The Simandou iron ore mine is located in the southwestern part of Guinea, about 650 kilometers from the capital Conakry, in the Simandou mountain range (la chaîne du mont Simandou). The mining area covers 738 square kilometers and contains the world's richest untapped iron ore. The Simandou iron ore mine is regarded by the international mining community as the largest and highest quality undeveloped iron ore reserve in the world.
The Simandou iron ore mine is a world-class large-scale high-quality open-pit hematite mine, with an overall ore grade of about 66% to 67%. The quality of the mine ranks among the best in the world, characterized by: large reserves, high quality, concentrated ore bodies, shallow burial, and ease of mining. Due to its extremely high commercial mining value, Simandou has long been a "big cake" that many international mining giants compete for, leading to more than a decade of ownership disputes.
The Simandou iron ore mine can be divided into two sections: the northern section includes blocks 1 and 2 and a relatively small Zogota iron mine; the southern section includes blocks 3 and 4. The entire Simandou area has at least five blocks, with resource quantities in both the northern and southern sections exceeding 2 billion tons, and the exploration level of the mining area is not high, leaving significant exploration potential in the surrounding and deeper areas.
Rio Tinto's inaction despite holding mining rights
In 1997, Rio Tinto's subsidiary Simfer S.A. obtained exploration licenses for four blocks of the Simandou iron ore mine, covering a total area of 1,488 square kilometers. Three years later, it withdrew from 50% of the area, retaining exploration rights for 738 square kilometers and extending the license for two more years. By 2002, when the exploration rights expired, Simfer had still not carried out substantial work. Despite not submitting a feasibility report for the next steps, the Guinean government extended the license for another two years, but no substantial work was done. Subsequently, Rio Tinto requested to accelerate the development of the Simandou project, and in 2006, Rio Tinto took over the exploration rights for 738 square kilometers from Simfer and obtained a 25-year concession.
However, until 2008, Rio Tinto had made almost no progress at the Simandou iron ore mine. In the ten years from the discovery of the Simandou iron ore mine by Simfer in 1997 to 2008, only six drill holes were implemented in blocks 1 and 2.
Power struggles: The protracted ownership dispute over the northern section of Simandou
In 2008, the Guinean government was very dissatisfied with Rio Tinto's inaction despite holding mining rights, and on the grounds of "not doing enough to mine," it revoked the mining rights for the northern section of Simandou (blocks 1, 2, and the Zogota iron mine) and sold them to BSG Resources, owned by Israeli diamond tycoon Beny Steinmetz, leading to a more than ten-year ownership dispute over the northern section of Simandou.
After BSG Resources obtained exploration rights for a total of 369 square kilometers in blocks 1 and 2 of Simandou, it conducted exploration in these two blocks. By June 2010, it had completed 94 drill holes with a total depth of 15,864 meters and submitted a feasibility study report in October 2009, which was reviewed by the government and granted mining concessions. Later, Vale invested $2.5 billion to acquire 51% of the shares in the northern section of Simandou owned by BSG Resources, thus becoming embroiled in the ownership dispute over Simandou.
However, the legitimacy of the transfer of ownership of the northern section of Simandou from Rio Tinto to BSG Resources was questioned by outsiders, with some pointing out that BSG Resources obtained the mining rights through bribing Guinean officials. Rio Tinto also filed a lawsuit in the United States against Vale for stealing trade secrets and bribery. In 2011, Rio Tinto paid the Guinean government $700 million to retain the mining rights for the two blocks in the southern section.
In 2014, the Guinean government launched an investigation into the Simandou bribery case, determining that the licenses for blocks 1 and 2 in the northern section of Simandou were obtained by BSG Resources through bribery, and revoked the licenses held by Vale and BSG Resources in the northern section of Simandou. From 2014 to 2015, BSG Resources rebutted that this was a smear campaign, demanding the restoration of its licenses and compensation for losses. Between 2016 and 2017, Beny Steinmetz, the controller of BSG Resources, was arrested twice in Israel on charges of bribing Guinean officials, but was later released.
In February 2019, mediated by former French President Nicolas Sarkozy, BSG Resources reached an agreement with the Guinean government, in which BSG Resources agreed to give up blocks 1 and 2 of the Simandou project. The Guinean government also ended its bribery allegations and legal actions against BSG Resources, while BSG Resources was allowed to retain the smaller Zogota iron mine in the northern section of Simandou, thus ending the more than ten-year ownership dispute over the northern section of Simandou.
