China is the obvious solution to unlock the potential of the huge iron deposits in West Africa, according to Investec.
Although Indian steelmakers should not be left out of the equation as Jindal Steel and Power moved to shore up future supplies yesterday. There are also other deals understood to be in the offing from Indian companies.
The broker said it had identified six infrastructure hubs with the potential to produce up to 730 million tonnes per annum (mtpa), but which currently is largely unrealised.
The broker’s analysts suggest China is uniquely positioned and incentivised to develop these iron ore projects to reduce its dependence on Australian/Brazilian imports and to push the marginal cost, and price, of iron ore lower.
West Africa has more potential than Australia, adds Investec, and the economics work: “On paper, the solution is obvious. China should develop iron ore hubs in West Africa as an alternative to Australia and Brazil.”
Again, West Africa has yet to meet expectations it could be the region's equiValent of Australia's Pilbara.
Investec estimates China produces 60% of its steel using imported iron ore, which is sourced 50%/20% from Australia/Brazil.
Select projects within West Africa offer attractive returns to financial investors in the view of Investec, especially if built to a scale sufficient to minimise capital intensity and unit cash costs.
Since early 2008, only 30mtpa of capacity has been brought into production in West Africa from just a handful of projects, such as African Minerals’ 20mtpa Tonkolili project (Sierra Leone), London Mining’s 3.6mtpa Marampa project (Sierra Leone) and Wuhan Iron and Steel’s Bong mine in Liberia.
The six hubs Investec has identified are, firstly, Simandou (Guinea)/Nimba (Liberia): Simandou is probably the best quality undeveloped iron ore deposit globally and has the potential to produce towards 200mtpa, based on Rio Tinto and Vale’s development plans.
Second is the Western Cluster/Bong in Liberia: “In western Liberia there is a cluster of iron ore deposits that benefit from their proximity to the coast as well as legacy infrastructure.”
Third is Tonkolili/Marampa (Sierra Leone): “China has already successfully supported the development of African Minerals’ Tonkolili project in Sierra Leone, committing up to US$2.8bn in total.”
Number four is Cameroon/Gabon/Republic of Congo: “Although complicated by international boundaries, in the area of the Gabon, Cameroon and Republic of Congo (RoC) borders there is a group of significant iron ore deposits that would benefit from a route to the seaborne market through either Cameroon and/or Gabon.”
Yesterday Legend Mining (ASX: LEG) announced it would sell its Ngovayang iron ore project in Cameroon to India's Jindal Steel and Power for A$17.5 million in cash.
Jindal Steel and Power (BOM:532286) is one of India's major steel producers with a significant presence in sectors like mining, power generation and infrastructure.
For Cameroon, the capital expenditure required to construct the necessary port and rail infrastructure is significant. Australian firm Sundance Resources estimates that developing the port and rail infrastructure in Cameroon would cost around US$4bn.
A rail corridor through Cameroon would most benefit Sundance (Mbarga/Mbalam, Nabeba), Core Mining (Avima) and Afferro/IMIC (LON:AFF, LON:IMIC) at Nkout and Ntem.
The fifth hub identified by Investec is the SNIM/Sphere Minerals (Mauritania) asset where it sees considerable potential to expand iron ore production. State-owned Société Nationale Industrielle de Minière (SNIM) already produces 12mtpa of iron ore from three mines around Zouérate.
Australia's Charter Pacifica Corporation (ASX:CHF) has an iron ore Exploration Target of up to 4.4 billion tonnes at its Kaoua El Khadra iron ore project in Mauritania.
Finally, there is Mayoko/Zanaga (Republic of Congo): there are a number of projects in the Republic of Congo (RoC) that could produce more than 50mtpa and that Investec believes would benefit from joint development.
Exxaro is currently constructing the Mayoko project in RoC with first production forecast for 2H14, though rail capacity is currently limited.
The broker sees little logic in Equatorial Resources independently developing the nearby Mayoko-Moussondji project and there are obvious synergies and arguments for Exxaro and Equatorial Resources to combine their Mayoko assets.
While not particularly near the Mayoko cluster, Glencore Xstrata/Zanaga Iron Ore’s (LON:ZIOC) Zanaga project is targeting initial production of 12mtpa, including 1-2mtpa of direct shipping ore (DSO), expanding to 30mtpa, and would use at least some of the same rail infrastructure as Mayoko.