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African Minerals in $1.5bn China pact

July 14, 2010

“The scramble for west Africa’s iron supplies gained pace on Tuesday when a Chinese steel mill agreed to pay $1.5bn for a minority interest in a single non-producing iron ore project in Sierra Leone. …

Shandong Iron and Steel Group, one of China’s largest state-owned mills, has agreed to pay African Minerals $800m followed by two other cash payments totalling $1.5bn. The proceeds will help build African Minerals’ flagship mine at Tonkolili, a rich iron ore deposit in Sierra Leone, as well as the rail and port infrastructure required to make Tonkolili viable.”

Source: Financial Times, July 13, 2010

Observations:

  • Shandong’s money will mainly be used to build the infrastructure (railway and port) required to ship the ore to China.
  • Shandong will gain access to 10mln tonnes of iron ore per year at a price 15% below spot benchmark price.
  • Final agreement on the deal should be sealed in September.

Implications:

  • Total investments in iron ore projects in Sierra Leone, Guinea and Liberia this year are over $6bln already. Shared infrastructure for the various projects might create large synergies (like Rio Tinto and BHP Billiton are trying to achieve in Western Australia). Obviously, national governments are trying to force the companies to invest in the infrastructure of the deposit’s country.
  • Other Chinese companies might be interested in buying shares of the Tonkolili project. It will be up to mr. Timis to decide if he wants to run the project or wants to move on to new ventures.

©2010 – thebusinessofmining.com

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