Although the ownership issue of the northern section of Simandou was resolved, the disputes between Vale and BSG Resources, the joint venture partners in the northern section, were just beginning. Since 2019, Vale has initiated a series of claims totaling $1.2 billion against BSG Resources on the grounds of "fraud and breach of contract." Meanwhile, BSG Resources also transferred the Zogota iron mine to Niron Metals.
Chinese enterprises obtaining mining rights: The "big cake" turns into a "hard nut to crack"
After the ownership dispute over the northern section of Simandou was resolved, in July 2019, the Guinean government launched an international public tender for blocks 1 and 2 in the northern section. In October 2019, the "Winning Consortium (SMB-Winning Consortium)" formed by four companies, including China Hongqiao Group under Shandong Weiqiao Group, Singapore's Winning International Group, Yantai Port Group, and United Mining Supply Group, and Australia's Fortescue Metals Group made it to the final bidding. In November 2019, the Winning Consortium won the mining rights for the two blocks in the northern section of Simandou with a $14 billion investment commitment, while Fortescue Metals Group lost with a $9 billion investment commitment. The main reason was that the Guinean government required the construction of a railway about 650 kilometers long and a deep-water port for iron ore exports, but Fortescue Metals Group refused to build the railway.
In June 2020, the Winning Consortium officially signed an agreement with the Guinean government. According to the agreement, the Guinean government holds a 15% stake in the northern section of Simandou, while the Winning Consortium holds 85% of the shares. Thus, the Simandou project, which had been delayed for nearly 20 years, was about to enter the development stage.
Compared to the complex ownership disputes in the northern section of Simandou, the ownership relations in blocks 3 and 4 of the southern section are relatively simple, with both blocks consistently controlled by Rio Tinto. However, due to the large investment and many uncertainties associated with the project, Rio Tinto has been hesitant about it. In 2010, Rio Tinto approached China Aluminum to take over the southern section of Simandou and formed a joint venture with Chalco, with an investment structure of Chalco 50.35% and Rio Tinto 44.65%. In November 2016, Rio Tinto and Chalco signed a framework agreement for the transfer of the Simandou project, selling 45% of Rio Tinto's shares to Chalco for a price between 1.1 billion and 1.3 billion USD. However, due to various reasons, the negotiations did not progress smoothly, and in October 2018, Rio Tinto announced that the two parties failed to reach a final agreement within the agreement period. Currently, the equity situation in the southern section of Simandou is Rio Tinto 45%, Chalco 40%, and the Guinean government 15%.
Although Chinese enterprises have obtained the Simandou project, they need to invest huge amounts of money to build railways and ports, with the railway construction alone costing about 23 billion USD. They also face uncertainties such as reduced iron ore demand after the domestic construction peak, vicious competition from international iron ore giants, fluctuations in iron ore prices, and changes in the political environment of Guinea. Additionally, the Guinean government's 15% stake significantly impacts corporate profitability, making the project characterized by large investments, long cycles, and many uncertainties. The Simandou project has transformed from a "big cake" fiercely contested by international mining giants into a tough "hard bone" to chew.
Analysis of the development conditions of the Simandou project
From the discovery of the Simandou iron ore by a subsidiary of Rio Tinto in 1997 and obtaining exploration permits, to the formal signing of the development agreement between Winning Consortium and the Guinean government in June 2020, this world’s largest undeveloped iron ore, delayed for more than twenty years, is about to enter the development stage.
Although Chinese enterprises have currently obtained partial ownership of the southern and northern sections of Simandou, there remains significant uncertainty regarding profitability in subsequent production operations. It is certain that the Simandou project is one with both great opportunities and risks, and both aspects deserve in-depth study.
1. Favorable Conditions
(1) The reserves and grade of Simandou iron ore rank among the top in the world.
The Simandou iron ore in Guinea is hailed as the largest undeveloped iron ore with the highest ore quality in the world, believed to "potentially change the global iron ore supply and demand pattern and the rules of the international market." It has advantages such as large resource reserves, high grade, suitability for open-pit mining, and ease of extraction. The resource amounts in both the southern and northern sections of Simandou have been confirmed to be over 2 billion tons, and there is still significant exploration potential in the surrounding and deeper areas of the mining area, with the total resource estimated to reach 10 billion tons.
(2) Chinese enterprises can achieve economies of scale in Guinea's mining and upstream and downstream industrial chains.
In recent years, Chinese enterprises represented by Shandong Weiqiao Group have deeply participated in the development of Guinea's bauxite, promoting leapfrog development of Guinea's bauxite industry. Currently, Guinea has become the world's largest bauxite exporter and the largest source of bauxite imports for China, fully demonstrating the significant advantages of the integrated development of the two countries' mining industries and mutual benefits, and laying a solid foundation for deepening cooperation in iron ore development.
