Rio and its partners have the green light for Simandou. Pic: Getty Images
Bulk Buys: Iron ore market in waiting game as green lights appear for Simandou
Mining
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- Chinese and Guinean governments give green light to Simandou infrastructure deal
- Rio’s share of the mega project will clock in at US$6.2bn
- What impact will the high-grade West African iron ore mine have on supply?
The Rio Tinto (ASX:RIO) June quarter report yesterday was resplendent with production disappointments, its Pilbara iron ore shipments down 2% YoY and running behind guidance, alumina output hit by a gas outage and copper guided to the low end of the 2024 range.
But that fell into the background amid news Simandou, the mega iron ore project in Guinea dubbed for years ‘The Pilbara Killer’, is closer to reality than ever before.
Rio revealed yesterday a final agreement to develop Simandou was due for completion this week after the key investment approvals from the Guinean and Chinese Governments came through.
The project has an extraordinary scale and will add a substantial amount of high-grade product into the seaborne iron ore trade.
Comprised of two 60Mtpa blocks, Rio thinks Simandou will be shipping ore from next year, including 27Mtpa from its share of Blocks 3 & 4.
Other partners include Chinalco, Rio’s biggest shareholder, and Baowu Steel, the world’s biggest crude steel producer.
S&P’s Paul Bartholomew last week suggested Simandou would add around 55Mtpa in the medium term to global supplies, with few analysts bullish it will quickly ramp up to spec rates of 120Mtpa.
While that’s a tonne of new supply to hit a market whose major engine room – China’s steel and property sectors – is sputtering, a key question about cost is yet to be answered.
Exactly how much will Rio and its partners be able to ship a tonne of iron ore for when it requires the construction of 600km of rail through harsh mountainous countryside?
Rio yesterday confirmed it expected to spend US$21.50-23.50/t for each tonne it ships from the Pilbara, the world’s largest standalone iron ore business.
Its top competitors BHP (ASX:BHP) and Fortescue (ASX:FMG) both export, at least on a cash cost basis, at under US$20/t.
Singapore prices yesterday clocked in at US$108.30/t around 4pm AEST yesterday for 62% Fe iron ore. At grades in excess of 65% Fe, Simandou will draw a premium, but with China’s steel mills on thin margins demand is far higher in the discounted lower grade segment of the market where FMG, Mineral Resources (ASX:MIN), Gina Rinehart’s Roy Hill and Rio’s own SP10 product play.
Rio’s spend on Simandou
Rio will spend around US$3.5bn to co-fund its share of the infrastructure bill at Simandou and has already tipped in US$985m to settle expenditure incurred to date.
All up it will fork out US$6.2bn, the larger portion of the US$11.6bn the Simfer JV will need to pay (assuming no blowouts of course).
Simfer will construct its own mine and port infrastructure as well as a 70km rail-spur accompanied by rolling stock, while it will also fund 34% of the 552km trans-Guinea heavy haul rail system from the inland Simandou range to the Port.
That’s a lot to spend, with the companies behind the development clearly confident the world class development will make their cash back and then some.
Costs are key in iron ore, and BHP, RIO and FMG sit right at the top of the totem pole.
There is a gap to be filled in a cost curve that’s become incredibly steep because production taken offline by Brazil’s Vale after a tailings dam disaster in 2019 was largely filled by price sensitive marginal producers.
Simandou could hurt those at the top end of the cost curve, including some smaller Aussie producers, by bringing a wave of supply online. MinRes has already announced the closure of its Yilgarn ops due to cost pressures.
But Simandou is unlikely to severely hurt Rio’s lower cost Pilbara ops, themselves in need of new developments like Rhodes Ridge by the end of the decade to improve the quality mix and maintain the grades needed to support high volumes of its flagship Pilbara Blend products.
Curiously, despite the Simandou news one of the few juniors who could stand to benefit from the development – Arrow Minerals (ASX:AMD) – was down 16.7% yesterday. It is exploring blocks to the north of the blocks held by the Winning Consortium.
Magnetite murmurs
Definitely put Simandou higher on the ‘will happen’ list than Gina Rinehart’s foray into magnetite, which doesn’t look anywhere near as attractive based on numbers released to the ASX yesterday.
Hancock is taking the lead on studies into the Mt Bevan magnetite project in WA’s Yilgarn, a proposed 12Mtpa magnetite operation shared with junior Hawthorn Resources (ASX:HAW) and Indian-backed Legacy Iron Ore (ASX:LCY).
With a promised PFS now complete, Hancock owns 51% of the project alongside Legacy (29.4%) and Hawthorn (19.6%) in a JV deal that was later expanded to include lithium exploration in the region, which also plays host to Delta Lithium (ASX:DLI) Mt Ida lithium and gold deposits.
Premiums would be on offer for the DRI grade concentrate the project could produce (more than 70% Fe and under 2.5% silica).
