Rio seals $20bn Guinea mine deal

Rio Tinto has finally agreed a deal on the Simandou mine, after three years of wrangling over how to develop the $20 billion (£11.86 billion) iron-ore deposit in the remote forests of Guinea.

Rio Tinto and partners Aluminum Corp of China, or Chalco, and the International Finance Corporation, the private-sector arm of the World Bank, have been in talks with President Alpha Condé's government to work out a way forward.

Rio Tinto currently holds a license to mine around half of the deposit, around $10 billion worth of iron ore at current prices.

The field is significant for Rio which is set to produce 300 million tonnes (mt) of iron ore this year and 350mt in 2017, by adding 100mt per year once it becomes fully operational.

But first there is an infrastructure project which will cost an estimated $13 billion to build, including a 650 km railway from the mine to Guinea's Atlantic coast, and a deepwater port to ship the iron ore to China and Europe.

Rio Tinto and its partners have already approached potential financiers, such as General Electric, who will receive revenues from tariffs charged on goods transported by rail.

The mine will come into production around 2019, bringing in foreign investment and jobs to one of the world's poorest countries.

The deal is unusual in its involvement of a publicly listed multinational, a Chinese state-owned company and a global development financing body, and must be ratified by parliament, but it should be waived through as Guinea will keep a stake in the project, which could amount to 35% stake over the next 20 years.

Rio Tinto first secured exploration rights in Simandou in 1997. Condé was elected in 2010 on a promise of securing fairer deals for Guinea's mineral riches, with improved transparency in business.

Rio Tinto intimated that it chose to hammer out a legally watertight framework before attempting to raise funding, mindful of Guinea's history of political unrest.

Rio's plans to push ahead with Simandou come at a time when iron ore prices are weak on reduced demand from China, a concern highlighted in May when the Australian Treasury released its Budget, forecasting that iron ore prices are set to fall to $86 by June, and to $82 by June 2016. The very high grade Guinean ore should help protect margins in this environment.

Rio Tinto's heavy reliance on iron ore for 77% of its total earnings but has managed to duck price pressures by reducing costs and capital expenditure, allowing underlying earnings to climb 10% last year.

The shares were up 0.5% in the first hour of trading on Tuesday to 3,245p.