(Bloomberg) -- Rio Tinto Group will spend around $6.2 billion on development of the vast Simandou iron ore deposit in Guinea, its first official estimate for a marathon project that aims to deliver high-quality material for steelmakers seeking to curb emissions.
Outlining a $30 billion capital-expenditure plan for the group over the coming three years, Rio said initial production from its Simfer joint venture in Simandou is expected from 2025, faster than most analysts had forecast. That would come after completion of what will be one of Africa’s largest-ever infrastructure projects, including hundreds of kilometers of rail and a port.
The mining giant’s partner in the project is its largest investor, Aluminum Corp. of China, known as Chinalco.
“It is of course expensive to build a new iron ore mine, because you also have to build the infrastructure, but it is iron ore of an exceptional quality, probably the highest quality on the planet,” Rio’s Chief Executive Officer Jakob Stausholm told Bloomberg Television in an interview. “It’s the ore for the future.”
Development of Simandou, where Rio has been working for more than two decades, has been snarled for years by government changes in Guinea, a litany of disputes over ownership, plus infrastructure, operational and environmental challenges. Rio has persisted in large part due to the scale of the deposit — but also because of the quality, with ore that is higher grade than in the industry’s dominant Pilbara region in Australia.
Steel mills aiming to shift away from coal-consuming blast furnaces toward less emissions-intensive processes like direct reduced iron technology will increasingly need premium ore.
The project, with an average grade of 65.3% iron and low impurities, would ultimately account for around 7% of Rio’s reported tons, and lift the overall average for the group to 60.6% iron from 60.3%, according to analysts at RBC Capital Markets LLC.
Read more: World’s Iron Ore Powerhouse Is Preparing to Reinvent Itself
Others pointed to an aggressive timeline that may yet falter, given the troubled history of the project and operational challenges.
“We have Simandou starting in 2027, so the time line is more aggressive than we had expected,” JP Morgan analysts wrote in a research note. The complexity of development and challenges around use of a shared rail line mean “we will need to gain more confidence on the project before modeling it on Rio’s indicated timeline,” the analysts said.
The Simfer development has an initial mine life of at least 26 years, and will ramp up to a rate of 60 million tons a year, with Rio’s share amounting to 27 million.
Rio, the world’s top iron ore exporter, needs to invest just to sustain its current level of production, but also expects urbanization in India and across parts of Asia to drive additional growth. Though Rio forecasts China — home to the world’s largest steel industry — will soon hit a peak in consumption, the producer expects global demand will rise almost a quarter by 2050.
“I’m optimistic,” Stausholm said of the Chinese economy in the Wednesday interview. “The property market has its challenges, but then again, China is spending more again on infrastructure.” Other industries like electric vehicles are helping to add demand, he said.
Simandou is divided into four blocks, with blocks 1 and 2 controlled by the Winning Consortium Simandou, backed by Chinese and Singaporean companies, while Rio and Chinalco own blocks 3 and 4. New assessments of the Simfer concession’s size show it holds about 1.5 billion tons of reserves and a potential further resource of 1.4 billion tons, Rio said.
London-based Rio and its partner previously struck a deal with Guinea and the Winning Consortium Simandou — which is building another project at the same site — to develop 600 kilometers (373 miles) of rail lines needed to transport the iron ore to the port.
Rio’s internal rate of return on the Simfer project and associated infrastructure is between 11% and 13%, the producer said in a statement.
--With assistance from Haidi Lun, Clara Ferreira Marques and Jason Scott.
(Updates with CEO comments in paragraph 4, 5 and 13, analyst comments in paragraphs 8, 9 and 10.)
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