Rio expects Simandou investment framework by early 2014

Rio Tinto’s (ASX: RIO) giant Simandou iron ore project in the North West African country of Guinea, is nearing a key milestone for the mining behemoth and shareholders. In an interview with the Wall Street Journal Alan Davies, Rio’s head of diamonds and minerals, said an investment framework is nearly complete.

The $19.9 billion project, which will produce between 90 and 100 million tonnes of high grade iron ore per year, has three owners. Rio owns 50%, Chinalco owns 45% and World Bank’s International Commission owns the remaining 5%.

As part of an agreement that Guinea made with Rio in exchange for the $700 million they paid to keep the project, the government has the right to take up to 15% ownership of the project for free and could potentially control the construction of its infrastructure. However the government, like Rio, will not take part in the construction of its 650km of rail and port facilities.

The investment framework which is to be ratified by the government in coming months, is needed before the huge construction project can get underway. Although management (and shareholders) would have liked some peace of mind this year, the recently elected government will need to tend to other matters first.

“We understand that they will be considering the budget first and then one of the top orders of business will be the investment framework,” Mr Davies said to WSJ. “I’d expect by the end of the first quarter of next year, and certainly when we speak to President Alpha Conde… he [said that he] will make sure that it will go as quickly as possible.”

The project has already cost $3 billion but shareholders will have to wait until at least 2018 for production to commence. At full production, Simandou will only produce less than one third the group’s current target production of 290 million tonnes of iron ore per year.

Foolish Takeaway

Like BHP Billiton (ASX: BHP) Rio has a number of projects in developing nations around the globe, including its huge copper and gold project in Mongolia named Oyu Tolgoi. These pose exciting opportunities for shareholders but they also come with a heightened degree of risk however both mining heavyweights have good track records in dealing with these types of projects throughout the world.

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

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