Simandou Economic Impact Report Investment Framework update

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2 A note from Alan Davies, chief executive, Diamonds & Minerals, and president of the Project I am delighted to present to you this 214 update of the. It has been a challenging 18 months since the inaugural report was published. Internationally, economic conditions forced resource development companies to more closely scrutinise their capital expenditure plans. In Guinea, ongoing democratic consolidation and a regional outbreak of the Ebola virus understandably impacted investment and growth. Despite these difficulties, both Guinea and the Project achieved milestones of truly historic significance. For Guinea, successful parliamentary elections resulted in the formation of the National Assembly. For, the Investment Framework was negotiated, signed, and on 14 June 214, ratified by the National Assembly. Given the importance of these developments, it is timely to update our Project forecasts of direct and indirect economic impacts. It is also an opportunity to take stock of the considerable economic benefits that we continue to deliver in Guinea. Nearly 3, Guineans are building roads, executing early engineering works, and delivering on commitments we signed up to in the Social and Environmental Impact Assessment (SEIA). On behalf of the partners, I thank them for moving this world class project forward. Cautionary statement about forward-looking statements This document includes forward-looking statements within the meaning of the U.S. Private Securities Litigation Reform Act of All statements other than statements of historical facts included in this document, including, without limitation, those regarding the Project (including, for the purposes of this section, Rio Tinto s affiliates and shareholders) financial position, business strategy, plans and objectives of management for future operations (including development plans and objectives relating to the Project s products, production forecasts and reserve and resource positions), are forward-looking statements. Such forward-looking statements involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of the Project, or industry results, to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. Such forwardlooking statements are based on numerous assumptions regarding the Project s present and future business strategies and the environment in which the Project will operate in the future. Among the important factors that could cause the Project s actual results, performance or achievements to differ materially from those in the forward-looking statements include, among others, levels of actual production during any period, levels of demand and market prices, the ability to produce and transport products profitably, the impact of foreign currency exchange rates on market prices and operating costs, operational problems, political uncertainty and economic conditions in relevant areas of the world. Forward-looking statements should, therefore, be construed in light of such risk factors and undue reliance should not be placed on forward-looking statements. These forward-looking statements speak only as of the date of this document. Simfer S.A. expressly disclaims any obligation or undertaking to release publicly any updates or revisions to any forward-looking statement contained herein to reflect any change in the Project s expectations with regard thereto or any change in events, conditions or circumstances on which any such statement is based. In addition to establishing the legal and commercial basis for the development of, the Investment Framework locked in key Project parameters to secure its role as a sustainable driver of growth and prosperity for Guinea. The Project s partners committed to a rail and port infrastructure solution that is trans-guinean, multi-user and multi-purpose. The State committed to provide a supporting environment for the construction and long term operations of the Project. The Investment Framework also established a Build-Operate-Transfer model for the vast infrastructure assets, meaning they will ultimately be vested in the Guinean State. Alan Davies Chief executive, Diamonds & Minerals Rio Tinto 2 1

3 Contents Left A local market place in Guinea. The Project has spent over US$35 million in Guinean currency purchases, helping grow hundreds of Guinean companies. 4 Summary 6 Introduction 9 PART I Guinea economic overview 9 Historic overview 11 Key economic indicators 12 Guinea and sub-saharan Africa 13 Guinea and resource rich countries 15 PART II Future economic impacts of 16 Total economic contribution 19 Value add 22 Payments to capital and capital expenditure 24 Payments to the State 25 Employment 26 Payments to suppliers 28 PART III Project outcomes to date 28 Capital and investment 29 Payments to the State 29 Employment 32 Procurement 33 Investments in development 35 Local economic development 37 PART IV Catalysing development 37 Development through infrastructure 39 The potential - from poverty to prosperity 41 Catalysing the region s potential for growth 41 Creating the Corridor 43 Conclusion 2 3

4 Summary Below An aerial photograph showing the extensive drilling exploration platforms and road network which has been built on the slopes of Pic de Fon. At 1,6 metres elevation, Pic de Fon is the highest peak in the range. Guinea economic overview The Guinean economy grew slower than forecast, with 213 GDP growth estimated at 2.5 per cent. Key challenges included a global slowdown in mining investment, completion of the political transition, and the outbreak of the Ebola virus. Important national milestones were still achieved with successful elections for the National Assembly, completing the democratic transition, and the signing of the Investment Framework. Guinea s macroeconomic stability and progress on the reform agenda were recognised by the international community, the IMF in particular. Future economic impacts of At full production, the Project is forecast to generate revenues in the order of US$7.5 billion (214 USD), directly adding US$5.6 billion to Guinean GDP. 1 According to IMF forecasts, this will make Guinea the fastest growing economy in the world. The Guinean State will benefit through taxes, royalties and dividends, as well as ultimate ownership of s vast rail and port assets as agreed to in the Investment Framework. Annual payments to the State are forecast to reach up to US$1.5 billion at full production, and this could rise significantly after the transfer of s infrastructure assets to the State. At full production, is planning to hire approximately 4,5 direct employees and 3,5 additional contractors. Through indirect and induced employment effects, the Project could support 45, new jobs. Economic impacts to date Despite being in the development phase, has already paid a total of more than US$3 million to the Guinean State in employment taxes and other charges, in addition to the US$7 million payment as part of the 211 Settlement Agreement. Over US$35 million has been spent in local currency purchases. Nearly 3, Guineans were being employed by the Project in mid-214 (direct employees and contractors). Over 95 per cent of Simfer s direct workforce is Guinean. Over US$1 million has been invested into public benefit projects in Guinea. Catalysing development has committed to mutli-user access for its vast trans-guinean railway and deep water port to support broad-based economic development. Preliminary economic analysis suggests that the Project could support a Southern Guinean Growth Corridor, which could unlock additional economic activity of at least US$3 billion per year. The Corridor has been strongly endorsed by the Government of Guinea and was identified in Guinea s 213 Poverty Reduction Strategy Paper as a key policy tool for promoting economic growth going forward. 1 Financial projections in this report are expressed in 214 USD unless otherwise indicated. Forecast based on the long term market analysts average price forecast of US$75 per wet metric tonne (Free On Board) and production of 1 mtpa. As part of the Investment Framework, Project partners and the State have made co-commitments to maximise Guinean employment and procurement opportunities. 4 5

5 Introduction, a world class integrated mine, rail and port project in Guinea, aims to develop one of the largest high grade iron ore resources in the world. This report examines the impacts of this vast project on the Guinean economy. It builds on the 212, updating the analysis to reflect recent changes. Overview of the Project is much more than a mine. In fact, two thirds of the capital will fund the development of extensive infrastructure stretching across southern Guinea. Key components of the Project include: the Mine an open pit iron ore mine in south-eastern Guinea; the Railway a trans-guinean railway of approximately 65km to transport the iron ore from the mine to the Guinean coast; the Port a new deep water port located south of Conakry in the Morebaya River; and associated developments to provide utilities and supporting infrastructure including construction facilities, quarries, power stations, water supply facilities, access roads and accommodation. of the World Bank Group. The State currently holds a 7.5 per cent stake in Simfer and has options to progressively acquire over a 2 year period up to a total of 15 per cent stake at no cost (and free carried), and a further 2 per cent contributing stake. The rail, port, and associated infrastructure will be owned, funded and built by a separate infrastructure company ( InfraCo ). InfraCo will be held by a consortium of world-class international investors with the financial resources and technical skills to deliver this world class project. Simfer S.A. will support the development of the infrastructure by being a foundation customer. Recent developments In April 211, Simfer S.A. and the State signed the Settlement Agreement which set the path for the Project s development. It separated ownership of the mine and infrastructure assets, committed the Project s partners to undertake subsequent design and engineering stages, and required that the Project s legal and commercial foundations be laid out in a comprehensive investment charter the Investment Framework (IF). In , engineering progressed to the Definitive Engineering (DE) Phase. In parallel, the Project completed a Social and Environment Impact Assessment (SEIA), which was approved by the Government of Guinea in February 213. Most recently, in May 214, the IF was finalised by the Project s partners, ratified by the National Assembly, and promulgated by Presidential decree. The IF is a critical piece of legislation for both Guinea and the Project partners, providing the legal and commercial foundation for the Figure 1: Map of the Project Project. It vests the State as a shareholder in the mine, and outlines the required State enablers needed to facilitate the construction and long term operations of the Project. The IF also establishes a Build-Operate-Transfer (BOT) Convention for the infrastructure. Rail and port infrastructure will be funded and built by a consortium of international investors and, after 3 years of operation, transferred to the State at no cost. As of mid-214, the Project is developing the Bankable Feasibility Study (BFS) and working with the State to secure funding for the infrastructure component of the Project. PIN corridor (Project of National Interest) Mine concession boundary Construction of the Project is planned to occur in two stages. The first stage will develop the southern Ouelaba mine site to a capacity of approximately 5 million tonnes per annum ( mtpa ). The second stage will develop the Pic de Fon deposit and expand the capacity of rail and port facilities, lifting total production to approximately 1 mtpa. The Partnership The Project consists of two separate mine and infrastructure entities. The mining concession is held by Simfer S.A. which is a joint venture between the Republic of Guinea (the State ), Rio Tinto, Aluminium Corporation of China (Chinalco), and the International Finance Corporation (IFC), a member 6 7

