As China emerges from the pandemic determined to stabilise its economy, state-owned steel giant Baowu Group has been given the green light by Beijing to ensure that first production by 2025 becomes a reality. In December 2022, Baowu agreed terms with joint venture partners including Rio Tinto on developing infrastructure for the Simandou iron ore project.
Simandou in southwest
Guinea is considered to be the world's largest undeveloped high-quality iron
ore deposit, with estimated reserves of 2.4Bt of Fe grading 65% iron ore. The
deposit is expected to be mined at full capacity of 100Mtpa, with all four
blocks mined concurrently.
The site has a long history of disputes regarding ownership
rights, along with various lawsuits. These difficulties are finally subsiding
as important infrastructure for the railway and tunnelling has commenced with iron
ore production expected by 2025.
The value of Simandou
has been estimated at US$140bn over the next 25 years. In the past, the
geographic location made any exploration difficult, due to the remote mountain
ranges. The infrastructure required includes a new 550km railway and new multi-user
deep-water port. The railway will include two tunnels. A 11km tunnel (Kindia
Tunnel) at Madina-Ola subprefecture, and a second 9km tunnel (Mamou tunnel) at
Oure-Kaba subprefecture.
Equity Stake
The ownership of the Simandou
iron ore deposits over the years has involved corruption allegations, extensive
court hearings and lawsuits since it was first discovered in 1997. All these
issues have finally alleviated. The northern blocks (1 and 2) a joint venture
of Winning Consortium Simandou (90%) and the Guinea Government (10%). The JV won a
US$14bn government tender in November 2019 to develop the blocks. This group is
currently constructing the railway infrastructure for the Simandou project. Blocks
1 and 2 have expected annual production of 60Mt.
The ownership of Southern
blocks (3 and 4) is owned by a JV comprising Rio Tinto (45.05%), China’s Chinalco
(39.95%), and the Guinea Government (15%). Rio Tino was able to keep blocks 3
and 4 after paying the Guinea government US$700m back in 2011, to guarantee
their tenure for the lifetime of the Simandou mine. Blocks 3 and 4 have
expected annual production of 40Mt.
Since Guinea’s ruling
junta took control of the government from September 2021, the project has been
suspended twice. In March 2022, the project was halted by the government as it
was seeking to acquire a 15% free hold interest in the rail and port
infrastructure. The Guinean government emphasised that infrastructure projects
must be completed by December 2024 and commercial production must start by 31st
March 2025. In addition, the infrastructure would become Guinean state property
upon completion.
On 19th June 2022, the
Guinean government required the partners of the Simandou iron ore project—Rio
Tinto and Chinese-backed Consortium SMB Winning—to form a joint venture within
14 days. However, the government said that the two partners had shown a
"lack of willingness" to work on the partnership. Therefore, it ordered
the cessation of all activities at the Simandou iron ore deposit in July.
In late July 2022, Rio
Tinto joined with Chinese-backed Winning Consortium Simandou (WCS) and the
Guinean government to form La Compagnie du TransGuinéen (The TransGuinean Company)
to develop infrastructure for the Simandou iron ore project. Rio Tinto and WCS
each receive a 42.5% equity share of La Compagnie du TransGuinéen. The balance
of 15% free carry equity stake was taken by the Guinean government.
Iron Ore Supply Forecasts
Guinea is expected to
become the next world class iron ore exporter. AME forecast that all four
blocks will commence production by 2025 with expected production of 10Mt. AME
expects progressive ramp up of production to 60Mt by 2027 and 100Mt by 2030. This
forecast is based on producers’ commitment, particularly China’s involvement.

Opportunities and Challenges
To reduce the
country’s dependence on Australia and secure steady supplies, China‘s Ministry
of Industry and Information Technology (MIIT) released a five-year plan to
achieve a target of 45% iron ore self-sufficiency by 2025. Around ~20% of iron
ore will come from the country's oversea assets, coupled with another 25% from
increased domestic production.
To ensure that supply
can be obtained, China is investing in exploration and mines overseas. Iron ore
product from Simandou is expected to be shipped to China for steel production
and has the potential to reshape the global supply chain.
The agreement between
Baowu and Rio Tinto signed in December 2022 is a crucial step for giving
China’s regulators the green light to release the capital required for the
project. The high-grade iron ore deposits at Simandou will benefit steelmakers
who are looking at reducing carbon emissions compared to lower quality iron
ore.
Moreover, the newly
established state-owned enterprise group, China Mineral Resources Group (CMRG),
is expected to become the largest iron ore buyer who will import iron ore from
2023 on behalf of ~20 of the largest steel companies in China, including steel
giants Baowu and Ansteel.
The two companies jointly produce over 230Mt of steel
a year and are expanding by merging with rivals. The new company will likely
import at least 460Mt of iron ore a year, or more than 40% of Chinese demand.
Therefore, Baowu is a core for Simandou project and CMRG to achieve their
targets.
However, there was
still no formal agreement on the infrastructure sharing arrangements between
the rival consortiums. Rio Tinto has emphasised their commitment to the
Simandou project, but it said that the project was the most uncertain element
of the company’s capital spend allocation.
The joined parties are
focussing on next steps, including shareholding agreement, cost estimates and
funding, and securing all necessary approvals and other permits and agreements.
Moreover, Rio Tinto and WCS are committed to developing rail and port
infrastructure in line with internationally recognised environmental, social
and governance standards.
Construction of the
tunnels commenced in June 2021 with an expected completion date of January
2024. Other challenges of building the railway included 235 bridges and 1,000
culverts. The deep-water port will be developed in Matakong, Forecariah
prefecture. Expected iron ore exports are expected to be around 68 capsize
voyages a year.