for the industry trade group contretemps.

Simandou is still a greenfield project in a remote location that will require significant spending on infrastructure development before any mining work can actually begin. Such a daunting task has already scared off some miners that otherwise might have been interested in the auction process. Anglo American (NASDAQOTH:AAUKY), for example, has apparently taken itself out of the running, saying it prefers instead to expand upon existing assets in west and central Africa.

Rio Tinto is still moving forward with development of the southern half of the claim. It recently agreed to an investment framework with Guinea to jump-start the long-delayed mining operation by finding investment to build a 650-kilometer jungle railroad, construct a deepwater port at Morebaya, and create supporting infrastructure. Although there's no time frame for when construction will begin, let alone production starting, it goes a long way toward resolving many of the issues that caused the original delays.

Glencore, unlike many of its peers, doesn't have exposure to iron ore. Though it would require considerable up-front costs to prepare the project, the payoff down the road would be sizable.

Although BHP Billiton believes iron ore remains one of its key five pillars of future growth, it's potential interest here is curious as the company is selling its nearby Nimba iron-ore project, possibly to ArcelorMittal. It was supposedly looking to exit West Africa and focus its efforts elsewhere around the world. Like Simandou, Nimba needs extensive development of infrastructure, but at current iron-ore pricing BHP has been uninterested in spending the cash.

Regardless of which companies are actually involved in the upcoming auction, it's clear that major players remain interested and that the prize is worth enough to them that using whatever means necessary to gain an edge is fair game.

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Rich Duprey 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.

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