6 Part I Guinea economic overview Left The port of Conakry. The Project s demand for a diverse range of goods boosts the Guinean economy. Historic overview Since achieving independence in 1958, Guinea has struggled to realise its tremendous economic potential. Its rich endowment of natural resources is yet to catalyse strong and sustained economic development. Despite periods of growth, economic improvement has been hampered by international isolation, a low base of capital and skills, and governance challenges. As shown in Figure 2, while Guinea did not experience Africa s twenty year slide in real incomes, neither has it benefitted from the following decades of strong growth. Since 1995, the gap between per-capita incomes in Guinea and sub-saharan Africa has nearly doubled. Guinea s prospects have improved materially following the return to democracy in 21. Government institutions have continued to develop, most recently with the inauguration of the National Assembly in 214. Monetary policy has been prudent, evidenced by declining inflation and a stable exchange rate. International development and financial institutions have re-engaged, including the World Bank and the IMF, which completed the HIPC debt relief process with Guinea in 212. The Project continues to make a considerable contribution to the economy, albeit at a fraction of the scale that will follow during construction and operations. The owners have invested more than three billion dollars in geological exploration, engineering studies and early infrastructure works, and paid US$7 million to the State as part of the 211 Settlement Agreement. In 213, the Project continued to employ thousands of Guineans, and to support hundreds of Guinean businesses through local procurement. Looking forward, the construction and operation phases of will trigger a step change in Guinea s economic performance. The IMF forecasts Guinea to become the fastest growing economy in the world before the end of the decade peaking at over 17 per cent annum. 2 This unprecedented growth will be driven initially by the mining sector, and especially as a first mover major capital project. 8 9

7 Figure 2: Guinean economic performance since independence 2,5 1958: Independence from France under Touré GDP per capita 214 US$ 1984: Touré dies. Conté takes power : Civil wars in Liberia and Sierra Leone 21: Condé elected President 28: Conté dies. Camara takes power 212: HIPC debt relief 214: National Assembly inaugurated Key economic indicators Although Guinea continues to reap the benefits of its transition to democratic rule, has been a challenging period for the Guinean economy. GDP growth during 213 was estimated at 2.5 per cent, down from nearly 4 per cent in 212 and well below prior projections of nearly 5 per cent see Figure 3a. This has been attributed to the delayed legislative elections, global economic conditions, and a slowdown in mining investment and activity which included the continued closure of the Friguia alumina refinery. Economic activity was expected to rebound following the successful completion of elections and the inauguration of the National Assembly. However, this coincided with West Africa s first outbreak of the Ebola virus in March 214. In addition to claiming hundreds of lives, the outbreak has reduced the movement of goods and people, thereby depressing trade and economic activity. 3 In the face of these challenges, the country and economy have exhibited impressive resilience. Disciplined monetary and exchange rate policy helped further reduce inflation and keep the exchange rate stable see Figures 3b and 3c. 213 public expenditures were cut to offset the reduction in government revenue (Figure 3d). The Government continued to implement its economic reform program, successfully meeting the requirements of the IMF s Extended Credit Facility programme and posting further gains in the World Bank s Ease of Doing Business index. This builds on the 212 achievement of reaching the completion point with the IMF and World Bank for the Enhanced Heavily Indebted Poor Countries (HIPC) Initiative. HIPC reduced Guinea s total external debt service obligations by US$2.1 billion over 4 years a reduction of over 6 per cent in average annual debt servicing requirements. 1,5 Figure 3a: Real GDP growth rate Figure 3c: US$/GNF exchange rate 6% 8, sub-saharan Africa 4% 2% 6, 4, 1, % 2, -2% (Projected) (Projected) Source: IMF World Economic Outlook, April 214; Banque de France Source: IMF World Economic Outlook, April 214; Banque de France 5 Guinea Figure 3b: Consumer price inflation Figure 3d: Government budget balance per cent GDP 4% 2% Settlement Agreement payment* % 2% 1% % Source: IMF World Economic Outlook, April 23 and April % -1% % (Projected) -2% (Projected) Source: IMF World Economic Outlook, April 214; Banque de France * Settlement Agreement classified as capital payment. Excluded from Government s operating budget Source: IMF World Economic Outlook, April 214; Banque de France 1 2 IMF World Economic Outlook, April An initial World Bank-IMF assessment of the economic impact of the Ebola outbreak in Guinea projected a one percentage point reduction in GDP growth for 214 from 4.5 per cent to 3.5 per cent. 11

8 Guinea and sub-saharan Africa In comparison with its peers, Guinea remains relatively under-developed. In 213, Guinean GDP per capita was US$56, compared with an average of US$1,5 for sub-saharan Africa (SSA). Guinea thus ranked 34 out of 45 SSA countries, and 175 out of 186 countries globally see Figure 4a. The UN s Human Development Index tells a similar story. The index is a composite measure of life expectancy, education and income. In 213, Guinea ranked 38 out of 46 SSA countries, and 179 out of 187 countries globally see Figure 4b. Figure 4a: GDP per capita of sub-saharan African countries (213 US$) 25, 2, 15, 1, 5, sub-saharan Africa aggregate average (US$1,5) Guinea is focussed on improving its relatively low indicators for institutional capacity. In the World Bank s Ease of Doing Business Index, the country ranked 37 out of 47 SSA countries, and 175 out of 189 countries globally see Figure 4c. Key challenges still include tax administration, investor protection, and access to credit. However, significant gains have been recorded in recent years, reflecting the Government s reform agenda. Improvements in the ease of starting a business and registering of property helped lift Guinea s ranking by four places in 214. Guinea (US$56) Guinea and resource rich countries In 213, the Natural Resource Governance Institute (NRGI) published its inaugural Resource Governance Index. Overall, Guinea received a score of 46/1, ranking it 33 of the 58 resource-rich countries surveyed. In the sub-saharan African region, it ranked 7 out of 16 countries surveyed. Figure 5a below compares Guinea s score against the average for sub-saharan Africa. Guinea s performance varied significantly across the four criteria used by NRGI. As the report noted, A very good Institutional & Legal Setting score contrasted with poor performance on the Enabling Environment component. Guinea s high score for Institutional & Legal Settings, the 5th highest amongst all surveyed countries, was largely due to reforms carried out since 21. These have included changes to the mining code, the requirement for environmental and social impact assessments, clarity in revenue collection, and re-joining the Extractive Industries Transparency Initiative (EITI). Guinea s low score for Enabling Environment reflected Guinea s scores in international indices for corruption, rule of law and government effectiveness. In short, while Guinea ranks in the bottom 1 per cent of countries for many of these indices, it has also recorded notable improvements in recent years. Overall, this performance augers well for a country with such vast mineral opportunities. However, it also underlines the importance of efforts to build a more conducive enabling environment for project implementation. Source: IMF World Economic Outlook, April 214 Figure 4b: Human Development Index of sub-saharan African countries 1 Figure 5a: Resource Governance Index composite scores sub-saharan Africa average Guinea Source: 213 UN Human Development Index Guinea sub-saharan Africa Rest of World Source: 213 National Resource Governance Institute Figure 4c: Ease of Doing Business Index of sub-saharan African countries, relative global ranking (1 = highest, = lowest) 1.8 Figure 5b: Category scores of Guinea relative to other countries in index sub-saharan Africa average Guinea 4 2 Institutional and legal setting Reporting practices Safeguards and quality controls Enabling Environment Source: 214 World Bank Ease of Doing Business Guinea sub-saharan Africa Rest of World Source: 213 National Resource Governance Institute 12 13

9 Part II Future economic impacts of Left Welding at the Simfer Logistics Base in Conakry. As part of the Simfer Apprenticeship Programme, 2 Simfer employees will be enrolled in professional trade apprenticeships including welding. While the mining, oil and gas sectors often collectively account for a significant share of domestic economic production in resource-rich countries, individual projects rarely have a marked effect on national economies. is different. The exceptional scale of the project, combined with the relatively small size of the Guinean economy, means that will have very large direct impacts on the national economy. Indeed, as shown in Figure 2, the Project is expected to underpin a burst of rapid economic growth, with the IMF projecting Guinea to be the fastest growing economy in the world by the end of the decade. The Project will pass through several different phases over its lifetime, with each phase delivering a different mix of economic impacts. Figure 6 below shows five distinct phases exploration, design and engineering, construction, operation pretransfer, and operation post-transfer. The two different operational phases reflect the Build-Operate-Transfer (BOT) approach agreed to in the Investment Framework for s rail and port infrastructure. Private investors will own, finance and build the infrastructure. After 3 years of operation, ownership of these multibillion dollar assets will be transferred to the Guinean State at no cost, earning significant additional revenue for the Government. Figure 6: Indicative spread of economic impacts of a mining project over time Relative contribution Exploration Detailed Construction Operation pre-transfer Operation post-transfer design and engineering Project to date (Part III) Pre-Transfer Operations Snapshot (Part II) Post-Transfer Operations Snapshot (Part I) Increasing benefits (growing over time): Payments to Government Project-enabled development e.g, Growth Corridor Immediate benefits (peaks during construction): Investment Local procurement Employment Time 14 15

