Vale SA (NYSE:VALE)- in the valley of iron ore doubt
Simandou, a world-class iron ore mine situated in South-east Guinea, is described as the largest un-tapped iron ore deposit in the world. Brazil’s Vale SA (NYSE:VALE), China’s Aluminum Corp and Beny Steinmetz, the Israeli billionaire have invested in this mine. The Rio Tinto Group, which is the 2nd largest mining company in the world has had an interest in this mine since 1997 but will not be successful in meeting its production start date of 2015. In 2011, the cost of this mining project was an estimated $9M. Simandou Guinea has revealed that since then the cost has more than doubled.
The Guinea Storm
The issue with Simandou is its actual location. It is located in the south-eastern tip of Guinea. The fastest route to the coast would ideally be a straight line towards the west, but then that runs right through Liberia as well as Sierra Leone. If a railway were to be built (as it will have to be), the Guinea government wants it to operate only across its own soil, by opening up the interiors of the country. That would mean a lengthy 700 km route that would first head north and then head west till it reaches Kabak port.
The railway route
The big question mark is about who exactly is going to construct this railway and where is the money going to come from? It would easily be possible for a company the size of Rio Tinto, to pay for the entire rail project from its own reserves. Remember that the Simandou iron ore mine is being developed by this mining giant. The company may be willing to do that, but in return it would also want to keep a large chunk of the profits. The Guinean government wants to construct the railway, but does not have either the expertise or the money for it. This is a Catch22 situation that many developing countries experience.
There is no refuting the fact that the infrastructure of railways, roads, water supply and power lines play very crucial roles in the progress of any mining operation. This, in turn is critical to the prosperity of the nation’s economy. At the moment, all that Vale SA (NYSE:VALE) can do is wait and watch while the drama unfolds.