Profit projection

For Chalco, the $1.35 billion is only an initial investment. Overall, the Simandou project will require a colossal amount of capital, which Rio Tinto, Chalco and the IFC will provide in proportion with their stakes. Exact figures for required investments from the three are difficult to predict since a timeframe has yet to be set for when the Simandou project will start making money.

Most industry experts agree that real profits from the Simandou project are unlikely, if not impossible, within the next five years. Iron ore exploration is traditionally a long-term investment and Guinea's outdated and inefficient infrastructure is certainly no help - four to five years are needed just to complete a water and electricity supply network, railroad systems and harbors necessary for exporting the iron ore.

In spite of the lack of short-term benefits, the project will benefit Chalco and the Chinese iron and steel industry in the long run. China is now the biggest importer of iron ore. But iron ore prices are decided by large producers, and those producers typically charge the highest prices possible to maximize their profits. Under the deal, iron ore produced in Simandou will first supply the Chinese market, an encouraging turn of events for China's ore-hungry steel mills.

At the July 29 signing ceremony, Xiong said the development of the Simandou project will help quicken the pace of infrastructure construction and economic development in Guinea, and also efficiently balance China's need for security of supply on the global iron ore market.

Chalco faces other risks aside from profit concerns. The two companies have not reached any agreement on key issues like iron ore sales and transportation. And since the joint venture is a sales company, the question arises: Who should be responsible for mining and distributing profits from iron ore sales? As the memorandum indicates, Rio Tinto's controlling stake puts it in charge of project operations, meaning Rio Tinto has the final say on iron ore pricing. Now, Chalco must seriously consider how it can guarantee its interests in the new company.

More pressing, the Guinean Government has the option to acquire a 20-percent stake in the project - an option the Guinean Government has expressed a willingness to exercise. If it does so, the interests of Rio Tinto, Chalco and IFC will decrease accordingly, which means a dilution of Chalco's stake in the joint venture.