10 Over these five phases, the Project will generate two distinct streams of benefits. The Immediate Benefits stream includes capital investment and associated local procurement and employment, which are all expected to peak during the construction phase. This stream of benefits will reduce significantly at the end of construction, although procurement and employment benefits will remain substantial over the operational life of the mine. On the other hand, the Increasing Benefits stream accelerates once the mine becomes operational. In particular, this includes payments to the State, which will occur through a combination of royalties, taxes and dividends. It also includes Project-induced social and economic development, which is especially important in the case of the Project. Part IV of this report shows how the magnitude of these induced benefits is likely to outstrip even the largest direct benefits. The rest of this section reviews future Project revenue streams and explores implications for the providers of capital, the Government, the local workforce and suppliers. In doing so, the study focusses on two discrete moments in time. A pre-transfer operations snapshot looks at outcomes in a given year after the State has been able to exercise all potential options to buy into the Project, yet while infrastructure assets are still held by private investors. The post-transfer operations snapshot looks at outcomes in a later year, once infrastructure assets have been transferred to the State. The analysis draws on financial and operational modelling as of mid-214, incorporating the financial, commercial and operating parameters defined in the Investment Framework. It assumes, for illustrative purposes, 1 per cent equity financing by all partners. The iron ore price used for these calculations is an average of market analysts long term forecasts. Total economic contribution Understanding the scale of The total economic contribution of any enterprise can most readily be evaluated by considering its revenues. This measure accounts for the total value of production from a company s activities, which is dispersed as payments to government, suppliers, employees and contractors, the providers of capital, or retained in the business for future reinvestment. As such, project revenue gives a useful headline number to measure and compare the overall size of enterprises. Revenues generated by the Project will be very large, especially in comparison to the size of the Guinean economy. After full ramp-up, the Project is planning to produce 1 million tonnes per annum of high grade iron ore. The consensus view of market analysts is for a long term real iron ore price of US$75 per wet metric tonne (214 US$, Free On Board) which results in total Project revenues of approximately US$7.5 billion per annum. Figure 7 helps put this in perspective. Based on these calculations, annual revenues of the Project will be: 12 per cent of the GDP of Guinea in 213; Over three times as large as the 4-year value of Guinea s HIPC debt relief package; Over 2 times larger than Official Development Assistance to Guinea in 212. Figure 7: The relative size of the Project to the Guinean economy US$2.1 billion HIPC dept relief for Guinea (over 4 years) US$1.3 billion Guinea Govt revenue (213) Official Development Assistance to Guinea (212) US$.3 bn US$6.3 billion GDP of Guinea (213) US$7.5 billion Annual economic contribution of (Project revenues at full production*) * Project revenues in 214 US$. Based on the long term market analysts average price forecast of US$75 per wet metric tonne (Free On Board) and production of 1 mtpa. Source: IMF; OECD; Project 16 17

11 s scale is underlined in Figure 8, which compares the relative sizes of major natural resource projects worldwide. When measured as a percentage of GDP, s annual revenues and capital investment (including infrastructure) put it in a league of its own. This scale means tremendous opportunities for an economy that has underperformed in recent decades. But it also comes with significant challenges. Funding, engineering studies and constructing activities can be complex. Upskilling the local workforce into newly created jobs can take years of training. Similarly, developing local businesses to benefit from procurement opportunities requires extensive planning and early investment in physical infrastructure and institutional capacity. Action is being taken to meet these challenges. Following ratification of the Investment Framework, Project partners are seeking a consortium of international investors to own, fund and build the infrastructure component of the Project. The Project has also implemented a wide range of programmes to optimise local economic benefit and participation which are reviewed in Part III. They include the construction of a Governmentrun training centre, an international secondment programme to Rio Tinto worksites, and an IFCrun programme to grow Guinean businesses into suppliers. also poses specific challenges for the State. A strong enabling environment is crucial to ensure timely delivery of the Project as well as local participation initiatives. The Project s success is dependent on the Government delivering a streamlined projects approvals process, supporting local supplier development programmes, ensuring a consistent process for resettling and compensating affected communities, improving training facilities and curriculums, and strengthening tax and customs administration. Once the mine is operational, the State will also face the challenge of managing a large and sudden inflow of mineral revenues. Developing institutional capacity requires extensive planning, early investment and the assistance of international donors and bilateral partners. The State has already undertaken widely praised reforms to improve its institutional and legal settings (see Guinea and resource rich countries in Part I). Further improvements in institutional capacity will not only support the Project, but also a stronger investment climate to attract additional projects and foreign investment following s first move. Value add While useful to understand the relative size of an enterprise, headline revenue does not typically reflect the economic value created by a company. For example, a firm can have large revenues but create little new value for an economy if it is simply passing through costs from wholesale suppliers. On the other hand, discussions of economic contributions are sometimes narrowly focused on the distribution of accounting profits, at one end, or direct expenditure on social programmes, at the other. These approaches tend to be too limited in their focus, failing to capture broader economic benefits from business activities. A more robust way to measure the economic value created by a company is through the lens of value add. Value add can be thought of as the value that a company has added to its inputs through its processes of production. It is calculated by measuring the difference between the value of outputs sold (i.e. revenues) and the cost of goods and services bought in to achieve this (i.e. materials, services and components). Equally, it can be thought of as the sum of payments to labour (wages), the State (taxes and royalties), and to capital (interest payments to debt providers, dividends to shareholders, and retained earnings). The sum of value added across all public and private enterprises within a given country equals the most widely recognised measure of an economy s size, gross domestic product (GDP). Figure 9 illustrates, for any given firm, the different concepts of profit, value add, and revenue. It also highlights the four key components that are analysed in this chapter capital, taxes and royalties, labour, and suppliers. Figure 8: Size of natural resource projects, relative to host economies Figure 9: Measuring economic contributions illustrative diagram of value add accounting Size of bubble represents capital expenditure Oil and gas project Mining project Anuual revenue/gdp per cent Escondida 5 Cobre Panama 25 Zanaga Oyu Tolgoi Dividends Taxes Royalties Other capital costs Labour Pre-tax profit Gross value add Project revenues Capital Taxes & royalties Labour Suppliers Total capital expenditure/gdp per cent 3 35 Note: Adapted from Exhibit 32 in Reverse the Curse (McKinsey, 213). Based on 211 GDP, and mining assets values at 212 average prices. Does not show Sepon or San Cristobal mining projects which have forecast revenues of 46 per cent GDP and 23 per cent GDP respectively, but with relatively low capital expenditure (<1 per cent). Project updated from McKinsey analysis to reflect Project estimates as of August 214. Bought-in inputs (Payments to suppliers) Source: World Bank; Wood Mackenzie; McKinsey Global Institute; Project

