Rio Tinto Bets Big On World's Largest Untapped Iron Ore Mine

Rio Tinto has invested significantly in the Simandou project, with the aim to exploit the world’s largest untapped supply of high-grade iron ore, despite facing legal and funding challenges.
The company’s share price has seen a 27% drop in recent months, with hopes that the Simandou project will revitalize investor sentiment.
While iron ore remains the company’s primary profit source, Rio Tinto is diversifying into green minerals, targeting materials essential for the green revolution and renewable technologies.

Rio Tinto’s long-held ambitions of mining the world’s largest untapped supply of high-grade iron ore inched closer this summer – after signing deals to build nearly 400 miles of railway infrastructure.

The Anglo-Australian commodities giant is hoping to bolster its position as one of the world’s biggest iron ore miners by exploiting the Simandou deposit, located in a remote, mountainous region of Guinea.

After years of legal wrangling and delays, the project – which could produce 2.3bn tonnes of high-grade iron ore across its two vast deposits – suddenly looked to be on the brink of development.

There were even media reports Rio was telling analysts it planned to invest up to $5.5bn in unearthing the iron ore at the Simandou site over the next two and a half years, pending a final investment decision.

However, the project has faced fresh hurdles, with Rio’s Chinese partners reportedly failing to cough up funds to help with preparatory work.

This has shouldered Rio with the sole financial burden of preparing the site – which is a joint venture with the government of Guinea and a consortium of Chinese groups.

While Rio owns 45 percent in two of Simandou’s four mining blocks and 53 percent in the overall Simfer joint venture, China’s Chalco Iron Ore Holdings (CIOH) – which consists of four Chinese companies – has a 47 percent share.

Yet, none of these partners have made funds available, with Rio spending more than $500m on the project so far, which should have been split with the other stakeholders.

Rio has also attracted significant attention from regulators settling allegations of a bribery scheme in Guinea with a $15m civil penalty to the US Securities and Exchange Commission – while not admitting or denying the regulator’s findings.

The UK’s Serious Fraud Office, meanwhile, recently dropped a case into allegations of corruption regarding Rio’s business conduct in Guinea – but a six-year running case from the Australian Federal Police into allegations of consultancy payments remains ongoing.

With the Simandou project still requiring regulatory approvals from competition authorities and government sign-offs from both Guinea and the Chinese state – these swirling allegations could also threaten the project.

It is also generally damaging to the company’s reputation, with Rio halting work last month after a second indigenous rock shelter was damaged by in Western Australia.

This was just three years after a mass boardroom exodus after the destruction of the Juukan Gorge caves and a damning workplace report which revealed widespread bullying, racism and allegations of sexual harassment.

Rio share price struggles amid flagging demand

This also comes in the challenging context of Rio’s flagging share price, with the company pinning hopes on Simandou’s approval to boost investor sentiment.

Rio has seen its share price nosedive over the past eight months, falling from 6,277p per share in mid-February to a low of 4,559 per share in August – a 27 percent fall.

It has benefited from a recent slight recovery since then – with the company priced at 5,013p per share ahead of Wednesday’s trading.

However, the outlook remains gloomy – with Rio unveiling its lowest first-half-year profits since the pandemic in August, plagued by tumbling iron ore prices.

It posted profits of £4.4bn for the first six months of trading this year, falling more than a third from the £6.7bn bumper figure posted 12 months prior.

The company, which chiefly operates from its mining complexes in the Pilbara region of Western Australia, is highly dependent on Chinese demand to power its earnings.

However, the country’s sluggish economic revival since lifting pandemic restrictions at the start of the year has eased demand for the material – which is a key steel-making ingredient, making it central for infrastructure projects and construction.

This has caused iron ore prices to significantly flag, with average prices for Pilbara iron ore slipping to $98.60 per tonne in the first half, 11.1 percent below last year – according to Refinitiv data.

Rio is hoping to present a case of the present and the future to shareholders – with the Simandou project for its staple iron ore products and green mineral expansions into copper and aluminum, indicating its future in the race for electric vehicles and ramping up renewable technologies.

However, iron ore still accounts for nearly 80 percent of Rio Tinto’s profits, according to figures in its half-year results – which makes it an urgent issue.

Myron Jobson, senior personal finance analyst at Interactive Investors, believed this made the Simandou project a particularly “big deal for the miner.”

He said: “The miner’s fortunes have been hit by China’s sluggish economic revival. China is the world’s largest market for metal, but the nation is in the middle of a prolonged downturn caused by rising unemployment and high debts. The inflationary backdrop has also added to Rio Tinto’s cost burden with higher fuel and raw material costs as well as higher wage bills because of labour shortages.”

Susannah Streeter, a senior analyst at Hargreaves Lansdown, argued the medium-term prospects for Rio are “still murky, particularly given concerns about the effects of high-interest rates on economies.”

However, looking further ahead, she was sure Rio’s diversification “should stand it in good stead.”

“The company is pushing into metals that contribute to global decarbonizing efforts. The company already has exposure to aluminum and copper and is building its lithium business. These metals are sought after as components needed to power the green revolution, and there is the potential for significant price rises as the energy transition accelerates,” she said.

Russ Mould, senior investment director at AJ Bell, warned that while progress at Simandou would benefit Rio, this would only add “extra leverage to iron price as production ramps.”

This meant Rio would have to play a waiting game for an economic recovery in its key markets.

“What gets iron ore going? The reverse of the above – a global economic upturn (presaged by rate cuts, will be the theory), a better outlook in China and a weaker dollar could all help,” he said.

Rio’s hopes of reviving investor sentiment seem tailored towards Simandou and future hopes of surging demand in green minerals – but there are risks it could have little power other than to wait in hopes of a global economic recovery which could boost its business once again.

By CityAM