Mining Infrastructure in the Republic of Guinea: Expansion Opportunities, Greenfield Challenges

InfraShare Partners 24 February 2016

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©2016 InfraShare Partners Limited

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Guinea’s Bulk Mineral Potential

• Bauxite: – 26% of world’s reserves, but only

7% of production

– Main bauxite deposits located in the northwest of the country, inland from Kamsar ( )

• Iron ore: – Extensive high-grade deposits,

including Simandou (North and South)

– Main occurrences in the southeast

• Rail/port infrastructure: – Bulk mining is an “infrastructure

game”

– Undeveloped bauxite deposits are potentially served by existing rail and port infrastructure and/or corridors

– New Trans-Guinean Railway proposed for Simandou South could potentially open up iron ore region

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Existing and Proposed Rail/Port Infrastructure

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A. Sangaredi-Boké-Kamsar: – ~140 km rail line Sangaredi to Kamsar

port ( ) – supports existing bauxite exports (CBG) – expansion of rail planned – expansion of port also planned

B. Kinda-Conakry: – ~105 km rail line from Kindia to Conakry

port ( ) – Supports existing bauxite exports

(CBK/RUSAL) + some cargo/passenger – Inefficiencies limit capacity of line – Rail corridor continues from Kindia to

Kankan (not currently operational)

C. Fria-Conakry: – ~140 km narrow gauge rail line from

Fria to Conakry port ( ) – Historically supported alumina exports +

cargo (Friguia/RUSAL) – Condition of line has degrading after

Friguia refinery closure

D. Trans-Guinean Railway: – Proposed ~650 km rail line from

Simandou South project to Morebaya river in Forécariah ( ) (cost: >$15B)

– Feasibility/financing/timing uncertain

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• Existing rail and port assets are owned by the State (ANAIM)

• Financed and constructed with State borrowings in early 1970s

• Loans repaid by GoG in early 1990s

• CBG has operated a bauxite export operation since 1970s

• CBG has always operated the rail and port infrastructure under concession

• CBG has been the only substantial mining operation in the region

• Historically, CBG was subject to a very weak “access undertaking” – CBG operates a limited passenger service

• CBG’s rail/portconcession was recently extended

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Sangaredi-Boké-Kamsar Infrastructure

CBG operations (Rio Tinto/Alcoa/Dadco and GoG)

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• GAC project ( ): – First to successfully negotiate access with CBG (6+ years)

– Project is now controlled by EGA

– Phase 1 comprises a bauxite export operation

• CBG mine ( ): – Controlled by Halco consortium (Rio Tinto, Alcoa, Dadco)

– Now proposes an expansion to increase production from ~13 mpta to ~24mpta

• Dian Dian project ( ): – Owned by RUSAL

– Has also sought access to rail infrastructure

• “Multi-user" agreements have now been signed between CBG, GAC, RUSAL and GoG

• However, the ability of future projects to access existing infrastructure remains unclear

• GoG is contemplating the sale of Santou-Houda-Boffa mineral rights ( )

• Many other bauxite projects await development

• By effectively leveraging its existing Boké infrastructure, Guinea can assume its rightful place as one of the world’s leading bauxite producers

Leveraging Boke Rail and Port Infrastructure

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CBG operations (Rio Tinto/Alcoa/Dadco and GoG)

GAC project (Mubadala/DUBAL)

Dian-Dian project (Rusal)

Santou-Houda-Boffa licenses (ex-BHP Billiton)

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CBG’s Current View?

• CBG has published an ESIA in connection with its proposed expansion project

• ESIA considers the “cumulative effects” of the CBG project and other existing/future projects

• CBG’s ESIA: – Assumes separate and parallel Dian Dian

(RUSAL) rail and port

– Assumes no use of its rail corridor by future sponsors of Boffa-Santou-Houda

– Considers no other potential projects

• Doubts about access for future Boké bauxite projects persist

• This could discourage much-needed investment

• GoG will need to clarify the situation going forward

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Kindia-Conakry Infrastructure

• Kindia-Conakry: – Infrastructure owned by the State through ANAIM

– Long-term concession rights over the railway were granted many years ago to CBK (RUSAL) ( )

– No access obligation was imposed on CBK

– CBK has a dedicated terminal at Conakry port

– CBK output is declining (5-6 years remaining)