According to statistics from Guinea's Ministry of Mines and Geology, as of September 2019, there were 7 foreign mining companies actually producing bauxite in Guinea, with an annual production capacity of 84 million tons, among which the Winning Consortium's Boké Mining Company (SMB) and Henan International Capacity accounted for 40 million tons and 6 million tons respectively, accounting for 55%. In 2019, the "Africa Investment Forum and Awards Ceremony" (AIFA) awarded the Winning Consortium the "Best Mining Project" award in recognition of its outstanding contributions to bauxite mining, fulfilling social responsibilities, and community development.
Driven by mining development, related companies in infrastructure and equipment manufacturing in China have also gained development opportunities in Guinea. In December 2019, China Overseas Infrastructure Development Investment Company signed a cooperation agreement with the Guinean Presidential Office's Major Projects Bureau. In April 2020, CRRC Zhuzhou Locomotive Co., Ltd. exported bauxite open-top wagons to Guinea. This type of bauxite open-top wagon will be mass-produced and is expected to become the largest single order for CRRC Yangtze Group's exports to Africa in recent years. In May 2020, Ansteel exclusively won the bid for the steel supply project for the Dassa railway in Guinea. Additionally, according to the Economic and Commercial Office of the Embassy of the People's Republic of China in Guinea, in the coming years, State Power Investment Corporation, TBEA, and China Aluminum Corporation will invest in building alumina plants and supporting thermal power plants in Guinea. It can be seen that Chinese enterprises have formed economies of scale in Guinea's mining and upstream and downstream industrial chains, achieving synergistic effects at the industrial chain level in Guinea's iron ore development.
(3) The Winning Consortium and Chalco are strong, and the southern and northern sections of Simandou can be developed cooperatively.
Currently, the Winning Consortium holds 85% of the shares in blocks 1 and 2 of the northern section of Simandou, while the Guinean government holds 15% of the shares; in the southern section, Rio Tinto holds 45% of the shares, Chalco holds 40%, and the Guinean government holds 15%. Both the southern and northern sections of Simandou have been granted mining rights to Chinese companies, and both companies are strong: the Winning Consortium is a star enterprise in Guinea, closely related to the Guinean government, with rich experience in mineral development and operation in Guinea, deeply involved in bauxite development (with an annual output accounting for half of Guinea's total), helping Guinea become the world's largest bauxite exporter; China Aluminum is the world's largest supplier of alumina and electrolytic aluminum, with the Boffa bauxite project already in production in Guinea, which has bauxite reserves of 2.41 billion tons and an annual output of 12 million tons. If the Winning Consortium and Chalco jointly develop the southern and northern sections of Simandou, they can significantly reduce infrastructure construction costs while lowering corporate risks.
(4) It has important significance from the perspective of national demand.
China is the world's largest importer of iron ore. According to data from China Customs, since 2015, China's monthly iron ore imports have consistently maintained an average level of around or above 75 million tons. Since 2011, China has formed a high dependence on imported iron ore, with the current external dependence reaching about 80%. According to data from the National Bureau of Statistics in 2018, Australia and Brazil are the main channels for China's iron ore imports, with iron ore imports from Australia reaching as high as 724 million tons, accounting for about 70% of China's total iron ore imports during the same period, while iron ore imports from Brazil during the same period were about 205 million tons, accounting for about 19%.
From the above data, it can be seen that China currently has a high dependence on imported iron ore and a single source of imports, with Australia alone accounting for a large portion of China's iron ore imports, resulting in a long-term lack of pricing power in the international iron ore market and being constrained. In addition, the lack of pricing power in iron ore has also led to a significant decline in the profits of domestic steel enterprises, resulting in huge losses.
In view of this, China urgently needs to expand iron ore import channels, seek high-quality overseas iron ore projects, enhance its voice, and gradually obtain pricing power or partial pricing power for iron ore, reversing the passive situation in the international iron ore market.
2. Disadvantages and Risks
(1) Huge Initial Investment
The Simandou iron ore mine is located in the southeastern part of Guinea, far from the port, with poor land transportation facilities. In October 2019, the relatively small Nimba iron ore mine and the Zogota iron ore mine were approved by the Guinean government to export through the railway of Arcelor Mittal from neighboring Liberia. However, for the Simandou mine, the Guinean government requires the construction of a railway approximately 650 kilometers long and a deep-water port within Guinea for iron ore exports. Although the Simandou mine is considered one of the best undeveloped iron ore mines in the world, the huge initial investment for companies means that long-term operational development is necessary to recoup costs. If there are future political changes in Guinea, vicious competition among iron ore giants, a decrease in domestic iron ore demand, and other unforeseen factors, companies will bear significant risks.
