Bulk Buys: Pilbara Killer Simandou edges ever closer and the case for an SA coal deal
Simandou, the mammoth iron ore development in West Africa known colloquially as the ‘Pilbara Killer’ appears to be a step closer to fruition amid reports its Junta Government has approved a JV agreement for Rio Tinto (ASX:RIO) and a host of Chinese partners to build port and rail infrastructure for the development.
The project is regarded as the largest undeveloped deposit of iron ore globally and has sat idle due to market volatility, corruption and government instability since Rio Tinto discovered the 65% Fe plus iron ore bounty in the Simandou Ranges in the 1990s.
It has long been stalled over issues related to the route to market. While it is located within Guinea, the closest port to the multi-billion tonne iron ore deposits is through neighbouring Liberia.
But the two consortia behind the four block Simandou mines will instead be building a 650km long rail in Guinea which will skim the Sierra Leone border and ship the ore to China through a new port south of the capital of Conakry at Morebaya.
The JV agreement underpinning that was approved by the Guinean National Transition Council — a decision making body which has governed the country since a military coup in 2021 — over the weekend, according to Bloomberg. It is anticipating the completion of the project by December next year.
However, it is understood the sign off is viewed as a minor step in the approvals process, with Chinese approvals likely to be the biggest milestone to come.
Rio’s next major market update should come with its full year results on February 21.
The project has long been a source of angst for Australian investors, viewing the project as an opportunity for China to wean itself off its symbiotic reliance on the Pilbara’s legendary hematite deposits.
The total market for seaborne iron ore sits at around 1.5Bt, the bulk of that shipped to China, which produced more than 1Bt of crude steel in each of the past four years.
There are concerns that as China’s steel demand begins to drop off and emissions standards tighten, it will look to replace Australian iron ore — most of which grades under the 62% Fe benchmark — with higher grade material from Simandou.
The port is expected to have a capacity of 120Mt, with the two southern blocks owned by Rio Tinto and its top shareholder Chinalco to begin production in 2025 and ramp up over 30 months to 60Mt. The other two blocks to the north are held by the Winning Consortium, with China’s largest steelmaker Baowu also playing a role alongside the Guinean Government.
Rio Tinto’s share of the asset will come in at 27Mt, under a tenth of the scale of its Pilbara iron ore business, which will ship 323-338Mt in 2024.
The Simfer JV, which Rio is a part of, contains a resource of 2.8Bt at 65.5% Fe, a product which should generate DSO premiums largely reserved for the high grade iron ore produced in Brazil by Vale.
The mine’s development is also tied into Rio’s decarbonisation push. Higher grades of iron ore require less coal and energy to be refined into steel, saving carbon emissions in the blast furnace.
Rio has also stated it plans to produce products eventually at Simandou that will be sent separatedly blast furnaces and direct reduced iron plants. DRI steel mills — which require iron ore of low impurity and normally utilise pellets derived from processed magnetite concentrate — could theoretically be carbon free if they can be adapted to run off green hydrogen.
Currently all the major producers have plans to increase tonnages incrementally out of the Pilbara, with demand for iron ore remaining strong enough to keep prices well above long term averages at over US$130/t late last year and early this year — despite major frailties in China’s real estate market.
Iron ore was fetching US$125.50/t on the Singapore Exchange yesterday, and US$132.12/t for the most traded Dalian contract in China.
The Simfer JV share of Simandou is expected to come in at US$11.6 billion, with Rio to spend US$6.2b.
At the time the capex figure was revealed in December, RBC’s Tyler Broda and Kaan Peker said their supply and demand models had Simandou ramping to 100Mt by 2029, supplying 6.2% of global export volumes by 2027.
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ASX, JSE and AIM listed coal producer MC Mining (ASX:MCM) has told minority shareholders to take no action after a combination of Chinese and South African interests formed a consortium holding 64.3% of its shares launched a 16c per share takeover of the company last year.
MCM owns 84% of the operating Uitkomst Colliery, which produces PCI and thermal coal and sold 102,266t in the December quarter, as well as 100% of the semi-soft and thermal Vele Aluwani Colliery, which produced 48,268t of thermal coal in the three months to December 31.
But its big asset is the 68% owned Makhado mine, an undeveloped thermal and hard coking coal mine expected to cost US$98 million to bring to life, which could sell 810,000t of mid vol hard coking coal and 620,000t of 5500kcal thermal coal a year.
A consortium led by large shareholders Senosi Group (41.23%) and Dendocept (6.93%), used their bidder’s statement last week to warn minority investors of funding risks for the company, which will need to raise over double its market cap to develop Makhado and had just US$3.36m in the bank on December 31.
It is also facing liquidity issues, they said. Up to February 1, 2024, just $2300 had been traded on the ASX this year.
The consortium said the offer comes in at a 23.1% premium to the price of MCM shares before its intention to make a bid was announced on November 3 last year.
“With only US$3.4 million cash at 31 December 2023 and debt of more than US$10.1 million (plus accruing interest), it is anticipated MCM will require an equity raise in the near term which will have a significant dilutive effect on current shareholders who decide not to participate,” the consortium said in its bidder’s statement.
“Further, notwithstanding the immediate need to repair the balance sheet, MCM will require significant future funding to develop and unlock any value from its asset base.
“MCM’s flagship project Makhado has a peak funding requirement of approximately US$98 million which is more than 250% of the current market capitalisation of MCM.
“The Offer provides an opportunity for MCM Shareholders to sell their MCM Shares ahead of the anticipated dilution future dilution and considerable funding/balance sheet risks facing the company.”
MCM said it had established an independent board committee to review the takeover offer and will procure and independent expert’s report to assess the bid, but told shareholders they should take no action to the off-market takeover offer until then.
Front month Newcastle coal futures were paying US$123.65/t yesterday, with premium hard coking coal at US$316/t.
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