China Kingho Energy Group, one of China’s largest privately owned energy groups, remains optimistic it can make progress on a US$6bn-10bn Sierra Leone iron ore mining project as early as next year in spite of China’s slumping appetite for the metal ore.

“The difficulties we have faced so far are the macro-economic and market conditions,” said James Chang, director of external affairs in the Kingho chairman’s office told beyondbrics.

“The typical problem is the surprising fall of iron ore prices and commodity trading activities. This will affect the financiers ideas; the investment banks or any financial institutions looking at iron ore resources due to the generally downside risk of iron ore and other commodity markets,” he added.

Nevertheless, Chang said, the company is hoping to start signing agreements with co-investors next year, after preparatory work has progressed. Ten companies from Europe, Australia and China are currently interested in signing such agreements, he added. The US$6bn-10bn project includes an iron ore mine, with a potential 30m tonne annual capacity, as well as a railway line, a deepwater port and a smelting facility.

Chang said:

“As to when agreements can be signed, I cannot give a fixed date, but I think by the end of this year they should be at an advanced stage. It is more likely to be finalised before the Chinese New Year or February 2015.”

The company has much unfinished work in Sierra Leone, with the exploration phase, geological reports and construction feasibility studies still incomplete, Chang said. “So once we are fully prepared, we will sign documents with the companies that would like to invest,” he added.

Chang says China Kingho has support for the project from Chinese and international banks, but the details of the financing plan – which may involve separate facilities for the iron ore mine and its supporting infrastructure – are not yet in place.

West Africa’s famous untapped iron ore reserves have attracted foreign major and minor mining companies, with some projects battling to take off while others have succeeded, albeit slowly. Lack of infrastructure, such as railway lines and power, and the need for huge capital investment are some of the key obstacles miners face.

Financing is set to be a big hurdle
Investec analyst Hunter Hillcoat told beyondbrics that China Kingho could face problems raising capital. He said:

“The key challenge will be actually securing the financing, versus talking about it. These transactions always take a longer time than expected and Chinese investors have become a lot more cautious.”

He added that the project would need to compete for capital against a number of other projects in other countries, many of which are almost certainly more advanced and of a higher calibre than the China Kingho project.

“With Chinese firms developing the infrastructure themselves, the usual challenge of a lack of infrastructure is less of a concern, but other challenges may include permits and approvals (can be a lengthy process), sourcing skilled staff and community relations,” Hillcoat added.

In 2013, Bloomberg said Chinese companies attempted US$107bn worth of mining takeovers over the past five years, with 42 per cent by value ending in failure.

Carole Ferguson, a senior research analyst at SP Angel, says the credibility of Chinese investment has been damaged with a number of groups not following through with ‘real’ money. Separately, last year a deal worth about US$1.3bn with Chinese company Hanlong and Australian miner Sundance for the latter’s Cameroonian iron ore operation failed to materialise. According to Sundance, the funding condition was not met and Hanlong said it was unlikely to meet other required conditions.

Merlin Linehan, founder of independent consultancy China in Africa, believes Chinese companies are being more careful and selective when it comes to investments in the mining/natural resource sector in Africa.

“This is due to increased competition from other companies, as other nations/firms get involved in African mining,” he explains. “The resource boom ending – rising prices are not certain and there has been over-production of iron ore of late. [There is also] uncertainty regarding demand for raw materials as growth in China is not what it was.”

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