Rio seals iron ore deal but on Guinea's terms

RIO Tinto has secured a deal with the west African nation of Guinea to develop the $US10 billion-plus ($9.3bn) Simandou iron ore project, but has been forced, with joint venture partner Chalco, to pay its government $US700 million and let it take up to a 35 per cent stake. A Rio spokesman said more studies were needed before construction of the mine, which Guinea has been threatening to strip from the company, could begin but first exports were targeted by the middle of 2015.

Rio iron ore boss Sam Walsh said the project, which the miner had planned to produce from in 2013 at a cost of $US6bn, would cost more than $US10bn.

"The agreement gives us the certainty we need to allow us to invest and move forward quickly so we can bring this great resource into production and deliver its benefits to the Guinean people and (Rio subsidiary) Simfer's shareholders," Mr Walsh said.

Hong Kong-listed Chalco, which is controlled by Rio's major shareholder, the state-owned Chinalco, will still take a 44.65 per cent stake and pay Rio $US1.35bn.

"I would like to acknowledge the excellent support of Chinalco during the negotiation of the final agreement and we look forward to partnering with Chalco in developing both the mine and infrastructure," Mr Walsh said.

It is believed Chalco's involvement in the project has played a big part in Rio being able to negotiate with the government, given China's growing influence and investment in Africa.

Rio was stripped of two of its four Simandou blocks in 2008 and after elections in Guinea late last year was given until May to strike a bargain with the new government to keep the other tenements, which house the iron ore resources it plans to mine.

Besides agreeing to a $US700m payment it had not been expected to pay, Rio has had to let Guinea take up to 35 per cent of the project, up from the previous government's plans to take 20 per cent.

In a clause that could be a red light to any critics predicting potential trouble, Rio has been forced to commit to making "every reasonable effort" to achieve first production by the end of 2014.

Under the current mine plans, which Rio has already spent $US750m progressing, the mine will ramp up to full production of 95 million tonnes a year over five years, indicating full production in 2020 if everything goes to plan.

Rio would only say it would require more than $US10bn of investment on the mine, a new railway and port infrastructure.

It is unclear when Rio will make an announcement saying the board has approved the project or what the final investment will be.

About 70 per cent of the spending will be on infrastructure, including what is expected to be a 740km railway to the coast.

Rio owns 95 per cent of Simandou, with the World Bank's International Finance Corporation owning the rest. Rio has agreed to let Chalco take 47 per cent of its interest for $US1.35bn but is yet to sign a binding deal.

Rio's share of the one-off payment being made "in recognition of all outstanding issues and finalisation of all new investment agreements" will be $352m based on the 50.35 per cent stake it will retain once the Chalco deal goes through. Guinea will be given a 15 per cent stake in Simandou, for which it will not have to contribute development costs.

It will also pay "historic cost" for another 10 per cent stake, on which it will contribute to development cost. Rio would not say what the historic cost was.

In 15 years it will be able to buy another 5 per cent stake at market value and another 5 per cent 15 years after that.