12 Figure 1 shows a breakdown of the value add components of using pre- and posttransfer snapshots. This analysis assumes a long term iron ore price of US$75 per wet metric tonne and an ongoing production rate of 1 mtpa, which is the design capacity of infrastructure. 4 Both snapshots occur after the State has been able and assumed to exercise all its options to buy into the Project, and after the expiration of the corporate income tax exemption period. 5 It also assumes 1 per cent equity financing by shareholders. 6 Figure 1: Distribution of Project revenues Payment to capital - infraco Payment to capital - Simfer S.A Taxes & royalties Payments to labour Payments to suppliers (a) Pre-transfer operations snapshot, assuming 1 mtpa 2% 13% 25% Simfer S.A. Govt contributory equity (total potential) Total Value add = 75% ($5.6bn 214 USD) 5% 4% 17% Simfer S.A. Govt free carry InfraCo Under ownership of private investors 34% Simfer S.A. Rio Tinto, Chinalco, IFC The total value add of is projected to be US$5.6 billion per annum. In other words, the project will directly add US$5.6 billion to Guinean GDP, while supporting the economic activities of suppliers by an additional US$1.9 billion. In 213, Guinean GDP was estimated to be US$6.3 billion. This means that the direct economic impact of could nearly double the national economy - an especially remarkable outcome given nearly four decades of slow growth (see Figure 2 in Part I). Factoring in multiplier effects, the true effect is expected to be significantly larger. 7 (b) Post-transfer operations snapshot, assuming 1 mtpa 2% 25% 21% Simfer S.A. Govt contributory equity (total potential) 9% 8% Total Value add = 75% ($5.6bn 214 USD) InfraCo Under ownership of Guinean State 7% 29% Simfer S.A. Govt free carry Paym Paym Taxe Simfer S.A. Rio Tinto, Chinalco, IFC Paym Paym Paym Paym Figure 1 also provides important insights into some of the particular features of the Project. First, significant annual payments to capital are required to repay the very large upfront investment cost of, especially for the infrastructure component. Even with respect to the mining industry more generally, which is inherently a capital intensive industry, has high demands on capital. Figure 11 compares the distribution of revenues for during pre-transfer operations with that for the Rio Tinto Group as a whole, and highlights the high-capital-investment - low-operating-cost character of this project. Second, the relatively low share of payments for operating costs reflects s operational cost competitiveness, which will help secure long-term Guinean economic interests. The high quality iron ore of the deposit underpins low pertonne operating costs. This means that is likely to be able to operate profitably even if cyclical drops in iron ore prices force other projects with higher operating costs to manage production levels. In essence, will be well placed to sustain economic benefits to local employees, suppliers, Government and other shareholders throughout the business cycle. Third, even where some value-add components are small in percentage terms, they remain remarkably large in absolute terms. For example, the direct wage bill is estimated to be US$14 million a year, equivalent to more than 4 per cent of the entire Government wage bill. Equally, the payments to suppliers (local and international) come to US$1.9 billion and are equal to 3 per cent of the size of the entire Guinean economy in 213. Finally, Figure 1 also highlights the structural change that occurs after 3 years, when the whole of InfraCo will be transferred to the Guinean State at no cost. At this point, the State s total potential earnings double due to increased tax revenues, increased Simfer dividends, and dividends from its new ownership of the infrastructure company. The rest of Part II takes a closer look at each of the components of Project revenue: Payments to capital; Payments to Government; Employment; and Payments to suppliers. Figure 11: Comparison of revenue distribution for the Project with the Rio Tinto Group Capital Taxes & royalties Labour Suppliers 2% Project (Pre-transfer operations snapshot) 25% 75% 6% 45% Rio Tinto Group (213) 55% 26% 13% 16% 4 The current mine plan, which is aligned with the declared proved resources under JORC guidelines, currently anticipates a gradual reduction in the volumes of iron ore produced over time. However, this report assumes that the infrastructure assets will continue to operate at design capacity during the post transfer operations, transporting product either from new discoveries by or adjacent deposits. 5 As per the 214 Investment Framework, Simfer will be exempt from corporate income tax for eight years from the first year of taxable profit, followed by a corporate tax rate of 3 per cent. 6 Debt financing of Simfer S.A. will reduce free cash flows to shareholders. If the Project or a shareholder finances capital through debt, part of the future cash flows will be needed to pay the interest and principal on that debt. 7 Behere Dolbere reports a GDP multiplier of 1.5 for South African mines, and forecasts the same value for Mongolia s Oyu Tolgoi mine. Using this multiplier as reference, the total GDP impact of would be approximately US$8 billion. 13% Note: operations snapshot reflects distributions prior to transfer of infrastructure to Government ownership and is after the corporate income tax exemption period. 1 per cent = US$7.5 billion 214 US$. Rio Tinto Group figures are for per cent = US$56 billion, 213 US$. Capital payments for the Rio Tinto Group include reinvestment (13 per cent), and dividends and interest (13 per cent). Source: Project; Rio Tinto Group. 2 21

13 Payments to capital and capital expenditure Payments to capital are required to compensate investors who provide upfront funds. Further to enabling the development of the Project, however, there are considerable additional benefits to Guinea from this extraordinary large investment into the country. Capital intensity As indicated previously, modern mining requires more capital relative to other inputs than most other economic activities. In turn, is more capital intensive than most mining projects. While smallerscale projects can leverage existing infrastructure, large scale projects like need to build greenfield infrastructure. Capital costs for are expected to be in the order of US$2 billion (subject to ongoing capital optimisation studies), with approximately two thirds expected to be spent on infrastructure. The result is not only higher absolute capital costs, but higher unit capital costs. This trend is underlined in recent JP Morgan analysis of 17 iron ore projects in West Africa. The average unit capital cost of large projects (45-1 mtpa) is estimated to be 5 per cent higher than small developments (5-15 mtpa) see Figure 12. In the case of, high capital intensity is reflected in high annual allowances to repay the providers of capital, especially infrastructure capital. These repayments take the form of (i) funds paid back to shareholders, including the State, (ii) interest and principal payments for money borrowed from the financial sector, and (iii) cash retained in the business to allow for the replacement of depreciated assets and to fund future expansions. State participation The State currently holds a 7.5 per cent stake in Simfer S.A. as a free carry, which will increase to 15 per cent once certain milestones are met. (A free carry means that the State receives the benefits of being a shareholder without having to contribute any capital). The State also has options to buy up to an additional 2 per cent of Simfer over time, meaning its total shareholding could reach 35 per cent. If all of these options are exercised in full, and assuming a 1 per cent equity financing for the project as a whole for illustrative purposes, dividend payments to the State for its shareholdings in Simfer S.A. are expected to reach US$7 million (214 US$) per annum pre-transfer and over US$1 billion posttransfer (assuming 1 mtpa throughout). In addition, the Government will receive an annual return on its ownership of InfraCo post-transfer. At that point in time, adding potential dividends from Simfer and InfraCo, total capital payments to the State could be as high as US$1.7 billion per annum (whilst operating at a 1 mtpa and dependent on financing arrangements). As shown in Figure 1, the annual return that the State will receive post-transfer of InfraCo is forecast to be less than the annual return that private investors will receive pre-transfer. This reflects the fact that the State will benefit from ultimate ownership of the infrastructure at no cost, and that InfraCo s private investors will need to be fully compensated prior to this transfer. Direct Investment The introduction of Foreign Direct Investment (FDI) is a key way in which the Project continues to positively impact the Guinean economy. Through FDI, countries build their capital stock which is one of the core determinants of a country s long-term economic output. This is particularly important in a country like Guinea, where the lack of domestic capital is a major constraint on economic performance. New inflows of FDI can also be self-reinforcing, with each new investment sending positive messages to other potential investors about Guinea s merits as an investment destination. Despite recent improvements in international indices, Guinea still scores very low in international business rankings (see Figure 4c). Major investments such as can help change this perception. Figure 13: CAPEX compared with other proposed projects in Guinea US$4.5 billion Kalia US$5 billion Sangarédi/Kamsar (GAC) This important infrastructure investment can also have a catalytic effect on economic development in the surrounding region. Part IV of this report looks at the importance of anchor mines to commercially underpin multi-user infrastructure, opening up new investment opportunities across different economic sectors. Figure 13 puts the planned capex investment into context. It is 4 times larger than the average annual FDI into Guinea in the period , and roughly three times the current national GDP. This is a further reminder that the Project could not occur without significant foreign investment to fund its development. US$6 billion Télimélé (CPI) Figure 12: Capital intensity of West African iron ore projects US$4 billion Dian-Dian Capital intensity US$/tonne capacity 3 US$1.2bn Kamsar (CBG) US$2 billion Indicative estimate CAPEX* Small projects with low capital intensity Large projects with high capital intensity royalties Average annual FDI into Guinea, US$.5 bn Note: Project updated to reflect Project estimates as of August 214. Source: JP Morgan, West Africa: The new iron ore province Capacity million tonnes per annum * capex estimate is for both infrastructure (approximately two-thirds of the cost) and the mine (approximately one third). The capex estimate is indicative only, and not an official Project estimate of costs. s capex requirements are being optimised as part of the ongoing Bankable Feasibility Study. Other Projects are at different levels of development, with capex estimates as reported in the 14/63 IMF Country Report. 22 Source: IMF Country Report No. 14/63, March