But a $5bn construction bill, far beyond the project’s mid point NPV of ~$1.7bn, reads less well.
Magnetite operations are complex and often come in well over budget.
Take the Sino Iron mine or FMG’s Iron Bridge for instance. The latter, initially expected to cost US$2.6bn, eventually clocked in closer to US$4bn.
Updates will be closely watched on the progress it’s made this financial year as well when FMG’s June results come out on July 25, after first-year production guidance for what will eventually be a 22Mtpa mine was cut from an initial 7Mt for FY24 to just 2Mt at the March quarter read, due largely to a water pipeline problem.
That said, if anyone has money to spare it’s Gina.
ASX iron ore stocks
Scroll or swipe to reveal table. Click headings to sort.
| CODE | COMPANY | PRICE | WEEK RETURN % | MONTH RETURN % | 6 MONTH RETURN % | YEAR RETURN % | MARKET CAP |
|---|---|---|---|---|---|---|---|
| ACS | Accent Resources NL | 0.007 | 0% | 0% | -13% | -36% | $ 3,311,890.98 |
| ADY | Admiralty Resources. | 0.012 | 0% | 50% | 71% | 71% | $ 19,553,687.28 |
| AKO | Akora Resources | 0.14 | 0% | -7% | 1% | -2% | $ 16,868,232.64 |
| BCK | Brockman Mining Ltd | 0.024 | 14% | 4% | 0% | -31% | $ 222,725,571.14 |
| BHP | BHP Group Limited | 43.08 | -1% | 0% | -9% | -5% | $ 221,473,750,778.39 |
| CIA | Champion Iron Ltd | 6.34 | -2% | -3% | -24% | 7% | $ 3,352,113,476.47 |
| CZR | CZR Resources Ltd | 0.275 | -4% | 2% | -28% | 67% | $ 64,827,027.65 |
| DRE | Dreadnought Resources Ltd | 0.022 | -4% | 22% | -15% | -66% | $ 77,287,605.12 |
| EFE | Eastern Resources | 0.004 | -20% | -38% | -50% | -64% | $ 4,967,785.84 |
| CUF | Cufe Ltd | 0.011 | -21% | -15% | -42% | -39% | $ 17,356,460.75 |
| FEX | Fenix Resources Ltd | 0.405 | 8% | 19% | 42% | 37% | $ 263,954,809.60 |
| FMG | Fortescue Ltd | 22.59 | 4% | -3% | -17% | -1% | $ 69,215,131,356.64 |
| RHK | Red Hawk Mining Ltd | 0.845 | 6% | -3% | 29% | 99% | $ 168,840,699.76 |
| GEN | Genmin | 0.125 | 9% | 4% | -22% | -17% | $ 82,227,532.32 |
| GRR | Grange Resources. | 0.37 | 0% | 12% | -19% | -35% | $ 439,788,705.24 |
| GWR | GWR Group Ltd | 0.08 | 3% | -12% | -8% | -17% | $ 25,697,332.40 |
| HAV | Havilah Resources | 0.24 | 17% | 33% | 26% | 4% | $ 77,576,606.45 |
| HAW | Hawthorn Resources | 0.06 | 0% | -14% | -40% | -59% | $ 20,100,936.78 |
| HIO | Hawsons Iron Ltd | 0.027 | 0% | -4% | -41% | -41% | $ 26,232,065.86 |
| IRD | Iron Road Ltd | 0.076 | -5% | -8% | 10% | -13% | $ 64,073,592.97 |
| JNO | Juno | 0.03 | 0% | -30% | -71% | -60% | $ 5,458,357.80 |
| LCY | Legacy Iron Ore | 0.016 | 23% | 23% | -6% | -16% | $ 107,989,675.67 |
| MAG | Magmatic Resrce Ltd | 0.07 | 8% | 19% | 75% | -11% | $ 32,112,904.98 |
| MDX | Mindax Limited | 0.05 | 25% | -11% | -12% | -18% | $ 98,341,621.44 |
| MGT | Magnetite Mines | 0.29 | -5% | -11% | 2% | -33% | $ 30,022,579.84 |
| MGU | Magnum Mining & Exp | 0.014 | 8% | -7% | -53% | -60% | $ 11,331,059.64 |
| MGX | Mount Gibson Iron | 0.43 | -1% | 5% | -20% | -7% | $ 523,892,879.19 |
| MIN | Mineral Resources. | 57.62 | 2% | -8% | -5% | -21% | $ 11,329,297,520.60 |
| MIO | Macarthur Minerals | 0.059 | -13% | -3% | -56% | -69% | $ 10,323,707.28 |
| PFE | Panteraminerals | 0.033 | -11% | -18% | -38% | -62% | $ 12,507,881.46 |
| PLG | Pearlgullironlimited | 0.02 | 11% | -13% | -38% | -38% | $ 3,681,752.22 |
| RHI | Red Hill Minerals | 5.56 | -12% | 3% | 37% | 53% | $ 368,092,567.50 |
