66 Business The EconomistDecember 7th 2019
2 enemies in neighbouring Yemen) knocked
out more than half Aramco’s oil production
in September, highlighting the company’s
security risks.
He has had more sway over Aramco’s of-
fer price and size of the float. Many inves-
tors balked at Aramco’s valuation range,
which was announced in November. Bern-
stein, one of the few research outfits not
linked to a bank collecting Aramco’s fees,
reckoned $1.2trn-1.5trn was more reason-
able—a range confirmed by a survey of in-
stitutional investors, who told Bernstein
they would buy Aramco at a mean valua-
tion of $1.26trn.
Prince Muhammad’s desire for a higher
offer price was understandable. On many
metrics, Aramco easily outcompetes rivals
such as ExxonMobil or bp. Its reserves are
15 times larger, production costs a quarter
as big, debt negligible and return on capital
superb. Chances are that when the world
takes its last sip of oil, it will be Saudi crude.
But oil investors in 2019, skittish about
the commodity’s prospects, care more
about cash. At a valuation of $1.7trn,
Aramco’s dividend yield would be lower
than the supermajors’ (see chart). Investors
surveyed by Bernstein worried about
Aramco’s governance. Saudi Arabia may
lean on the company if national finances
deteriorate—the imf expects Saudi debt to
be 23% of gdp this year, up from 17% in 2017.
As important, Aramco’s sales growth is
limited by Saudi Arabia’s habit of limiting
output to stabilise global oil markets.Rolling up the magic carpet
Facing a chasm between the prince’s pre-
ferred, high price and what international
investors were willing to pay, Aramco
abruptly cancelled road shows in America
and Europe. It is expected to secure invest-
ments from neighbours, including Abu
Dhabi and Kuwait.
But many buyers will be locals. The
company and its bankers courted Saudis
eagerly, through call centres and advertise-
ments on billboards, social media, even
atms. The Saudi central bank doubled le-verage limits for retail investors buying
shares in Aramco. Wealthy families in the
capital, Riyadh, feel that participation in
the ipo is required to maintain good stand-
ing, one local businessman explains.
Of course, $25bn wouldn’t be nothing.
Still, bankers will get a fraction of the fees
they hoped for. Aramco may raise less cash
than it would have at a lower price: floating
the full 5% at a valuation of $1.2trn could
rake in $60bn. Saudi Arabia will see capital
flow mostly within the kingdom, not gush
in from the outside. A reliance on local
shareholders poses a political problem, if a
falling oil price depresses Aramco’s share
price. Prince Muhammad is keenly aware
that neighbouring countries have looked
fragile of late—leaders have been ousted in
Algeria, Lebanon and, most recently, Iraq.
Propping up the oil price looks as tricky
as ever. Last year opec, an oil-producers’club, and its allies, led by Russia, agreed to
lower output by 1.2m barrels a day, or 2.3%
of their production. The deal was extended
to March 2020. But the cartel may need to
seek deeper cuts, as supply surges in Brazil,
Guyana and Norway.
Merely encouraging opec members to
comply with the existing deal, let alone
commit to more cuts, will be tough. The
group’s meeting in Vienna on December
5th-6th promises to be tense. Russia has
pumped oil faster this year than before the
deal. With partners overproducing Saudi
Arabia has consistently had to undershoot
its quota. The new oil minister wants more
compliance from the others, says Helima
Croft of rbc Capital Markets, an invest-
ment bank. The question is how forcefully
he will seek it. Either way, the listing will
leave the kingdom no less dependent on
the price of crude than it is today. 7Sweet crude, sour aftertasteSources: Bloomberg;
company reports*Average of five biggest
†Valued at $1.7trnReturn on capital employed, %Dividend yield, %2018Saudi Aramco 41Oil majors* 8Saudi Aramco† 4.4Oil majors* 5.5W
hen prospectorsdiscovered a
gargantuan deposit of iron ore in
the misty Simandou mountains 17 years
ago, many Guineans hoped it would
transform their impoverished country.
The remote location makes its estimated
2.4bn tonnes of iron ore—valued at
perhaps $230bn—hard to mine. Gyrating
commodity prices scared off investment.
So did lurid corruption scandals in-
volving billionaires, government offi-
cials and mining companies.
A new chapter has opened in the saga.
An embattled Israeli diamond tycoon,
Beny Steinmetz, surrendered his claims
to Simandou in February, after ten years
of legal battles with Guinea’s govern-
ment and Rio Tinto, an Anglo-Australian
mining giant. Simandou North was put
up for tender. Last month the winner was
announced: smb, a joint-venture owned
by a consortium which includes Win-
ning Shipping, a Singaporean maritime
firm, ums, a Guinean-French logistics
company, and Shandong Weiqiao, a big
Chinese aluminium producer. The enti-
ty, in which Guinea’s government holds a
10% stake, will pay $15bn to develop the
site, build a new deepwater port and a
650km railway to link the two. Guinea’s
parliament is expected to wave the deal
through in the coming weeks.
The successful bid is a coup for smb,
which is barely known outside the west
African nation. It is also a departure from
smb’s previous business—bauxite. The
firm was founded in 2014 to meet China’s
voracious demand for the ore, fromwhich aluminium is smelted. Guinea has
a quarter of the world’s proven reserves
of the stuff. In 2018 smb exported 36m
tonnes of it, worth around $2.1bn, mostly
to China, which imports about half its
bauxite from smb. Winning’s vessels
ferry about 200 shiploads a year to Chi-
nese ports.
The private joint-venture keeps its
finances close to its chest but Bob Adam,
an expert on mining in Guinea, reckons
that after taxes, royalties and operating
costs smb is making about $800m profit
a year. “They are now the most signif-
icant economic enterprise in Guinea,” he
says—and the only one among the
world’s biggest bauxite producers with a
direct link to China.
A shift into iron ore presents chal-
lenges. Building a port and a railway
through the country’s malaria-infested
forest will take years and could cost
much more than the estimated $10bn.
smb will have to co-ordinate with Rio
Tinto and Chalco, a Hong Kong-listed
company controlled by Chinalco, a Chi-
nese state-run firm, which jointly con-
trol Simandou’s southern blocks. The
Boké region (the bin the firm’s name) has
been plagued by riots. Many local resi-
dents are angered by lack of access to
clean water or health care. But China is
keen on Simandou’s high-grade iron ore,
which emits less pollution when pro-
cessed, says Eric Humphery-Smith from
Verisk Maplecroft, a risk consultancy. It
also wants to lock in supply. And it can
afford to wait.Galvanised
Mining in AfricaDAKAR
One of the world’s biggest iron-ore deposits has a new owner