February 2023
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.