Renewed Interest in West Africa Iron Ore

Australian miners are showing renewed interest in developing rich iron ore deposits in West Africa, but political risks and infrastructure challenges will constrain progress.

Six of the world’s largest mining and steel companies, including Rio Tinto and BHP Billiton, have plans to develop substantial mines in various West African countries, a couple of which contain some of the world’s richest untapped deposits of iron ore. The region has long been on the radar of mining investors but project development has been hindered by political risk and financing constraints.

According to a tally by Macquarie Bank, miners are currently working on around 20 iron ore projects in seven West African countries – Gabon, Guinea, Ivory Coast, Liberia, Mauritania, Senegal and Sierra Leone – with a potential total annual production of approximately 400 million tonnes, roughly equal to the combined current output of both major Pilbara producers. The estimated capital costs to develop these projects are similarly large: Phase I development of Rio’s Simandou iron ore concession in Guinea will cost US$6 billion; a BHP Billiton project in Liberia US$3billion; and three projects involving multinational steel concern Arcelor Mittal US$4 billion-plus.

At the smaller end of the spectrum, Perth-based company, Sphere Minerals, is currently well advanced in developing its Guelb el Aouj project in partnership with Société  Nationale Industrielle et Minière (SNIM), Mauritania’s state-owned iron ore producer. The project has a capital cost of at least US$1.65 billion and the mine could be producingin 2012. And in Cameroon Perth-based Sundance Resources is building its Mbalam mine at a cost of more than US$3 billion.

The appeal of West African iron ore is its high quality – high iron content and low impurities–particularly in Guinea, which should enable it to earn a premium on the international market. Macquarie reckons that the lowest-cost West African projects come in at around the 65th percentile of the iron ore cost curve on a delivered- China basis–attractive considering that ore fromVale’s Carajas system in Brazil and from the Pilbara (Rio and BHP) dominates below that.

Still, despite the region’s potential, development has been hindered by political risks, notably long-standing civil wars, unstable regimes and inhospitable investment climates. Even now that many of these conflicts have been resolved, most West African states remain risky investment destinations. Take Guinea, site of the richest untapped iron ore deposits: the two frontrunners in an upcoming presidential election have both said they will review mining contracts established by the current military junta. Rio is also at loggerheads with the junta for taking away half of its Simandou concession. Two other iron ore-rich countries, Liberia and Sierra Leone, are making fitful recoveries from devastating civil wars and are struggling to deliver even rudimentary services to their citizens let alone create the right policy mix for technically complex mining operations.

Project development has also been constrained by the need to build transport infrastructure from the ground up. Rio’s Simandou concession, for example, requires the construction of a 650 km rail line and associated port. A lack of deep water ports is a broader problem. For example, Port Buchanan in Liberia can only accommodate Panamax ore ships rather than larger over Panamax ships. This infrastructure deficit adds to both the capital cost of mine development and transport costs.

Because of political risk and infrastructure deficits, only some of the 20-plus projects on the drawing boards will progress to full production. Likely candidates to make the grade are those that can harness ‘cluster’ benefits, notably the sharing of infrastructure.

Companies may well need to bring in a cashed-up partner to provide start-up capital or infrastructure expertise. Two recent tie-ups with Chinese companies suggest potential for this kind of cooperation exists: China’s state-owned aluminium company Chinalco will pay Rio US$1.35 billion in return for 47% of its Simandou concession in Guinea; and AIM-listed explorer African Minerals has signed agreements with China Railways Materials Commercial Corp and Shandong Iron and Steel, to develop the Tonkolili iron ore deposit in Sierra Leone.