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Why Rio Tinto Is Shelving The Simandou Project

Rio Tinto has decided to put its Simandou iron ore project in Guinea on hold, less than two months after submitting a bankable feasibility study to the Guinean government, which is indicative of the company's strategic direction under recently appointed CEO Jean-Sebastien Jacques. Under the new CEO, the company views the $20 billion cost of developing the mine as unjustified, given the prevailing weakness in iron ore pricing and the uncertain pricing outlook for the commodity in the long term.

Iron ore prices have fallen sharply over the past few years as a result of an oversupply situation stemming from a ramp up in iron ore production by iron ore mining giants despite floundering demand conditions. Since iron ore is used as an input in steelmaking, the demand for the commodity is dependent on the demand for steel and consequently, on economic growth. Slowing economic growth and demand for steel in China, the world's largest iron ore consumer - which accounts for the purchase of nearly 70% of the global seaborne iron ore supply, has weakened the demand for iron ore. Chinese demand for steel, which fell over 5% in 2015, is expected to decline in 2016 and 2017 as well. With the Chinese economy transitioning to a consumption-driven economy from an investment-driven economy, the robustness of demand for iron ore from the country in the long term remains under a cloud.

Given the uncertainty over the long-term strength of iron ore prices, Rio Tinto's new management has decided to shelve the Simandou iron ore project. Had Rio Tinto opted to develop the Simandou mine, assuming that the mine commenced production by 2022 - the end of our forecast period, it would have boosted the company's iron ore shipments by 6%, as illustrated below. Though Rio Tinto is foregoing the development of a project that can significantly increase its iron ore output, given the uncertainty in iron ore prices, waiting for greater visibility as far as pricing is concerned before committing to a $20 billion project is a smart move by the management.

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Notes:

1) The purpose of these analyses is to help readers focus on a few important things. We hope such lean communication sparks thinking, and encourages readers to comment and ask questions on the comment section, or email content@trefis.com

2) Figures mentioned are approximate values to help our readers remember the key concepts more intuitively. For precise figures, please refer to our complete analysis for Rio Tinto

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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