30/11/2015 - 13:20

Rio concerns emerge out of Africa

30/11/2015 - 13:20

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A US court ruling concerning the controversial Simandou iron ore project in West Africa is a worry for Rio Tinto, but not WA.

TOUGH MARKET: The last thing WA’s iron ore sector needs is another world-class competitor. Photo: Christian Sprogoe

A US court ruling concerning the controversial Simandou iron ore project in West Africa is a worry for Rio Tinto, but not WA.

NORMALLY it is safe to say that what’s good for Rio Tinto is good for Western Australia, given the big mining company’s extensive interests here.

However, last week there was an event with a difference, which produced a situation where a bad turn for Rio Tinto could be good for WA.

The setback was a loss in a New York court over the contentious, but potentially valuable, Simandou iron ore prospect in the West African country of Guinea.

What happened was an excellent example of lawyers not knowing the rules of the court, rather than it being a decision based on right and wrong, because it seems that Rio Tinto’s lawyers lodged their paperwork too late and failed to impress the judge with their arguments.

In any event, Rio Tinto’s case alleging ‘racketeering’ on the part of Brazil’s big iron ore miner, Vale, and Israeli billionaire Beny Steinmetz was kicked out, despite claims that Vale and Mr Steinmetz’s company, BSGR, stole Rio Tinto’s rights to Simandou.

An appeal by Rio Tinto seems certain, not just because of annoyance at losing a legal fight but also because it might further delay the development of Simandou.

And that’s the good bit for WA, because the last thing our iron ore industry needs is another world-class competitor at a time of low prices.

The Simandou situation is actually far trickier than developing, or not developing, a big new mine. It is layered in politics, corruption, and pressure on Rio Tinto to make an investment decision it would prefer to not make.

Discovered decades ago, the iron ore at Simandou is high grade and measured in the billions of tonnes. It is, however, a long way from the coast, lacks rail and port services, and is in that part of Africa famous for disease, dodgy deals and too many men with guns.

In the boom of a few years ago when iron ore was fetching more than $US130 a tonne, Simandou was a screaming certainty to be developed, as well as looking like a honeypot for every crook in West Africa because of the money it represented.

Rolling a long and tricky story forward, and skipping quickly over frequent changes of government in Guinea … Rio Tinto now finds itself as co-owner of Simandou with its Chinese partner, Chinalco, and faces increasingly strident demands from the government to make a firm investment decision on the mine.

Unfortunately for Rio Tinto and Chinalco, a go-ahead at Simandou means committing $US10 billion on a mine that no-one, other than the government of Guinea, actually wants, given the iron ore price crash to below $US45/t.

In one sense Rio Tinto has worked itself into an awkward situation having fought hard to kick Vale and BSGR off a potential project to which it had held clear title for decades, only to now find that the iron ore market has turned against its development.

What happens next could be interesting, because on one hand Rio Tinto must push on with Simandou or the government of Guinea will threaten to take the project away and offer it to another potential developer.

However, if Rio Tinto caves in to the Guinea government’s demands it could risk financial market reprisals, given the need for the company to spend billions of dollars of shareholders’ funds, or to raise fresh debt, on a mine no-one actually wants.

It would be far better for Rio Tinto if Simandou were delayed further, perhaps by continuing to fight the case against Vale and BSGR in a New York court, or by appealing to Guinea’s recently re-elected president, Alpha Condé.

Armed with a fresh mandate and certain of another five years in office, President Condé is in a strong position to warn Rio Tinto that it must develop Simandou or risk forfeiting the project.

For WA’s iron ore industry, which once felt threatened by the development of big new mines in West Africa, the latest legal and political events in Guinea are good news, even if they’re potentially bad for Rio Tinto.

And the person in Perth cheering loudest for a further delay in Simandou is Gina Rinehart as she gets ready to start exports from the Roy Hill mine.

A few years ago Mrs Rinehart was a staunch critic of Rio Tinto’s plans for African iron ore mining, saying it should stick to investing in WA. It looks like she might get her way.

Loss of sparkle

RIO Tinto’s problems do not stop with iron ore and the thorny question of what to do with Simandou, because crashing prices for copper, coal and aluminium are weighing heavily on the company – and that’s before considering the crisis in diamonds.

The first hint of trouble for diamonds, long-regarded as the glittering leader of Rio Tinto’s diverse portfolio of commodity assets, came a few weeks ago when the company confirmed it had stopped final processing of gems at the Argyle mine in WA’s north – a decision designed to remove excess material from the market.

More recently, the diamond world was again in the headlines, for mixed reasons. First came news of the discovery of the world’s second-biggest gem, a 1,111-carat monster, in Botswana. Then came news that the share prices of most stock exchange-listed diamond miners had crashed.

One big diamond, it seems, has not been sufficient to maintain investor interest in miners such as Petra Diamonds, where shares have fallen by 60 per cent. Gem Diamonds and Firestone Diamonds are down by 50 per cent.

Those independently listed diamond miners are proxies for Rio Tinto’s diamond division, which is also probably worth half what it was at this time last year; proving the point that diamonds are hard, in more ways than one.

Carmichael crunch

THERE is another form of carbon also facing tough times, with coal prices in the basement and once high-flying projects likely to be stalled for some time. This includes the biggest of them all – the Adani Group’s proposed 55 million tonnes a year Carmichael mine in Queensland.

According to a study by investment bank UBS, Carmichael needs a coal price of $US126/t (the incentive price) to encourage investors and banks to fund the mine, a price more than double the current price of thermal coal of $US55/t.

Environmentalists are keen to kill Carmichael, but the market might beat them to it.


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