New Rio Tinto CEO lays out plan for growth without Simandou

New Rio Tinto CEO lays out plan for growth without Simandou

Rio Tinto (ASX:RIO) will shelve the US$20 billion Simandou iron ore project in Guinea because of huge overcapacity in the iron ore market, according to new CEO Jean-Sebastien Jacques.

The plan to develop the world’s largest unexploited iron ore deposit, which holds more than two billion tonnes of iron ore and could double the size of Guinea’s economy, has been dropped because Jacques feels the current market environment cannot justify a project of such magnitude.

Jacques said: “We’ve been very clear that it’s a very expensive project. We did deliver the BFS (bankable feasibility study) to the government as per the agreement a few weeks ago and we’ve been very clear that in the current market environment we don’t see a way forward in relation to Simandou.

“We’ve been absolutely on record on this one. It’s not the right time to develop this project from a Rio standpoint. The other stakeholders might have different perspectives on this one.”

Rio was granted the exploration rights for the Simandou area in 1997 but was subsequently stripped of the northern half by the Guinean government in 2008, reportedly because of the delayed approach in developing the mine.

“The conditions in iron ore are clear – there is overcapacity in the market place,” said Jacques, who starts work today as Rio’s new CEO.

“So when you look at the capital intensity of the project and the current iron ore market conditions, the alignment of stars is not the right one from our perspective.”

However, the Guinean government feel Rio’s reluctance to develop the project is ‘driven by a global agenda that has nothing to do with the project economics’ and released a combative response.

A government official said: “We expect Rio Tinto to stick to its commitments in the investment framework. We are confident that a funding solution will be found with our partners based on a long-term perspective without delaying the project.

“We have had confirmation, as part of the BFS, from a reputable independent firm, that Simandou will be potentially, ‘in terms of cost competitiveness, the fifth most profitable iron ore mine in the world by 2025’.

“We expect all stakeholders to share our long-term view. Guinea will not let the Simandou project be driven by a global agenda that actually has nothing to do with the project economics. The [capital expenditure] is indeed a challenge, but we will overcome it.”

Despite the clear challenges ahead in terms of the Simandou project becoming a reality Jacques said, in an interview with Bloomberg, that Rio will be concentrating on expanding existing projects rather than bringing in new deals to induce growth.

“M&A is not top of the agenda today,” Jacques said in the interview on 29 June. “We have been very clear with the shareholders and the market that unless we see a way which creates value for our shareholders, so the right price, we will not do it.”

Looking ahead Rio will focus on the mega projects it already has in its portfolio. Both the $6 billion expansion at the Oyu Tolgoi copper mine in Mongolia and the building of the $1.9 billion Amrun bauxite project in Australia will be key assets. The Australian miner will also decide on a new mine in Australia’s Pilbara region.

“Mines are being depleted, we need to grow,” said Jacques. “Otherwise you don’t have a business very, very fast. We will grow at the right pace.”

Rio’s ASX-listed shares climbed 1.4% to AUS$46.69 on Monday morning, making the total rise this year 4.4%.