14 Payments to the State In the pre-transfer operations snapshot used in this section, total income tax and royalty payments are expected to be around US$1 billion per year (214 US$), which is more than 75 per cent of the entire revenues of the Guinean Government in 213. Figure 14: Overview of payments to the State from the Project This estimate does not include dividend payments. Nor does it capture employment taxes and other smaller fixed fees, levies and contributions. Figure 12 summarises the different revenue streams and when they are expected to commence. Employment will undergo two distinct phases of employment: construction and operations. Construction will require a vast amount of highly skilled labour, but for a shorter period of time than during long term operations. As of 214, the Project is already employing nearly 3, Guineans (direct employees and contractors). This makes one of the largest private employers in the Guinean economy today. (See Part III for further details on employment by the Project to date). Many more local jobs will be created during construction, spread primarily across the Project s ten core prefectures in southern Guinea. While some specialised jobs will need to be filled by non-guinean experts, the Project continues to invest heavily to equip Guineans with skills and expertise required to maximise the share of local employment. 24 Legend: Size of payment per annum, 214 US$ +++ >US$5m ++ US$1 5m + US$ 1m Revenue stream Settlement Agreement Development phase Initial operations Steady state operations snapshots* Pre-transfer Post-transfer Comment +++ One-off US$7m payment made in 211 Employment taxes Royalties % FOB Income taxes % after eight years from first taxable profit Other taxes and payments Simfer equity Free carry Simfer equity Contributory Land taxes, surface levies, and other taxes Up to 15%. No capital contribution required Options for Government to buy into up to 2% InfraCo equity +++ No capital contribution required * Steady state snapshot reflects distributions assuming the Government of Guinea has exercised its options to acquire a 35 per cent equity interest in Simfer S.A., and is after the income tax exemption period. Pre-transfer and post-transfer snapshots both assumes production of 1 mtpa. To date, the primary Project contribution to Government revenues has come from a US$7 million payment as part of the Settlement Agreement in 211. Employment related taxes represent another important source of income, which will grow significantly during construction as the workforce expands. The greatest contribution to Government revenues, however, will begin with operations. Initially, this will come from royalties and dividends. The Government will collect additional revenues from income tax after the corporate income tax exemption period. Once the State has exercised all potential options to buy into the Project, and prior to the transfer of InfraCo, the combined value of royalties, taxes and dividends to the Government (assuming 1 per cent equity financing) could approach US$1.7 billion per annum (214 US$). After the transfer of InfraCo., this figure is forecast to increase significantly. Assuming production of 1 mtpa, the total value of the various Project payments to the Government could exceed US$3 billion per annum. Again, it is important to note that cash flows to the State and other Project participants will be dependent on financing arrangements. In addition to the various revenue streams payable to the State, the Project will contribute.25 per cent of all revenues to regional investment and development across the Project s footprint. At full production, this is forecast to be equivalent to more than US$18 million per annum (214 US$). This investment sits alongside existing plans to support development across southern Guinea through the establishment of a growth corridor in partnership with the Government and key multilateral organisations (see Part IV). Figure 15: Workforce of mining projects and operations in Guinea (including non-guineans) 1, 2, 3, 4, 5, 6, 7, 8, Guinea Alumina Corporation Friguia S.A. (Rusal) Compagnie des Bauxites de Kindia (Rusal) Société Anglogold Ashanti de Guinée Société Minière de Dinguiraye Compagnie des Bauxites de Guinée 214 full production Direct For the operational phase, the Project will require approximately 2,8 employees at first ore production, growing to approximately 4,5 during steady state operations. In addition, approximately 3,5 sub-contractors will be employed to manage security, catering, housing and other auxiliary services. is committed to being a truly Guinean institution. The business is targeting 95 per cent of direct employment positions to be filled by Guineans at full production, dependent on the timely development of State-supported internationally recognised training programme. Employment opportunities include many skilled positions such as: Engineers and technicians to operate and maintain new generation mining technologies; Information and communications technology specialists to manage communication systems and applications across the 65km corridor; Commercial and financial specialists to manage nearly US$2 billion of supplier payments to local and international suppliers each year; Contractors Direct Note: Workforce estimates for mining operations other than are from 211/12. Source: 212 Review of the Guinea Chamber of Mines; Project. Contractors A wide range of specialised trade workers such as high voltage electricians, mechanics and welders, etc. Recruitment of Guineans into highly skilled roles is expected to present a significant challenge for the Project. Local skills shortages are acute and it can be difficult to find local candidates qualified to international standards for some critical positions. Capacity building across Guinea s vocational training, university and broader educational institutions will therefore be crucial to allowing the Project to meet its ambitious targets for Guinean employment. Over and above direct employment, the Project will also create a much larger number of jobs through indirect and induced employment effects. Based on analysis of large extractive projects in similar African economies, the Project estimates an employment multiplier of 5.7 for the operations phase. 8 This means that the total number of jobs that will be sustainably supported by the Project is expected to be approximately 45,, equivalent to nearly one per cent of Guinea s working age population. 8 McKinsey study conducted for Rio Tinto in 28 compares large natural resource projects across Africa and suggests labour multipliers of 6.3 and 5.7 for the construction and operation phases of, respectively. 25

15 Right Building wells as part of Simfer s community investment programme. Payments to suppliers The Project s construction phase offers a remarkable opportunity for local suppliers. While Project construction will occur during a limited period of time, lessons and success stories during these early years will establish a Guinean supply base that will last through operations and beyond and is expected to benefit other projects in Guinea. is already helping hundreds of small businesses to formally register themselves, open bank accounts, create business plans, and adopt formal accounting procedures. This is enabling them to bid for further work and become engines of grassroots economic growth. (See Part III for local supplier development initiatives and the Projects spend to date on local suppliers.) At full production, 25 per cent of Project revenues or around US$1.9 billion is expected to be spent on local and international suppliers each year. However, not all supplies can be reasonably expected to be locally procured and identifying local procurement opportunities requires a deep understanding of existing local suppliers, the iron ore supply chain, and technical procurement requirements. Figure 16 looks at the amenability of countries at different stages of development to key categories of spend in the mining industry. For a pre-transition economy like Guinea, one category identified as being well suited to local content is low skilled labour, which will account for a large absolute value, but represents a relatively small proportion of the Project s total costs. Utilities and medium skilled labour are the next most competitive categories, although even in these two groups, transitioning and mature economies have competitive advantages. The remaining categories, accounting for up to 75 per cent of spend in typical mining projects, are poorly suited to most pretransition economies. Maximising local procurement opportunities is a priority for and is a co-commitment of the State and Project partners, reaffirmed by the inclusion of clear local content principles in the Investment Framework. In particular, the Project has pledged to target procurement categories that can most directly help grow Guinean businesses and create Guinean jobs. The State has committed to working collaboratively with international donors and the private sector on providing an enabling environment for local content. This includes technical and supplier training, a fast track permitting and approval process, and facilitating joint ventures between international and local firms to enable skills transfer. Figure 16: Amenability to local content of different country types in the mining sector Basic materials Utilities Manual and low skill labour High Medium Low Country type Mature Transitioning Pre-transition Low to medium complexity equipment and parts Midtier skilled labour High complexity equipment and parts Technical support services Integrated plant equipment solutions Mangement EPCM Business support services 26 27

16 Part III - Project outcomes to date Getting a project as large as ready for construction requires a tremendous amount of planning and preparation. In recent years, billions of dollars have been invested to progress the Project which has led it to be one of Guinea s largest employers, even at this early phase. As a result, the Project is already having a meaningful impact on the economy of the country. This section reviews key indicators of this impact, following the same structure used in Part II; looking at capital and investment, payments to the Government of Guinea, employment, and procurement. It also reviews other investments in development, as well as initial evidence of local economic growth. Capital and investment As of January 214, total spend was approximately US$3.2 billion (inclusive of the US$7 million Settlement Agreement payment to the Government of Guinea). Significant additional funds have already been committed by the Project shareholders to continue to progress the project. Putting this in perspective, the IMF estimates net foreign direct investment into the whole of Guinea in 213 was US$1 billion. This level of investment reflects the scale of, and represents a strong vote of confidence by the Project partners. Areas of investment include: Geological investigations: The ore deposit needs to be proven to international standards requiring extensive drilling and modelling. Hundreds of kilometres of bore holes have been drilled, often requiring rigs to be dropped in by helicopter due to the lack of road access. Design and engineering of the railway and port: The Project is committed to building a southern Guinean railway stretching 65 km across the country, connecting to a new export port. This includes engineering Africa s longest railway tunnels (over 2km in combined length) to traverse the Mamou mountain range. Major engineering studies have also been undertaken on the port to accommodate deepwater ships in Guinea s shallow coastal waters. Logistics: The mine site is located two days drive from Conakry, Guinea s international gateway for shipping and aviation. has established trucking and aerial supply chains, continuously moving people, equipment and fuel across the country. This has included building an airport at Beyla as well as completing hundreds of kilometres of roadworks. Early works are currently underway on a logistics port in the Forécariah prefecture to handle materials and equipment needed for the construction of the Project. Social and environmental investments: has completed a Social and Environmental Impact Assessment (SEIA) meeting the standards of both the Government of Guinea and the IFC (part of the World Bank Group). This involved large scale studies and extensive consultation on a wide range of issues including cultural heritage, household incomes, biodiversity and greenhouse gas emissions. Compensation and livelihood restoration: Large scale mining projects require land for facilities. The Project, in conjunction with national and local governments, as well as the IFC, has established a world-leading process to ensure impacted households are fairly compensated and properly supported. Building a Guinean workforce: Guinea has a shortage of people with the internationally recognised skills needed to run a project like. The Project is responding by investing early in upskilling and training. As of 214, the Project employs over 2,9 Guineans (including 9 direct employees of Simfer) and is promoting high performing Guinean employees into senior management roles. Payments to the State A fundamental benefit of mining projects is the fiscal support they offer to governments. The vast majority of these benefits start flowing once the mine is operational through royalties, taxes and dividend payments (see Part II). In 211, Simfer paid the State US$7 million as part of the Settlement Agreement. By comparison, Guinean Government revenues (excluding the Settlement Agreement payment), averaged approximately US$1 billion per year in the period The Project pays millions of dollars each year to the Government in taxes and fees relating to its current operations. These are primarily employment taxes, but also include various levies and fees. Between 28 and 213, payments to the Government of Guinea by Simfer totalled over US$3 million, an average of more than US$5 million each year see Figure 17. s contracted suppliers have made significant additional payments. In 213 payments by Simfer were 18 per cent down on 212, driven by changes in work activities following the completion of the DE Report and the SEIA, as well as a global slowdown in mining investment. Figure 17: Payments to the Government of Guinea, excluding the Settlement Agreement (US$ million) Note: Payments including payroll taxation, précompte, land tax, customs-related levies and other permits and fees such as fixed duties and surface levies Employment Overview of local employment Despite being in the pre-construction phase, is already one the largest employers in Guinea. As shown in Figure 18, the Project s Guinean workforce was just under 3, as of mid-214 roughly the same size as in 213, but down from a peak of over 3,5 in 212. (Note, however, that Simfer s direct Guinean workforce has actually grown since 212.) s Guinean workforce is made up of 9 direct employees of Simfer, and over 2, contractors. Based on an employment multiplier for operations of 5.7, the total number of jobs the Project is supporting is expected to be more than 16, across Guinea. Although draws on international expertise for specialised work, Simfer is committed to being a truly Guinean-run and Guinean-led organisation. Thanks to extensive training and upskilling efforts over several years, Guineans have been promoted into an increasing number of senior positions previously filled by non-guineans. In mid-214, local workers made up 95 per cent of Simfer s direct employees, up from 85 per cent two years earlier. Figure 18: Headcount of Guinean nationals employed by the Project Direct Contractor Note: Estimates for are for December of reported year. For , estimates are for May. Nationality breakdowns for some contractors is not available (especially pre-212). In these cases, the proportion of the workforce that is Guinean has been estimated based on workforce surveys

