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Fortescue's Simandou bid unlikely to get investors' support, analysts say

Investors are unlikely to react positively to the bid of Fortescue Metals Group Ltd. to develop blocks 1 and 2 of the Simandou iron ore deposit in Guinea, The Australian reported, quoting JP Morgan analyst Lyndon Fagan and Morgan Stanley analyst Rahul Anand.

According to Fagan, the market is unlikely to see the bid as a positive step unless Fortescue finds a way around the Guinean government's demands that Simandou will be developed through a 650-kilometer in-country rail line and a new port, rather than a quicker trip to market through Liberia.

Fagan said that the project could offer an attractive return on investment for Fortescue if a low capex trucking option is pursued. He also noted that given Guinea's rank compared with Australia in terms of sovereign risk, widespread investor support cannot be expected if the project is awarded to Fortescue.

"A large-scale pursuit of Simandou could also change the Fortescue investment case for some investors based on ESG screens, along with development risks," Fagan said.

Meanwhile, Anand said Fortescue's bid was likely for long-term positioning.

"If a significant cash outlay is made, investors could focus on impact to near-term payout and leverage," Anand wrote in a client note.