Chalco to pour cash into Guinea mine

Aluminum Corp of China (Chalco), the nation's biggest producer of the metal, signed in Beijing a binding agreement Thursday with Rio Tinto Group to establish a joint venture and operate an iron ore mine at Simandou in southeast Guinea.

Thursday's agreement follows an MOU between Chalco's parent Chinalco and Rio in March. The Guinean government has recently expressed a willingness to exercise an option to buy up to 20 percent of the project, said Rio in a statement. Chinalco holds 9 percent stake in Rio.

Analysts say the first non-aluminum overseas foray will be Chalco's new profit generator outside the volatile and oversupplied aluminum market, and the possible Guinea government involvement in the project also adds to the chances of success.

Simandou, described as the world's top undeveloped iron ore deposit by Rio, has 2.25 billion metric tons of iron ore resources. Rio said it had already spent over $650 million on exploration and evaluation work necessary to develop the mine, expecting the mine to produce over 70 million metric tons of high- grade iron ore per year.

Under the agreement, Chalco will acquire a 47 percent interest in the joint venture by providing $1.35 billion over the next two to three years.

The Simandou venture is expected to begin production within five years.

Heng Kun, chief equities analyst with Essence Security, said it is essential for the company to diversify its asset base since the profitability of Chalco's main businesses is declining.

Aluminum prices have dropped below output costs, Chalco President Luo Jianchuan said in June. Aluminum futures in Shanghai have declined 12 percent this year.

Chalco posted a loss of 4.6 billion yuan ($678.67 million) in 2009.

"To raise funds, Chalco needs to convince investors of potential profit growth. The Simandou project will contribute to profit if it succeeds and win investors' confidence," said Liang Jianwen, analyst at Guotai Junan Securities.

And it looks like Chalco's first foray abroad outside of the aluminum sector could be a big success due to the local government's backing.

Rio has been working on this for a while without government backing. But because the reputation of Chinese companies in Africa is better than that of Western firms, Chalco's participation could help solidify the deal, Heng from Essence said.

Chalco is also in talks with Rio to buy a stake in the $4.6 billion in Mongolia's Oyu Tolgoi mine, a copper tie-up between Rio and Ivanhoe Mines.

Source: Global Times