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Simandou price tag of $US20b too high

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    Rio Tinto's Alan Davies says Simandou price tag of $US20b too high

    PUBLISHED: 0 hour 13 MINUTES AGO | UPDATE: 0 hour 0 MINUTES AGO PRINT EDITION: 06 Feb 2015

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    Rio’s Alan Davies said he expected the infrastructure build to cost less than the estimate. Photo: Bohdan Warchomij
    Amanda Saunders

    Rio Tinto diamonds and minerals chief Alan Davies says the undeveloped Simandou iron ore project in Guinea he heads up can be built for considerably less than its $US20 billion ($26 billion) price tag, and says the crash in the iron ore price has not wrecked the investment case.

    Rio faces a number of hurdles to ensure its Simandou iron ore project in Guinea proceeds, including attracting infrastructure investors to fund the $US13.5 billion deep-water port and 650km rail needed to get the ore to the Guinea coast.

    Simandou is the world's richest iron ore deposit and one of the industry's most coveted prizes.

    But Mr Davies told The Australian Financial Review that he expected the infrastructure build to cost less than the $US13.5 billion estimate – which would be "good for everything", including enticing investors. Tenders have been issued to construction companies who are fiercely competing in a market lacking in big greenfields projects.

    Mr Davies says the undeveloped Simandou iron ore project in Guinea can be built for much less.

    "We would definitely expect costs to come down," Mr Davies said, speaking to AFR Weekend after presenting to a Melbourne Mining Club lunch.

    Rio transferred the key risk and the lion's share of funding onto a prospective consortium of infrastructure investors in an investment deal struck with the Guinean government last May. At the same time, it cemented Rio's control of the $US6.5 billion Simandou greenfield mine.

    Rio's spend on the project has been estimated at $US3 billion to $US4 billion.
    Iron ore prices have crashed about 40 per cent since Rio struck the deal in May, to hover just above $US60 a tonne, but Mr Davies insists that hasn't influenced the investment case for the project.
    "Our view (on the attractiveness of the project) hasn't changed, not at all," Mr Davies said. "Our view of the long-term price has not changed."
    Simandou houses ore at a grade of 66 to 67 per cent - above benchmark - and Mr Davies was "not worried about whether it would have a market".

    "China will need to migrate from lower-grade products to higher-grade products (as steel milling technology evolves) - they can only do that with a product like Simandou," he said. "We are the base load for the industry."

    The only guidance Rio has given on costs at Simandou is that they will be "first quartile".

    Mr Davies also dismissed suggestions that the spectre of unwanted suitor Glencore was putting fresh pressure on Rio to deliver on Simandou.

    "We are running the business in terms of long-term value and it (Glencore) is not influencing me in the slightest," he said.

    Glencore chief Ivan Glasenberg is also thought to have courted Chinalco - Rio's biggest shareholder and Simandou joint venture partner - playing on the state-owned giant's dissatisfaction over the project's slow progress.

    Simandou was originally meant to be in production by 2013 – and it was used as part of Rio's defence against a hostile takeover attempt by BHP in 2008 - but it has been delayed multiple times and the rough production target date is now 2018.

    Mr Davies also brushed off the theory that locking Rio's rivals out of Simandou was an incentive for the project, saying, "I'd be the proposer of the investment, and that's just not how I think”.

    “We generally don't make decisions based on strategic theorems,” he said.

    The vehicle housing the iron ore assets is owned by Rio, Chinalco, and the World Bank's International Finance Corporation, and the Guinean government was given a 7.5 per cent stake.

    Ownership of the infrastructure has been hived off into a separate vehicle, and Mr Davies says it was "a bit early to say" whether there was sufficient interest from investors.

    Enticing traditional "western" investors for the infrastructure consortium could prove hugely difficult given the high risk of operating in Africa. In addition, the infrastructure development will be returned to the Guinean government after 30 years.

    Rio is running a bankable feasibility study on the project, which has been delayed by at least six months by the breakout of Ebola in Guinea, which saw Rio staff on site relocated to London. It should be complete by the end of the year.
 
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