War stories... lol. that's a good way of putting it.
So the most common thing we are reading in arguing that iron ore price will come down is that new supply will eventually come online - theoretically that makes sense. So the question becomes "who" and "when". And as you have mentioned, the most obvious candidate is Africa, unfortunately developing a new mega project in Africa has challenges far greater than a healthy iron ore price:
1. Sovereign risk
The original battle between Rio, Vale and BSGR highlights just how real sovereign risk can be in frontier markets like Africa where assets could be confiscated even when you are one of the largest mining companies in the world
There is a typical 15-25% free carry interest for government of whichever nation the asset is in, in exchange for granting your the license and sometimes they throw in some sweetener and give you a tax free window. But that free carry interest is actually a huge cost u need to price into your model when evaluating the project
No one has more experience working and operating in frontier markets than the likes of Rio and BHP and they have both had major setbacks which was why Rio got Chalco in thinking that China's involvement in the project may help the development of the project - and 5 years later, the project got from bad to worse. So i dont know how much being "Chinese" really helps developing a project like that in Africa. Furthermore Chalco doesnt really have any iron ore experience which I am guessing is why they later on brought in Baosteel.
My guess is Rio has finally given up last year even though prices were recovering already and the only person who they could sell it to was China, and to get it done, they had to do it at a bad price hence the huge write-down. For the Chinese side, i mean if they get it for the cheap especially with all the money Rio has already sunk in there, even as a strategic land bank, why not. Chinese are great at playing the long game.
2. Lack of established infrastructure
Even in the rare event that it gets developed, the sheer scale of the project, the huge capex it needs, its location and lack of everything, it will be many many years before we will see any iron ore out of there... that's my guess.
To develop Africa into a meaningful sized iron ore producing region, it will take 10's of billions of dollars, I just cant think of anyone (including Chinese SOE's) have the incentives to do that right now, they won't repeat the mistake they made in 2007/2008 and just blindly investing into any new project they can see. On top of the strict capital control and on-going anti-corruption campaign, I don't know if China will rush into spending billlions to build up Simandou.
Also, once you input the free carry interest and the billions of dollars of upfront capex into your model, you will quickly see $70/t iron ore price get eaten up.
Sundance
I was a huge fan of the project, fundamentally it is a really cost competitive project. But it is a bowl of mess and really not of their own-doing either - On top of the challenges i mentioned above, they also face a lot of pushbacks within China because of the Hanlong scandal in China
So coming back to my last post's point, countries like Africa and Mongolia, despite their amazing mineral deposit, are unlikely to be developed at any meaningful way, not for many many years.
Anyways, my two cents on African iron ore projects.
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