| RIO | Rio Tinto Limited | 116.81 | -3% | -3% | -9% | -2% | $ 44,486,551,085.76 |
| RLC | Reedy Lagoon Corp. | 0.003 | 0% | -25% | -40% | -66% | $ 1,858,622.20 |
| CTN | Catalina Resources | 0.003 | 0% | 0% | -14% | -25% | $ 3,715,460.68 |
| SRK | Strike Resources | 0.035 | 0% | -8% | -27% | -52% | $ 9,931,250.00 |
| SRN | Surefire Rescs NL | 0.0065 | -19% | -19% | -28% | -57% | $ 12,911,000.78 |
| TI1 | Tombador Iron | 0.014 | 0% | 0% | 0% | -33% | $ 30,218,753.22 |
| TLM | Talisman Mining | 0.29 | 16% | 21% | 14% | 87% | $ 48,021,689.00 |
| EQN | Equinoxresources | 0.32 | 3% | -20% | 7% | 178% | $ 40,137,500.98 |
| AMD | Arrow Minerals | 0.003 | 20% | 0% | -57% | -25% | $ 31,618,095.29 |
| CTM | Centaurus Metals Ltd | 0.4 | -6% | -8% | -17% | -55% | $ 195,991,364.65 |
Coal prices fail to hold their nerve
While iron ore news is about to come thick and fast with BHP also on the reporting roster tomorrow, coal has slipped back under the radar after a few days on everyone’s lips a couple weeks ago.
The Grosvenor mine fire put the sector front and centre as met coal prices surged.
They’ve now given up all their gains, falling back to US$236/t as fears of immediate shortages failed to materialise.
Anglo called Force Majeure on some coal supplies to Asian steel mills, but only for the fourth quarter.
Thermal coal remains in stasis, trading for about US$135/t.
China posted its first year on year increase in coal output on June, according to stats from the National Bureau of Statistics, due to both increased coke margins for met coal and expectations of heatwaves in July and August for thermal.
ASX coal stocks
Scroll or swipe to reveal table. Click headings to sort.
| CODE | COMPANY | PRICE | WEEK RETURN % | MONTH RETURN % | 6 MONTH RETURN % | YEAR RETURN % | MARKET CAP |
|---|---|---|---|---|---|---|---|
| NAE | New Age Exploration | 0.004 | -11% | 0% | -27% | -27% | $ 5,381,696.73 |
| CKA | Cokal Ltd | 0.084 | -10% | -14% | -33% | -20% | $ 94,947,510.24 |
| BCB | Bowen Coal Limited | 0.051 | 0% | -15% | -47% | -64% | $ 142,400,274.90 |
| SVG | Savannah Goldfields | 0.037 | 95% | 61% | -18% | -62% | $ 11,524,481.56 |
| GRX | Greenx Metals Ltd | 0.875 | 1% | -5% | -8% | -22% | $ 245,432,908.16 |
| AKM | Aspire Mining Ltd | 0.33 | -8% | 27% | 65% | 358% | $ 190,363,869.38 |
| AVM | Advance Metals Ltd | 0.027 | 4% | 17% | -23% | -79% | $ 3,791,548.40 |
| YAL | Yancoal Aust Ltd | 7.14 | -4% | 15% | 34% | 50% | $ 9,454,346,368.92 |
| NHC | New Hope Corporation | 4.89 | -3% | 5% | -9% | 2% | $ 4,150,597,128.24 |
| TIG | Tigers Realm Coal | 0.004 | 33% | 0% | -27% | -33% | $ 52,266,809.47 |
| SMR | Stanmore Resources | 3.94 | 2% | 18% | -4% | 56% | $ 3,533,455,205.28 |
| WHC | Whitehaven Coal | 8.54 | -5% | 11% | 5% | 28% | $ 7,144,570,695.36 |
| BRL | Bathurst Res Ltd. | 0.835 | 4% | 3% | -12% | -16% | $ 156,915,019.60 |
| CRN | Coronado Global Res | 1.39 | -1% | 19% | -19% | -11% | $ 2,388,946,565.25 |
| JAL | Jameson Resources | 0.06 | 33% | 76% | 71% | 20% | $ 29,343,847.32 |
| TER | Terracom Ltd | 0.215 | -2% | 2% | -51% | -51% | $ 172,207,740.53 |
| ATU | Atrum Coal Ltd | 0.004526 | 0% | 0% | 0% | 0% | $ 11,966,853.96 |
| MCM | Mc Mining Ltd | 0.14 | 4% | -10% | 8% | -15% | $ 57,961,868.86 |
| DBI | Dalrymple Bay | 3.03 | 0% | 2% | 11% | 13% | $ 1,497,200,234.34 |
| AQC | Auspaccoal Ltd | 0.092 | -7% | 35% | -8% | -37% | $ 50,177,286.86 |
