Rio Tinto Ltd (ASX: RIO) shares may be widely known for giving investors exposure to Australian iron ore. But, the company may soon generate significant iron ore earnings from Africa.
According to The Australian, Shaw and Partners senior investment adviser Jed Richards noted that while Rio Tinto has historically focused on iron ore, the new African iron ore project Simandou should increase the company's supply later this year.
The Simandou mountain range covers more than 100km and is located in the southeast of the Republic of Guinea.
What is planned for the African mine?
Rio Tinto says the subsoils of Simandou contain a world-class ore reserve of high-grade iron ore, estimated at around 1.5 billion tonnes.
Simandou's mining concession is divided into four blocks. Rio Tinto holds the rights to blocks three and four through Rio Tinto Simfer, a joint venture between Rio Tinto and partners, including the Republic of Guinea.
The Aussie miner is also working with the entities involved with blocks one and two to co-develop the infrastructure needed to export the mined iron ore, including 600km of rail and port infrastructure.
First production from the Simfer mine is expected in 2025, ramping up over 30 months to an annualised capacity of 60 million tonnes per year (with Rio Tinto's share being 27 million tonnes).
According to Rio Tinto, the mine will initially deliver a single fines product before transitioning to a dual fines product of blast furnace and direct reduction ready ore.
Rio Tinto's share of the initial capital expenditure is estimated at more than US$6 billion.
Expert views on Rio Tinto shares and Simandou
Shaw and Partners senior investment adviser Richards believes the new iron ore supply is "expected to contribute to the softening of the global iron ore price."
Richards is also cautious about the fact that the project is located in Africa, which is seen as a less stable mining jurisdiction than Australia. The expert said:
I have often witnessed companies that operate in Africa come across trouble. Operational and geopolitical risks seems to be more problematic in Africa.
Richards said the Rio Tinto share price has "held up relatively well" and that he prefers to gain mining exposure from "more diversified miners".
I'd suggest that Rio Tinto's exposure to other commodities that have performed better than iron ore, such as copper, aluminium, and bauxite, may be why its shares have not fallen as much as those of other iron ore miners such as Fortescue Ltd (ASX: FMG).
Richards (and Shaw and Partners) rate Rio Tinto as a sell. Time will tell whether that investment call proves correct.
