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China to dump Rio Tinto’s huge iron ore project

Chinese owned Chinalco is set to receive a stake in Rio Tinto’s (ASX: RIO) huge Guinean project, called Simandou, from a listed Hong-Kong subsidiary.

According to The Australian China is distancing itself by transferring its ownership of the project from Chalco, listed on the Hong Kong Stock Exchange, to its unlisted parent company Chinalco because it’s receiving “scrutiny from stockmarket investors.” Chinalco is the biggest holder of Rio Tinto shares.

Although the assets have been held for some time, Simandou is in its early stages. Rio, Chalco and the World Bank have spent in excess of $3 billion on the project but no agreements have been reached on an investment strategy. In addition the Guinean government has the right to take a 15% stake in the project at no expense but could demand 35% if it chooses.

The government and the owners, of which Rio is the biggest at 51%, have made a draft agreement and targeted 2018 as the first production date. However Chalco, which owns 45%, and the government would like it to happen earlier.

An earlier production date looks unlikely. Rio has been focusing on delivering huge levels of output from its Pilbara operations. Simandou is expected to produce between 95 and 100 million tonnes of iron ore; Pilbara currently produces 237 million tonnes.

Chalco is believed to be loosening up its balance sheets to facilitate greater cash flow for other projects but said it will sell its stake in Simandou for a “fair and reasonable” price – said to be approximately $US 1.84 billion.

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Motley Fool contributor Owen Raskiewicz does not have a financial interest in any of the mentioned companies.

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