17 Local recruitment and training Achieving such a high level of local workforce participation, particularly for specialised skills and management roles, is testimony to the strong and lasting commitment made by. The Project has worked with Government, international donors and communities to implement a range of initiatives and policies to both upskill Guineans and ensure a fair distribution of employment opportunities. Investments and activities in training include: The Project has also registered over 23, Guineans living in project-affected prefectures in its local employment database of people wanting to work on the Project. Public lotteries from the database are the primary means of recruiting people into nonprofessional employment opportunities. This process was developed with communities to ensure a fair and transparent selection process. Figure 19: Location of s Guinean Workforce in 214 The Simfer Apprenticeship Programme Launched in June 214 in partnership with the Ministry of Technical Education and Vocational Training, Employment and Labour (METFPET), 2 Simfer local employees will be enrolled in certified professional trade apprenticeships. The programme covers a wide range of trades including automotive mechanics, electricians, welders, masons, and metallic construction workers. Construction of the multi-million dollar Beyla Vocational Training Centre (near completion as of mid-214) a joint initiative in collaboration with the Government of Guinea. The training centre will include eight general skills workshops, each with attached classrooms, and an additional four specialist skills workshops. Primary prefecture of work Senegal Guinea-Bissau Mali 25 1 Location of employment As of mid-214, the Project was employing over 1,8 Guineans in the Beyla prefecture, supporting works around the mine site, as well as a major upgrade on the Beyla-Nzérékoré road. Other hubs of employment include Conakry where many logistical, commercial and administrative functions are based, and Forécariah where early works are underway for the Marine Offloading Facility (MOF). However, employment benefits are likely to be more evenly spread across southern Guinea than this distribution suggests. As shown opposite in Figure 19, when mapped by place of birth, the Project is employing people from across the Project s core prefectures. Well over 7 people are currently employed who come from southern Guinean prefectures other than Beyla, Conakry and Forécariah. Legend # of employees (inc. contractors) <1 Guinea Cote d Ivoire Sierra Leone Prefectures Boundaries 5 1 Liberia Kilometers Prefecture of birth Senegal Guinea-Bissau Mali The National Development Programme a secondment programme for Simfer employees to Rio Tinto operations around the world. Secondments have been completed at sites in Australia, Canada, France, South Africa and Mozambique. Guinea Creation of the Simfer Graduate Recruitment Programme and the Simfer Internship Programme. Since 212, these initiatives have enabled over 1 young Guineans to build their professional careers. Cote d Ivoire Sierra Leone Over 1, man-hours of training delivered to the workforce. Prefectures Boundaries 5 Kilometers 3 1 Liberia 31

18 Procurement Local procurement As discussed in Part II, maximising local content is a priority for and is a co-commitment of the State and Project partners. Through local procurement, the Project aims to grow Guinean businesses and create Guinean jobs. Measuring local spend, though, is not straight forward. Exclusively focusing on ownership of contracted businesses can be unhelpful. A company might be majority foreign-owned, but use most of its revenues from to employ Guinean workers and buy Guinean goods. Such a company is likely to generate greater economic benefit for Guinea than a Guineanowned company that primarily imports foreign manufactured goods for resale in Guinea. In addition, evaluating effective ownership can be difficult and costly for each of the many thousands of purchases made by the Project. A useful proxy is spend occurring in local currency. Following this approach, has spent over US$35 million in local currency (Guinean francs) on Guinean companies the equivalent of over GNF 2.5 trillion at 214 exchange rates. Note that this figure does not capture additional GNF payments made in wages to Simfer employees, or in taxes and levies to the Government of Guinea. Figure 2: 213 GNF spend by ownership of company Majority foreign owned (11%) Majority Guinean owned (6%) Analysis of 213 Simfer spend shows that 6 per cent went to companies that were majority Guinean-owned and 11 per cent to companies that were majority foreign-owned. The remainder (29 per cent) went to companies where effective majority ownership has yet to be verified. s procurement spend has also been spread over a large number of Guinean firms. In 213, GNF payments were made to over 4 Guinean companies, a vast majority of which are Guinean owned. This reflects the depth to which is integrating into and supporting the local business environment. Guinea Buy Local Programme Large mining projects need goods and services that are not always locally available in a pre-transition economy like Guinea. Technical requirements of contract packages can be demanding and timeframes for delivery tight. (See Part II for further discussion of the challenges of local participation of pre-transition economies in mining projects.) To maximise s local procurement, the Project has established a Guinea Buy Local Programme. The programme has two main components: 1. Work with local suppliers to develop their capabilities: the aim of this component is to provide training, access to finance, and advisory services to assist Guinean businesses develop their capacity to competitively supply to the Project. 2. Buy local where possible: gives preference to Guinean enterprises for all contracts, where they offer prices, quantities, quality and delivery at least comparable to the overall market. It has also set up internal processes to encourage major suppliers to the mining industry to establish joint ventures or partnerships with local small and medium enterprises (SMEs). Developing local suppliers To deliver on these principles, has deployed resources across the supplier development cycle. Initiatives delivered in 213/14 include: Local Supplier Development Programme: Since 28, has worked with the IFC to deliver a Local Supplier Development Programme (LSDP) one of the most extensive programmes ever undertaken to develop local businesses prior to construction of a mining project. It works with Guinean businesses, helping them implement formal accounting procedures, access finance, and strategically target business opportunities that the Project is creating for them. In Q1 214 alone, nearly 1 Guinean SMEs attended LSDP workshops, with more 3 receiving follow-on in-depth advisory services. The Programme s alumni include companies such as Batipro a Guinean managed and owned construction company that holds a multi-million dollar contract to build the Beyla training centre. Its employee base has more than tripled since 27, and its revenues increased six-fold. Youth Entrepreneurship Training: Training sessions were held in Maferinyah (near the port site) under the theme of Entrepreneurship, job-seeking and forming companies. Following the event, 4 local youth have come together to form a new cooperative based in Maferinyah. Women s Entrepreneurship Coaching: Eight women s groups have been established in Beyla and Nionsomoridou (near the mine site) to support the establishment of women-led businesses. These include the processing and storage of agricultural products, market gardening and soap-making. Project support included technical support, the provision of equipment and functional literacy training. Microfinance: Since 21, the Project has funded a microfinance programme in Beyla, helping local entrepreneurs start and grow businesses. Establishment of a Local Business Council: In 213, the Project supported the creation of the Union des Operateurs de Forécariah. The council currently comprises of 16 members and helps local direct local entrepreneurs to business development initiatives. Business Registration: has registered over 1, Guinean businesses in its procurement systems. A recent registration drive identified 85 additional businesses in Forécariah and Maferinyah, not only capturing business information, but also capacity building needs of each business so that future training can be better targeted. Investments in development To date, over US$1 million has been invested by into public benefit programme in Guinea. Many of these investments are directed towards households and communities directly impacted by the Project. However, the scale and scope of mean that some of these investments also have national significance beyond the immediate Project footprint. National level Infrastructure: The Project is making one of the largest public road investments ever undertaken by a mining project through its National Roads Programme. Over 1,km of roads across southern Guinea are planned to be built or improved, providing access to construction sites while also benefiting the Guinean public. Work is currently focused on 132km of the N1 national highway connecting N Zérekoré and Beyla, which is being upgraded to a sealed 7m wide road. As of mid-214, over 6 Guineans were employed on this worksite. Not verified/ not reported (29%) Note: Based on analysis of US$54 million worth of GNF spend in 213. Fondation Rio Tinto 214 marked the launch of Fondation Rio Tinto, a non-profit organisation to promote socio-economic development throughout Guinea. The Foundation has the mission to deliver high-impact, lowunit cost, and replicable socioeconomic projects in partnership with specialist institutions and donors. The agriculture and food security sector has been defined as the first priority focus area. Fondation Rio Tinto is governed by a Board of Directors that instructs an Executive Management in charge of the day-to-day running of the organisation. Rio Tinto has provided US$2 million for investment in 214 and has pledged to maintain this annual contribution over the coming years

