In an effort to boost production from the Pilbara region, Rio Tinto Ltd. announced on September 14, 2022, that it would collaborate with its largest client China Baowu Steel Group, to construct an iron ore project in Western Australia for $2 billion.
The agreement comes amidst tense relations between Australia and China, the biggest exporter and consumers of iron ore in the world, respectively. Beijing’s recent initiative to centralize iron ore purchasing has sparked concerns that mining behemoths like Rio, BHP Group, and Fortescue Metals may suffer.
According to a study by accounting firm KPMG and the University of Sydney, China’s outbound direct investment in Australia has steadily decreased since 2016, with a meager $585 million investment in 2021 compared to $11.54 billion in 2016.
Rio, on the other hand, said that it had formed a strategic alliance with the new Chinese state-owned organization intended to centralize iron ore acquisitions.
China Baowu will retain the residual stake
According to Rio, it will invest $1.3 billion to construct the Western Range project in the Pilbara region and hold a 54% stake in the same. State-owned China Baowu will retain the residual stake and invest $700 million.
Rio Tinto stated that Western Range’s annual production capability of 25 million tonnes of iron ore “will assist continued production of the Pilbara Blend from Rio Tinto’s current Paraburdoo mining hub.”
The 25 million tonnes of iron ore that Western Range can produce annually will assist Rio Tinto’s current Paraburdoo mining center in maintaining Pilbara Blend output. A primary crusher will be built as part of the project, and a conveyor system stretching 18 kilometres will connect it to the current Paraburdoo processing plant.
According to the miner’s website, Pilbara Blend products account for around 70% of Rio Tinto’s portfolio of iron ore products and are renowned for their high-grade quality and stability.
As stated on China Baowu ‘s official WeChat account, the agreement with Rio will “strengthen the relationship of mutual benefit and win-win results”.
The Australian and Chinese governments, as well as Rio shareholders, must approve the sale. A fax seeking comment on the sale was not immediately answered by China’s State Administration for Market Regulation which regulates acquisitions.
Given that Beijing has historically pushed its enterprises to increase their investment in foreign resources, a Chinese source familiar with the agreement said that it was not anticipated to encounter regulatory obstacles.
Additionally, China Baowu and Rio entered into a sales agreement under which China Baowu will purchase up to 126.5 million tonnes of iron ore over the course of around 13 years from the Pilbara Western Range project.
“In the Pilbara’s eastern range, Rio and Baowu already have a joint venture agreement. The agreement made today basically extends that in the Western Range of Pilbara, “said John Mills, a Sydney-based equity analyst for Morningstar who specializes in mining.
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According to Rio Tinto, construction at the project is scheduled to start in early 2023, with the start of production following in 2025.
The mine will require about 800 ongoing operating positions which are anticipated to be filled by current employees moving from other sites in the Paraburdoo mining center. The building phase will sustain roughly 1,600 jobs.
The Group has already budgeted $9 to $10 billion for capital expenditures in 2023 and 2024 which includes Rio Tinto’s portion of the costs. Both parties will pay their respective shares of the capital expenditures for the mine’s development and operation expenses, as well as a small ongoing resource contribution fee based on Western Range production levels. No one is paying any upfront money in this transaction.
Along with the joint venture, Rio Tinto and Baowu have also agreed to enter into an iron ore sales contract at market rates for up to 126.5 million tonnes of iron ore over a period of about 13 years. This amount represents Baowu’s 46% share of the 275 million tonnes of production that the Joint Venture anticipates from the Western Range.
In the Pilbara, Rio Tinto has a strong history of collaborating and investing with clients to create new mines. The Pilbara joint venture between Rio Tinto and Baowu was established in 2002 and was intended to develop the Eastern Range deposits in the Hamersley Ranges (Eastern Range) and Western Range, subject to a 200 million tonnes production cap.
With the development of the Western Range, this transaction will maintain Rio Tinto’s partnership with Baowu. It is currently anticipated that the output cap will come solely from Eastern Range.
“This is a very major milestone for both Rio Tinto and Baowu, our largest customer internationally,” said Simon Trott, chief executive of Rio Tinto Iron Ore. “We have a long-standing, productive working relationship with Baowu and have shipped more than 200 million tonnes of iron ore through our initial joint venture. We are excited to continue this cooperation at Western Range.”
Both parties will contribute to the capital costs and mine operating expenses as well as a small continuing resource contribution fee based on Western Range production levels. There is no payment made in advance.
The Pilbara Blend, the industry standard, will continue to be produced thanks in part to the development of the Western Range, which marks the beginning of the next big phase of investment in the iron ore business.
Meanwhile, Rio Tinto and China Baowu are still collaborating on research into low-carbon steelmaking, looking at innovative ways to lower carbon emissions and enhance environmental performance throughout the steel value chain.
“The signing of the joint venture agreement for the Western Range Project is a landmark occasion in the history of collaboration between China Baowu and Rio Tinto,” said Shi Bing, chairman of Baowu Resources. We are grateful for both teams’ tenacious efforts in achieving this significant goal. For more than 20 years, the Bao-HI joint venture has been running smoothly, bringing about a win-win outcome and yielding friendship and trust.
“We hope that the two parties will further their mutually advantageous and win-win relationship, uphold the spirit of true cooperation, and extend their cooperation in more areas and facets on the basis of cooperating to complete the project successfully.”