(2) Weak Contractual Spirit of the Guinean Government
In the subsequent development and operation of the Simandou mine, it cannot be ruled out that the Guinean government may bypass the law to maximize its own interests, potentially redistributing mining rights or even reclaiming mining rights. Relevant enterprises need to have a high sense of crisis, remain vigilant, and maintain sensitivity to the Guinean government and policy trends.
(3) The Trend of Resource Nationalism in African Countries
Mining is a pillar industry and a major source of foreign exchange for many African countries, with the economic development of several countries heavily reliant on mining. In some resource-rich African countries, the value of mining accounts for more than 25% of GDP.
In recent years, as African countries' economies develop and international competition for mineral resources intensifies, the awareness of resource nationalism in African countries has been continuously strengthening. Many African countries have introduced new mining regulations in recent years, implementing measures that are unfavorable to investment, such as increasing mining tax rates, improving labor protection mechanisms, mandating government or local ownership in mining projects, and restricting the processing and export of raw minerals.
In the long term, as African countries develop economically, the trend of resource nationalism will gradually strengthen, and the economic development of African countries will also gradually reduce their dependence on mining. In the future, there may be increasing restrictions on international mining investments, which could impact the long-term operation of the Simandou project.
(4) Political Instability and Occasional Strikes
Guinea has a long history of military government rule. It was not until February 2018 that Guinea held local elections, where the ruling party led by President Condé unilaterally claimed victory, while the opposition did not recognize the election results, frequently holding strikes and protests, with a significant number of demonstrations escalating into violent incidents. Additionally, local environmental pollution, power outages, and conflicts of interest caused by mining development occasionally trigger small-scale riots and strikes. For example, in 2012, Russian Aluminum was forced to close its alumina plant due to ongoing strikes and labor disputes; in May 2017, riots occurred in the Boké bauxite mining area; on May 14, 2018, Boké mining employees went on strike. Overall, Guinea experiences frequent unexpected events, but they are generally manageable and primarily caused by conflicts of interest, making them relatively easy to resolve.
(5) Potential Malicious Competition from International Iron Ore Giants
The Simandou iron ore mine has large reserves, high grades, and is easy to mine, and is considered "capable of changing the global iron ore supply-demand pattern and the rules of the international market." It has long been a focus of international iron ore giants. Currently, the Simandou mine is about to enter the development stage, which may change the global iron ore supply-demand pattern, raising alarms among international iron ore giants, and it is likely to face malicious competition from them. These iron ore giants also own large reserves of high-grade iron ore projects in countries like Australia and Brazil, with relatively low production costs. Malicious competition often takes the form of price wars, which can drive out the higher-cost competitors, posing significant challenges for business operations and cost control.
(6) The Guinean Government Holds Partial Mining Rights, Challenging Corporate Profitability
From a corporate perspective, the success or failure of the Simandou project ultimately hinges on its profitability. According to Guinea's current Mining Law, foreign mining companies must establish a Guinean legal entity to apply for mining rights in Guinea, and the Guinean government must hold a certain percentage of non-voting shares. For example, the winning alliance led by Weiqiao Group established Boké Mining Company in Guinea, with the Guinean government holding 15% of non-voting shares; in the French AMR company, the Guinean government holds 15% of non-voting shares; the British Alufer Mining established Bel Air Mining SA in Guinea, with the Guinean government holding 15% of non-voting shares.
On June 4, 2020, the Guinean cabinet approved the Basic Mining Agreement for the Simandou Iron Mine Blocks 1 and 2. The Guinean Ministry of Mines and Geology has completed negotiations on the Mining Agreement for Blocks 1 and 2 with the Winning Alliance Group. According to the agreement, the Guinean government holds 15% of non-voting shares in the project. Over the next 25 years, the total mineral resource tax collected by the Guinean government from the Simandou Blocks 1 and 2 project will reach $15.5 billion. The government's shareholding and high taxes will pose significant challenges to corporate profitability.
3. Summary
Overall, the Simandou iron ore mine is a project with very clear advantages but also significant risks. From a resource perspective, Simandou is undoubtedly a world-class iron ore mine and can meet the national demand for iron ore resources, but it also faces risks of high investment, long cycles, and many uncertainties. Although Chinese-funded enterprises have obtained mining rights, there is still great uncertainty about whether the project can be profitable, and Chinese-funded enterprises will still face significant tests during the development and operation of the project.
(Author's Unit: International Mining Research Center, China Geological Survey; Wuhan Geological Survey Center, China Geological Survey)
Website Editor: Gong Li