By David Winning
SYDNEY-- Rio Tinto PLC's next leader will inherit a decision that could define the miner's next decade: whether to partner with China on a potentially lucrative but costly African project that could reshape the iron-ore market.
That decision adds to a list of challenges for the successor to Jean-Sébastien Jacques, who was forced out after Rio Tinto destroyed two ancient rock shelters at Juukan Gorge in Australia in May.
The iron ore buried in Guinea's Simandou mountains is among the world's largest untapped deposits of the commodity. Its riches have long been coveted by global miners and investors competing to exploit booming demand for a commodity used to make steel.
Chinese companies are pushing hard to develop Simandou after a consortium including a unit of aluminum maker China Hongqiao Group Ltd. and port operator Yantai Port Group Co. secured rights to mine the northern half of the deposit in a $14 billion tender late last year. Rio Tinto and partners own the southern half, but they could save billions of dollars in construction costs if they collaborate.
Rio Tinto's decision boils down to whether it wants to be involved in a project that could put pressure on iron-ore prices by increasing global supply of the commodity. A 2014 study by the company put the cost of developing the southern half of Simandou at $20 billion. Political risk in West Africa is also high.
Still, Simandou's iron ore is likely too valuable to remain in the ground. China consumes around one billion tons of the commodity every year, mostly imports from Australia. A development in Guinea would boost the security of China's supply, especially for high-grade ore that is typically less polluting when turned into steel.
"It's an awkward one for Rio Tinto," said Paul McTaggart, a Sydney-based resources analyst at Citi. "It either participates in the development of Simandou, and it puts pressure on iron-ore prices, or it doesn't participate and they have an iron-ore asset that's worth nothing."
Rio Tinto once saw Simandou as central to its ambitions to become the world's top iron-ore producer after winning the rights to mine a 300-square-mile area in 2006. But those plans soon foundered in a country with few skilled workers and poor infrastructure. Exporting the iron ore would have required spending billions of dollars to build a cross-country rail line and a deep water shipping port.
In 2008, Guinea's government stunned the mining industry by telling Rio Tinto it wasn't moving fast enough at Simandou and stripped the company of rights to develop 50% of the deposit. In 2016, Rio Tinto dismissed two executives for their alleged role in making $10.5 million in payments to a consultant in Guinea.
Scarred by the experience, Rio Tinto tried to get out of Simandou. But the company's plan to sell its interest to joint-venture partner Aluminum Corp. of China, known as Chinalco, fell apart in 2018 when the deal didn't complete.
"We have always assumed that Simandou would happen," Jakob Stausholm, Rio Tinto's chief financial officer, said in an interview. "It has always been in our long-term forecasts, and depending on the price of iron ore, there's space for Simandou."
To make a decision on Simandou, Rio Tinto's next chief executive will need to assess how quickly China's demand for steel will peak as that would influence the country's appetite for iron ore. The availability of scrap metal could also weaken demand. How Simandou's returns measure up against other options to grow production, including via acquisitions, will be another factor.
The company will have to assess the impact that Simandou's supply would have on iron-ore prices, as it risks making Rio Tinto's existing operations in Australia and Canada less profitable. Australia accounts for more than 50% of the world's trade in iron ore by sea.
"Simandou represents a major threat to long-term iron-ore prices," possibly reducing them by more than 10%, said Lyndon Fagan, analyst at J.P. Morgan Securities Australia Ltd.
Rio Tinto last month began a search for a successor to Mr. Jacques, who will remain in his role no later than March 31. Some analysts expect an external candidate will be chosen, as many potential leaders left the miner in the past four years. In addition to deciding Simandou, the new leader will have to rebuild the miner's reputation following the caves' destruction, deal with regulatory investigations in the U.S. and Australia, and oversee the delayed expansion of a copper mine in Mongolia.
The speed at which the group that owns the northern half of Simandou, SMB-Winning Consortium, is moving ahead has surprised industry watchers. In June, Guinea's government signed a basic agreement with SMB-Winning for the development of Simandou, including the need for a 400-mile railway through mountains and across marshy lowlands to the coast.
Goldman Sachs expects the consortium to start the railway's construction next year if it can secure financing, and begin producing iron ore about four years later. That narrows the window for Rio Tinto to decide whether to collaborate, with Goldman estimating that infrastructure sharing could cut combined construction costs by up to $7 billion and boost returns for each project by more than 3%.
Rio Tinto has signaled it is open to discussions on infrastructure sharing. The company is working with Chinalco and other partners to find ways to lower costs and speed up development of Simandou's southern half.
"We believe it makes economic sense to build an infrastructure system that can be shared," said Bold Baatar, chief executive of Rio Tinto's energy and minerals division.
Singapore-based Winning International Group, which leads the SMB-Winning Consortium, declined to comment on whether it would be open to collaborating with Rio Tinto.
Write to David Winning at email@example.com