19 Community level The Project supports impacted communities partly through direct assistance, but also by providing the resources and expertise to help communities manage development challenges and opportunities by themselves. In 213/14, examples included: Education and health facilities in Beyla: A major upgrade of Beyla hospital was completed, and construction work is ongoing for the Beyla Training Centre. The multi-million dollar training centre is a Government initiative, being funded and built by the Project, that will train local residents in the skills needed to participate in the mine. Public health: The Project trained 1 peer educators in Beyla and Forécariah to help prevent awareness of HIV prevention, reaching more than 1, people. A further 7 people were educated on malaria awareness, and the Project continued to distribute mosquito nets. Rio Tinto Guinea contributed US$1, to combat the 214 Ebola outbreak in Guinea. Natural resources management: The Project has developed natural resource management plans with six village regions around the environmentally sensitive Pic de Fon Classified Forest with a further two under development. These plans help residents maintain livelihoods whilst reducing pressure on the forest. In addition, the Project has planted and maintains 6 Ha of compensatory forests. In-migration management: Monitoring by shows that between 29 and 213, the total population of four towns near the port construction site increased from 13, to 25,. The Project is helping impacted communities prevent and mitigate adverse social impacts triggered by in-migration, but also to maximise opportunities associated with new arrivals which will help drive regional and national economic growth. Additionally, is funding two Guinean NGOs to monitor inflation in Projectaffected areas on a monthly basis. Household level The Project has not only established systems to ensure fair and equitable compensation for households impacted by the project, but to also maintain and enhance their economic livelihoods. In 213, launched several agricultural intensification projects to achieve this including: Rice: A rice intensification programme has been carried out on over 1 Ha of rice paddies, rebuilding the system of dykes, training farmers in improved techniques, and providing post-harvest equipment to women. The programme achieved considerable success with production increasing from an average of 6kg per hectare before the intervention to around 2kg per hectare at the end of the first growing season. Salt: Solar salt farming techniques have been introduced to replace the former method of boiling filtered salt water. The administering NGO (Association pour le Developpement Agricole de la Mangrove) set up nine sites in affected communities where the new technique was taught. This new technique not only produces higher output, but it also reduces the labour burden, eliminates mangrove deforestation and reduces health impacts of boiling salt water. Market Gardening and Cassava: A Guinean NGO (Association pour la Promotion Economique de Kindia) was engaged to facilitate the intensification of production across market gardening (3 Ha) and cassava (15 Ha). A total of 89 participants have received support in new agricultural techniques, improved seeds, provision of fertilisers and equipment, and a water pump to improve irrigation. Local economic development Economic analyses show that the broader benefits from an investment are often much larger than its direct contributions once multiplier effects are taken into account. Part of each dollar spent by a project buying goods and services will be re-spent in the local economy, thereby generating additional jobs and income. Accurate measurement of these indirect benefits can be challenging. However, rapid population fluctuations near a project can be a useful indicator of indirect benefits given that individuals often react to economic opportunities faster than they can be tracked by official data. The Project works with both the Government and local communities to monitor and manage in-migration flows. Following the commencement of Project activities in the Forécariah prefecture, a significant increase in population has been observed. Figure 21: Population growth of surveyed towns near the MOF, Guinea Marine offload facility construction site To Conakry Madinagbe 3,4 2,8 In both the closest village to the port (Senguelen) and the sub-prefecture administrative centre (Maférinya), growth rates exceeded 25 per cent a year between 29 and 213. This compares with just 2 per cent a year during the previous decade ( ). Similar levels of growth were recorded in villages and towns in the Beyla prefecture following increased activity around the mine site. Integrating newcomers into existing communities will introduce challenges and the Project is working with affected communities to help both plan for this and mitigate adverse impacts (see In-migration management on the previous page). Nonetheless, continued strong in-flows of people suggest that thousands are already responding to and taking advantage of new economic opportunities created by the Project. Maferinya 18,5 9,1 Legend To Forécariah Senguelen 2,9 1,4 YYY ZZZ 213 population 29 population Road Source: Government of Guinea, General Census of the Population and Habitat (29); Agence Monitoring d Expertise et de Recrutement International, Population Census PMOF (213)

20 Part IV Catalysing development Left An aerial view of the outskirts of Beyla, Guinea. Parts II and III of this report examine past, present and future core contributions from the Project. In addition to the material benefits from that have taken place already, through construction and operation the Project will create thousands of jobs, spend hundreds of millions of dollars locally, and make annual payments to government far exceeding the current fiscal revenue base. These impacts alone provide Guinea a once-in-a-generation opportunity for growth. But there is an even larger opportunity. The Project has the potential to unlock significant additional value through leveraging its infrastructure for broader development. This section looks at how this infrastructure and associated investments could catalyse economic development and underpin an unprecedented process of regional growth alongside the Project s footprint. When realised, this could deliver additional economic activity in the order of US$3 billion per year, becoming the single greatest economic legacy of. Development through infrastructure The infrastructure deficit Infrastructure is a critical enabler of development. Without access to affordable and reliable transport, energy, water and telecommunications, economic opportunities can go unrealised. A review of studies by the World Bank and Agence Française de Développement found evidence that investment in African infrastructure accounted for approximately a quarter of GDP growth in Africa between However, the same report also concludes that if African infrastructure investment had been at global benchmark levels, growth rates could have been one to two annual percentage points higher. This deficit in infrastructure investment is large, totalling approximately US$1 billion each year across the continent.9 Resource rich countries face particular challenges. High grade deposits of bulk commodities like coal or iron ore cannot be developed without heavy-haul infrastructure to bring them to market. According to a 213 IFC report, more than 4, km of railways are required to develop planned iron ore projects across west and central Africa, totalling at least US$52 billion in capital expenditure see Figure 22.1 The challenge in Guinea is especially acute. The country has a very limited stock of existing infrastructure. In the World Bank s 214 Logistics Performance Index, Guinea ranked 141 out of 16 surveyed countries for quality of infrastructure. Further, many of its key potential mineral resources are located in remote parts of the country. s deposits in the south-east corner of Guinea, require a 65km rail line to connect them with the country s coast. A new model for mining The interest in developing mining infrastructure extends beyond transporting ore. Policy makers in governments and development agencies are increasingly interested in how that same infrastructure can support development beyond the mine. Natural resource projects have traditionally built infrastructure for exclusive use by the project. More recently, some mining investors have started to consider to which extent mining railways could be opened up to agriculture, forestry and production from other primary sectors to lower the costs and time for long haul transportation in developing economies, supporting the competitiveness of local producers in host countries and encouraging economic diversification. Foster V. & Briceño-Garmendia, Africa s Infrastructure: A time for Transition. 21 IFC, Fostering greenfield mining-associated shared transport infrastructure through PPPs: Challenges and Solutions for sub-saharan Africa,

