This mine could change everything

Some things aren’t worth the wait. Think The Phantom Menace, Segway, or Windows Vista.

Others are worth the wait. Think The White Lotus, a bottle of Grange, or the Panama Canal.

As for the ~biggest mining project in history, Guinea’s new Simandou complex? Let’s see.

The $23B project actually opened yesterday (Tuesday), featuring a 600km (370mi) rail line, a deep-water port, and VIP ribbon-cutting guests like China’s Vice Premier Liu Guozhong, and Rwanda’s long-time leader Paul Kagame.

And it’s been a long time coming. British-Australian mining giant Rio Tinto started exploring Guinea’s Simandou range way back in 1997, and pretty soon realised its luck — this was an untapped, ~3 billion tonne deposit of high-grade iron ore.

But champagne pops were soon drowned out by 30 years of legal wrangling, coups, and corruption, gradually whittling Rio’s stake down to 25%.

As for the other 75%?

Enter China. 

Around the early 2010s, China got rattled by high iron ore prices, while Rio and others got rattled by Simandou’s massive infrastructure bill, particularly after the 2008 financial crisis.

So various state-backed firms out of China stepped in with the cash and pledged to build the mine’s epic rail and port infrastructure under China’s flagship Belt & Road Initiative.

As a result, China now has effective control of two of Simandou’s four blocks, and enjoys a kind of joint control with Rio over the remaining two.

And here’s why that matters to the world, starting locally in…

1. 🇬🇳 Guinea

One of Guinea’s officials just put it like this: “Simandou must be for us what oil was for the Gulf countries”. Production will ramp up over the next few years, but locals hope to eventually provide ~5% of the world’s iron ore, quadrupling their economy by 2040.

Of course, that’ll depend on variables like political stability, stewardship, and corruption, not to mention the ore price paid by the buyer for nearly 100% of Guinea’s output…

2. 🇨🇳 China

China already buys 75% of the world’s seaborne iron ore, hoovering it all up to fuel the nation’s historic infrastructure and manufacturing machine.

In practice that’s really meant relying on Australia, a deal that’s mostly worked well despite the occasional hard-ball tactics, like jailing Rio executives or halting BHP shipments.

And yet smooth or not, China’s strategists have become increasingly wary of ceding so much leverage to a US ally. So China’s Simandou play is really all about diversifying in both the commercial and strategic sense. And that means less leverage for…

3. 🇦🇺 Australia

They’re single-handedly pumping out 40% of the world’s iron ore supply Down Under, with the reddish dust long the country’s single-largest export (excluding the Hemsworths).

But Simandou now coming online will reshape iron ore’s cost curve, putting downward pressure on prices and potentially shuttering lower-quality / higher-cost producers. And that’s all against the backdrop of China’s cooling economy curbing its ore thirst, while slowly shifting towards lower-emission green steel (which prefers Guinea’s higher grades).

In concrete terms? Every US$10p/tonne drop in ore prices shaves up to 0.5% off Australia’s GDP growth, and another half a billion off tax receipts. So with markets bracing for a $10-$20 price drop over the coming years, Canberra’s job might get a little tougher.

Intrigue’s Take

Some lessons from this Simandou saga?

First, diversification is key, not just for China as the price-sensitive buyer or Australia as the revenue-dependent seller, but also Guinea as the ultimate decision-maker: mindful of China’s dominance, the local junta has actively courted the US for locomotives, France for railway signalling, and Germany for crushers in hopes they’ll all have a stake in making Simandou succeed. But whether a few trains or crushers will suffice is another question.

Second, we’ve long charted how China’s willingness to deploy rivers of cash on non-commercial terms comes with all kinds of risks, from creeping debt to an epic property bubble. But Simandou is shaping up as an example of how that approach can also pay off, now delivering a controlling stake in an ore deposit that’s set to reshape our world.

So… worth the wait? For China, quite possibly.

Sound even smarter:

• Guinea aims to supply 120 million tonnes of ore per year once fully operational. By way of comparison, Australia now supplies roughly eight times that volume.