• Kankan-Kinda: – Corridor has been established, but no operational rail

line is in place

– Potential value of this corridor is significant

– Marginal cost of constructing a rail line relatively low

– GoG has plans for “Central Guinea Growth Corridor”

• Opportunities/challenges: – Many other bauxite projects could use this

infrastructure

– Size and quality of deposits is somewhat lower than in Boké – to the prospect of constructing new infrastructure is very low

– RUSAL has resisted sharing the infrastructure

CBK operations (RUSAL)

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• Cost of Simandou infrastructure: >$15 billion

• GoG has required an “internal” infrastructure solution for Simandou – Rail and port to be backbone of planned

“South Guinea Growth Corridor”

• Global iron ore market currently over-supplied – Timing of “next generation” W. African iron

ore is now unclear

– Rio Tinto, BHP Billiton elected to leverage existing infrastructure in Pilbara

• Financing of Trans-Guinean railway impossible without Simandou South or North (or both) as “anchor clients”

• Infrastructure must be genuinely “open access” if Guinea is to emerge as the next Pilbara

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Infrastructure Key to Unlocking Simandou Iron Ore

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• Exploitation of Guinea’s minerals in the Nimba region requires access through Liberia

• ArcelorMittal operates the Yekepa mine in Liberia (close to the Guinean border) – Integrated operation that utilises State-owned Yekepa-

Buchanan rail corridor

– Long-term concession granted to ArcelorMittal to refurbish/operate

• Government of Liberia imposed a third party access obligation on ArcelorMittal: – Terms are highly problematic, giving an effective veto right

– ArcelorMittal has largely resisted access negotiations

• ArcelorMittal is seeking to acquire BHP Billiton’s interest in the Euronimba project in Guinea: – Transfer of control requires consent of the GoG

– ArcelorMittal seeks a bauxite export permit from GoG

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Access Through Liberia for Mount Nimba

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Shared-Use Infrastructure is Not Easy!

Access obligation: • Scope:

o Assets subject to sharing o Own-use exceptions o Access holiday o Sharing with direct competitors o “Use-it-or-lose-it” principles

• Process for third parties seeking access: o Qualifications for successful access-

seekers o Priority (e.g., first come, first served) o Timing / stages o Transparency of information o Determinations of capacity o Independent technical studies o Commercial access terms o Term of access and renewal rights o Dispute resolution (application

process and operating period) • Allocation of scarce capacity Access tariffs: • Basic principles (e.g., “cost reflective”) • Capital cost component:

o Cost of capital o Allocation of partial network costs to

individual users o Expansion costs o Stranded facilities

• Expansions: o Expansion proposals o Stakeholder engagement o Final expansion definition decision o Funding obligations o Management of expansion project o Allocation of interruption costs o Allocation of expansion project overrun

and delay risks o Roll-up or separation of capital and

operating costs re: tariffs Operations: • Basic obligations (e.g., “fair and non-

discriminatory”) • Founder rights:

o Infrastructure FM (e.g., priority use) o Upstream FM (e.g., catch-up right)

Regulatory: • Integrated vs. independently-operated

infrastructure • Scope of authority

o Access decisions o Tariffs o Operational matters

• Independence • Expertise / external support

• Operating costs: o Scope /definition o Related party costs o Separate accounting for integrated

projects • Founder compensation for:

o Completion risks assumed o Take-or-pay commitment o “Excess capital costs” imposed by

the state o Third party credit risks assumed

• Currency: o Tariffs o Allocation of currency risks

• SMEs: o Qualification / test o Limits on capacity allocation o Marginal cost pricing principles o Adjustments to commercial terms o Allocation of risks / burden among

non-SME users Project implementation: • Greenfield:

o Concession terms re: infrastructure sharing

o Infrastructure project proposals o Stakeholder engagement o Final project definition decision

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• Guinea has an opportunity to secure its rightful place as the leading bauxite supplier in the Atlantic basin: – To succeed, it must leverage its existing rail and

port infrastructure

• When and if market conditions allow the exploitation of Simandou iron ore: – Guinea can secure its future position as a

global iron ore leader by ensuring “open access” to the rail and port infrastructure (SGGC)

• Shared-use of mining infrastructure will also be critical in helping Guinea to achieve: – Broad-based economic development

– Economic diversification

– Reduced reliance on volatile commodity markets

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The Path Forward

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©2016 InfraShare Partners Limited