21 This multi-user/multi-purpose approach is attracting support from a growing list of research and development institutions. As the Columbia Centre notes, The World Bank, the African Development Bank and the African Union, along with various other development agencies, have endorsed the concept, recognising that private sector involvement is required to meet the vast infrastructure funding gap in developing countries. The need for an anchor mining investor However, getting large multiuser projects off the ground in Africa has often proven to be elusive. Theoretically attractive investments relying on multiple users are going undeveloped because of the difficulty in securing the very large amount of finance needed to build the infrastructure. As such, the IFC has argued that a creditworthy large anchor mine is the key starting point to making greenfield multi-users projects feasible in sub-saharan Africa. is well placed to be the anchor mine for southern Guinea. The Project has also made real financial and operational commitments to ensure core infrastructure can be leveraged for economic development. Port and rail infrastructure will be opened up to other users including light freight and passengers, and these assets will be transferred entirely to the Government of Guinea after 3 years of operation. Critically, it has also initiated pioneering work towards the development of a Southern Guinea Growth Corridor an economic planning initiative to use the Project as a catalyst for broad-based economic development along the 65 km rail corridor. The potential from poverty to prosperity The Project, together with spatial planners Dobbin International, undertook detailed work to identify the potential for economic growth in the Project s main area of influence. This area was defined as locations within two hours travelling time of the railway, encompassing 47,km 2 of land and a resident population of 1.8 million people. Currently, this region is generally isolated, poor and disconnected. Average annual incomes are estimated at US$1-2 per capita, significantly less than the national average of approximately US$5 per capita. Notwithstanding the current situation, this region is capable of generating enormous wealth. Through analysis of the drivers and constraints on development throughout this zone, the amenability of land to different economic uses has been identified see Figure 23 for an example from Forécariah. From this, a map of potential economic activity was constructed across the corridor see Figure 24. Collectively, identified activities could contribute an additional US$3 billion each year to Guinean GDP. This headline figure includes potential activity in primary non-mining sectors, specifically agriculture, forestry, horticulture and aquaculture. If realised, the growth corridor would sustainably transform this region into one of the most prosperous and productive parts of the country. The concept of a growth Corridor in southern Guinea offers an opportunity to realign the activities of relevant regional players under a common development framework and a path to transformation. Figure 23: Mapping potential productivity by economic sector Forécariah example Figure 22: Delivering Africa s iron ore projects will take more than US$5 billion in infrastructure investments Agriculture Aquaculture Low potential Medium potential High potential Constraint Low potential Medium potential High potential Constraint Legend Iron ore project Estimated cost of related infrastructure in country (US$bn) Western Africa Central Africa CAMEROON 7.6bn CAR Forestry Industry and services MAURTANIA 4.2bn REP. OF CONGO 3.8bn Low potential Medium potential High potential Constraint Low potential Medium potential High potential Constraint SENEGAL 4.4bn MALI GABON 3.4bn DRC GUINEA 12.bn SIERRA LEAONE 1.9bn LIBERIA 2.2bn COTE D IVOIRE Source: IFC, RBC Capital M. Note: Lighter shading represents higher productivity potential due to soil conditions, water availability, infrastructure and other development drivers analysed. 38 Source: Dobbin International. 39

22 Figure 24: The potential for development in the project s growth corridor Aquaculture Horticulture Agriculture Forestry Source: Dobbin International. Figure 25: Overview of the Project s investment and infrastructure footprint Source: Dobbin International Catalysing the region s potential for growth Maximising the economic contribution of the host region relies upon attracting new third party investment into agriculture, forestry, fisheries and other economic sectors. Through its innovative design and operating strategy, will lay the foundations for the entry of these new third party investors. s investments in infrastructure and skills include the following (see Figure 25): Passenger and light freight railway service: will establish a passenger and light freight service using part of any surplus capacity on the rail line. This will help reduce the time and cost of moving goods to and from markets, supporting agricultural developments in the corridor. While freight services are expected to run across the Corridor, passenger services are anticipated to operate on the eastern side of the Mamou range due to safety constraints in the 2km-long tunnels. Shipping: The Project is constructing a port in the Morebaya River that will be capable of accommodating the massive vessels needed to move iron ore around the world. The newly-dredged channel and port facilities could support non-mining activity including agricultural exports/imports and other shipping. Communication systems (fibre optic and wireless): The Project plans to enable third-party access to project telecommunications infrastructure so that private companies can significantly expand access to mobile telephony, internet and other data services across the Project footprint. Roads: The Project is investing in over 1,km of Guinean roads, through a mixture of new roads and the upgrading of existing ones. These works will considerably reduce travel time for hundreds of affected towns and villages. It is well established that, especially at early stages of development, roads have amongst the highest returns on investment. Urban development in hub towns: As hub towns for the Project, Beyla and Forécariah will be the focus of significant investments that will have broad public benefits: -- Housing: A significant number of employees and their families will be accommodated across these two towns. The Project s goal is to encourage the creation of a local housing industry, while supporting social and economic integration of employees into these existing communities. -- Urban roads: Roads necessary to support the expansion of Beyla and Forécariah will improve accessibility throughout those towns. -- Electricity: The Project is planning to supply electricity to its employees in Beyla and Forécariah, aiming to broaden this supply to local residents and businesses on a sustainable commercial basis. -- Social infrastructure: New health and education services will be required to meet the needs of s employees. As with electricity, the objective is to ensure this service is available to the public in a commercially sustainable way. -- Financial services: While better financial instruments will facilitate payments to employees and suppliers, they will also underpin other local transactions. is already exploring partnerships with banks and mobile phone providers to roll out mobile phone banking systems, which have been very successful in other African nations. Creating the Corridor The South Guinea Growth Corridor is a large economic planning initiative to organise and facilitate economic growth on the back of s unprecedented investments in the impacted region. Through a combination of pioneering technical plans and a decisive institutional architecture to underpin them, this work has offered a vision for regional growth that aligns with national development aspirations. This blueprint also offers a platform for cooperation and partnership to leverage core mining infrastructure and represents a practical configuration through which to harness the economic diversification potential of huge private investments in the otherwise characteristically enclave extractive industries The practical implementation of this vision will benefit from broad involvement and participation. There has already been considerable interest from other critical economic actors in the initiative. Crucially, the Government of Guinea has strongly endorsed this planning framework and, in collaboration with donors and the private sector, is setting up a dedicated body to steer progress going forward. The Corridor has been identified in Guinea s 213 Poverty Reduction Strategy Paper as a key policy tool for promoting economic growth. 4 41

23 Conclusion Left Rio Tinto employee takes rock sample. Following a difficult 213, during which global economic uncertainty combined with the challenges of local political transition, the year 214 has brought with it renewed optimism for both Guinea and the project. Successful parliamentary elections led to the formation of the National Assembly. Continuing prudence in macroeconomic management led to the recognition of international financial institutions, in particular the IMF. National growth forecasts resurged. For, a huge milestone was achieved with the completion of the Investment Framework and its ratification by the National Assembly, clearing the path to focussing on Project finance and development. The Investment Framework defines the key parameters for going forward, which include an entirely trans-guinea infrastructure solution open to other users, as well as the need for a State enabling environment for construction and long term operations. Within this context it also highlights the importance of maximising local spend and employment. The forecast economic contributions of the Project under this agreement remain extraordinary. For example, at operational steady state, is expected to directly add US$5.6 billion to Guinean GDP almost the size of the entire economy in 213. Tax, royalty and dividend payments to the Government are forecast to be as large as the entire amount of Government revenues collected today. After 3 years of operation, these infrastructure assets will be transferred to the Guinean State, further increasing the income it receives from this investment. Beyond these direct contributions, however, there is an even larger development opportunity. The region most directly affected by this project has tremendous underlying economic potential. Infrastructure investments made by the Project can help unlock this potential and underpin new grassroots economic activity by third party investors in complementary economic sectors, estimated in the order of US$3 billion per year. This ambitious regional development blueprint the Southern Guinea Growth Corridor offers a platform for partnership and collaboration between the Government, development players and investors, helping to redefine the role that large mining project can play in a nation s economic development trajectory

24 Review Left Road construction work on Pic de Fon. Guinea economic overview Following encouraging growth in 212, the economy grew slower than forecast in due to a mix of local, regional and global challenges (p.9) Guinea ranks in the bottom quartile of sub-saharan African countries across a range of development indices, although notable improvements were recorded over the last years (p.12) Recent reforms saw Guinea ranked fifth in the world for Institutional and Legal Settings in the inaugural Resource Governance Index (p.13) Future economic impacts of At full production, the Project is forecast to directly add US$5.6 billion to the GDP of Guinea roughly the size of the economy today (p.17) The Guinean State will benefit not only from a massive flow of taxes and royalties, but also dividend payments and ultimate ownership of the s vast rail and port assets (p.2) At full production, will employ approximately 8, people, including contractors (p.25) Project outcomes to date In mid-214 the Project was employing nearly 3, Guineans, making it one of the largest employers in Guinea (p.3) Over US$35 million has been spent buying goods and services from Guinean companies (p.32) In-migration has seen populations double in some urban centres near Project worksites (p.35) Catalysing development An infrastructure deficit is holding back development across sub-saharan Africa (p.37) s mutli-user infrastructure could help unlock additional economic value of at least US$3 billion per year (p.39) The Government of Guinea has endorsed a Southern Guinean Growth Corridor to leverage s capital investment for economic development (p.41) 44 45