Rio Tinto Guinea Deal Ends One of Mining's Greatest Sagas

A deal to develop Africa's largest mine has finally been struck after years of confusion and scandal.

The Simandou iron ore mine in Guinea is expected to cost $20bn (£12bn, €14.7bn). Mining giant Rio Tinto has entered into a framework agreement with its two joint venture partners, the International Finance Corporation (an arm of the World Bank) and Chinalco, the Chinese state-owned metals company.

The state of Guinea will retain 15% of any proceeds from the mine. In exchange, the joint venture will enjoy eight years' tax free operations in the country.

It's hoped that the project will create tens of thousands of jobs in both the mine itself and in the transport infrastructure that will have to be built in order to bring it online. 650km in railway lines will be required in order to transport iron ore to a new port to be built to export the mineral.

It represents some level of closure in what has been one of the longest and most baffling sagas in mining history.

In 1997, Rio Tinto, an Anglo-Australian company, acquired the rights to mine all four blocks of Simandou.

In 2008, two blocks were confiscated from Rio Tinto by Guinea's then-dictator Lansana Conté, a former general in the military who died in December 2008, 24 years after leading a coup.

The blocks were awarded to Beny Stenmetz Group Resources (BSGR), a company owned by the eponymous Israeli billionaire, on a three-year exploration license.

Two years later, Brazilian mining giant Valé paid $2.5bn to partner with BSGR on Simandou, before putting the project on hold in 2012 because of "falling iron ore prices".

However an FBI investigation which concluded in 2013 concluded that BSGR had been awarded the contracts under unlawful circumstances, finding "precise and consistent evidence establishing with sufficient certainty the existence of corrupt practices".

The company had entered into an agreement with Mamadie Touré, one of the four wives of Conté, whereby she would get millions of dollars and shares in the mine in return for helping it acquire the licenses.

BSGR were stripped of the mining rights, and BSGR was subsequently sued by Rio Tinto.

Jon Hyman, a Sub-Saharan Africa economist at Economist Intelligence Unit tells IBTimes UK that he's hopeful that a line has been drawn under the saga.

"I think the agreement is very encouraging for all involved. The government is showing good faith in Rio and Rio is showing confidence in the government and the country's potential," he said.

"The deal, coming soon after the government approved the stripping of the Simandou north licence from BSGR and Vale, may encourage other companies, hitherto wary of entering the country given concerns about the political and business environment."

Rio Tinto now hopes to be producing iron ore within five years. Given the involvement of Chinalco, it's reasonable to expect China to be the main off taker, although a fall away in Chinese demand has led to a deflation in iron ore and steel prices in recent months.

Over the past year particularly, China has attempted to start shifting its economy from an investment-based growth model to a consumption-based model. The large projects which have defined its exponential rise over the past two decades have become less frequent over the past 12 months, meaning China's demand for iron ore and finished steel has dropped off.

However, this year has seen some of the largest investment in iron ore in history, with investors clearly hopeful that the boom times will return.

Australia's Roy Hill mine in Pilbara, owned by the country's richest person Gina Rinehart, closed its financing in March, with commercial banks lending more than $7bn to the mine despite flat market conditions.

"There is a real concern that the market, already well supplied, will be flooded by Simandou, weighing on prices already under pressure from weaker Chinese demand," Hyman says.