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Africa’s iron ore revolution edges nearer

Africa’s iron ore revolution edges nearer

Mega investment deal signed
At the end of May, Guinea signed an investment with Simandou stakeholders Rio Tinto, Chinalco and the International Finance Corporation.

State Minister of Mines and Geology of the Republic of Guinea, Kerfalla Yansané says: “Simandou is one of the largest and best quality iron ore deposits in the world. It has the potential to provide the global market with highly competitive ore for more than 40 years.

This estimated $20bn project, aiming to develop blocks 3 and 4 of Simandou along with the infrastructure, will boost Guinea’s whole economy and spur our Southern Growth Corridor through mining, agriculture, forestry, livestock and trade. It’s about unlocking our huge potential, supporting our efforts to tackle poverty through jobs creation and economic diversification, and getting more attractive to foreign direct investment”.

Rio says the concession “will enable the development of the largest mine and infrastructure project ever undertaken in Africa. This will include the progressive development of a 100m tonne per annum mine, a 650-kilometre trans-Guinean railway and a new deep-water port”.

It is forecast operations will commence in five years’ time and create 45,000 jobs. The necessary railway and deep-water, multiuser port in the Forécariah prefecture needed to export the ore will account for about two thirds of the cost.  This new deal sees Guinea double its ownership share from 7.5% to 15%, without cost, and allows the state to purchase a further 20% stake over the next 20 years. In return, Rio will enjoy an eight-year income tax break followed by a 30% rate, with a 3.5% royalty on exports.

A separate infrastructure company, funded by investors, will own the railway and port for 30 years, after which point it will become government property. This infrastructure, it is hoped, will aid other sectors such as agriculture and forestry to flourish.

The agreement also precludes iron ore exports via Liberia, using ArcelorMittal’s railway. Sable Mining does have a right to export via Liberia and is expected to start exporting 5m tonnes a year from 2015.

As previously reported in African Business, the government of Guinea revoked Vale and BSGR’s rights to the northern part of Simandou on the basis of allegations of corruption that are robustly denied by the two companies. Rio forecasts iron ore output will reach 290m tonnes this year, rising to 350m tonnes in 2017 – before the addition of Simandou’s 100m tonnes a year.

The Congo-Cameroon-Gabon region is the other hot spot for the development of Africa iron ore. Sundance Resources’s Mbalam-Nabeba project on the Cameroon/Congo border will require a 510km railway and deep port, for which an infrastructure agreement was signed in June.
In 2012, Exxaro Resources (part owner of Kumba Iron Ore’s Sishen mine) acquired African Iron Limited, with iron ore assets in the Republic of Congo for $349m.

According to Glencore, cuts to capex have been focused on new projects that are (rightly in their view) seen as high risk and impossible to forecast – what capex there is, is being used to enhance existing operations. The company sees iron ore prices declining 26% between now and 2017. In additional to capex reductions, companies are instituting cost-cutting measures to preserve margins.

The biggest threat at the moment to the iron ore trade is a sustained fall in Chinese growth, and excessive supply entering the market. However, prices have some space to fall before new operations become uneconomic. The outlook post-2020 for iron ore demand is very good – by which time the continent’s producers should be set to capitalise on their new role at the centre of the iron ore trade.  

*In other ferrous metals news, Pan African Minerals $1bn Tambao manganese mine in Burkina Faso has been approved. It could be the largest manganese mine in the world when complete. It starts production in July and should be ramped up over the next three years to 3m tonnes p.a.

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