Why Chinese interest is soaring in West African Guinea’s Simandou iron ore reserves

Others on the list were the Kamoa copper and cobalt mine in the Democratic Republic of the Congo (DRC), from where China sources most of its cobalt for making electric vehicle batteries, and the Kururi potash mine project in Eritrea.

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Security tight in Chinese capital as foreign leaders arrive for Belt and Road Forum in Beijing

Security tight in Chinese capital as foreign leaders arrive for Belt and Road Forum in Beijing

The DRC mine is part of China’s plan to expand its supply of critical metals to power a green energy transition, at a time when the US and European Union are also angling for the same in Africa with similar aims. Potash, which is used for making fertilisers, is important as China seeks food security and wants to help Africa increase its food production as well as set up more manufacturing plants.

However, the Simandou iron ore reserve in Guinea stands out for its sheer size and China’s geopolitical aim of reducing dependence on Australia.

As much as 69 per cent of China’s iron ore supplies last year came from Australia, more than three times that from Brazil at second spot, according to shipbrokers Banchero Costa.

Development of the Simandou project had been held up for years over ownership disputes and the lack of supporting infrastructure, such as a railway to transport the ore from the remote mountainous corner of Guinea to seaports for export.

Political instability in Guinea further affected progress, after a September 2021 military coup ousted former president Alpha Condé and the ruling junta suspended mining activities at Simandou.

But China’s growing interest in the mega project has seen Chinese companies place a bigger bet on it, agreeing to fund the development of both the deposits and the infrastructure, including a railway line and port.

In March last year, Guinea’s ruling junta reached an agreement with British-Australian giant Rio Tinto and a Beijing-backed consortium to resume activities at Simandou, after infrastructure disputes were resolved.

Since July this year, the Guinean transitional government has signed a series of agreements with Chinese companies and Rio Tinto to develop the mine, as well as build a 650km trans-Guinean railway line and a port in the capital Conakry to bring ore extraction closer to reality.

Liz Gao, senior analyst in iron ore at commodities consultancy CRU Group, said the Simandou iron ore project’s capital expenditure is estimated at more than US$20 billion, and the break-even price for the mine would be US$70 per tonne during ramp up, and US$60 per tonne when producing at full capacity.

Observers say the Guinean iron ore will help China diversify its suppliers to avoid excessive dependence on Australia amid strained ties in recent years, as well as its drive to achieve resource security and to decarbonise the steel value chain since Simandou offers higher-grade ore.

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Gyude Moore, a senior policy fellow at the Washington-based Centre for Global Development and a former public works minister in Liberia, said investors have haggled with successive Guinean governments over their insistence that development of the Simandou mine must be linked to the construction of some core infrastructure – from a deep seaport in Conakry to a cross-country railway.

Moore said investors felt that the infrastructure cost alone made the project unviable commercially.

Lauren Johnston, a China-Africa researcher at the South African Institute of Interna­tional Affairs in Johannesburg, said China’s goal in the massive Simandou investment was higher quality ore development.

She said the new mega China-built Lekki deep seaport in Nigeria may make it more feasible to ship iron ore from Guinea and other West African countries to Asia on huge container ships, thus reducing transport costs involved in sending the cargo on smaller ships to South African deep seaports.

She said because Zimbabwe is about to inaugurate Africa’s largest steel mill, perhaps some of the ore from Simandou will go there as well. Chinese steel giant Tsingshan Holding Group is building a US$1 billion iron and steel plant in Zimbabwe through subsidiary firm Dinson Iron and Steel.

Gao of CRU Group highlighted China’s aim to diversify its iron ore suppliers to avoid dependence on Australia and Brazil, which account for 82 per cent of global seaborne iron ore exports.

She said though low-grade ores are in high demand now, the steel industry’s aim to decarbonise the sector will lead to a growing demand for higher-grade ores.

“Simandou will be a good option here with its capacity of 120 million tonnes per year of high-grade ore exports,” Gao said.

In September, China Baowu Steel Group signed a deal with the Chinese-backed Winning Consortium Simandou (WCS) to jointly develop blocks 1 and 2 in the northern section of the Simandou project, along with related infrastructure projects.

WCS, which owns the rights to the two blocks, has Singaporean shipowner Winning International Group, Chinese aluminium producer Shandong Weiqiao Group and Guinean logistics firm United Mining Supply International among its shareholders.

While the value of investment remains undisclosed, China Baowu is expected to get a major stake in WCS.

Johnston said the entry of China Baowu as a shareholder in WCS links the steel giant directly to the mine, which is a form of vertical integration.

Moore at the Centre for Global Development said the close links between industry and government in China were an indication that “China Baowu Steel is acting on signalling from the central government”.

Gao said the investment from China Baowu into Guinean iron ore shows that China’s largest steelmaker has a strong interest in both the southern and northern parts of Simandou. “Our analysis shows that we will need to see both come to the market to make the whole of Simandou economically viable.”

But she said while China Baowu’s commitment was certainly positive news for Simandou and Guinea, a lot more investments were needed, from Chinese stakeholders, Rio Tinto and WCS alike.

“After all, this is the largest infrastructure investment ever seen in Africa and there are many risks ahead for stakeholders and investors.”

China looks to Guinea’s vast Simandou iron ore mine to secure supply

The rights to the southern blocks, 3 and 4, of Simandou are held by Rio Tinto, the world’s largest iron ore producer, through Simfer, where the Guinean government has a 15 per cent stake.

Simfer Jersey – a joint venture between Rio and Hong Kong-based Chalco Iron Ore Holdings – holds the rest.

Baowu has a 20 per cent stake in Chalco, with 75 per cent owned by the Aluminum Corporation of China (Chinalco) and the rest shared between state-owned China Rail Construction Corporation and China Harbour Engineering Company. The Guinean government holds 15 per cent in each of the two parts.

Rio Tinto recently invested US$100 million for initial infrastructure works at Simandou.

Guinea also has rich reserves of bauxite, a key raw material for the aluminium industry. China is the biggest importer of the mineral.