Rio Tinto set to quit Guinea iron ore project with sale to Chinalco

(Repeats to additional subscribers)

* Struggle to find funders hampered progress

* Chinalco already holds stake

* China provides obvious market for iron ore

By Barbara Lewis and Rahul B

LONDON/BENGALURU, Oct (HKSE: 3366-OL.HK - news) 28 (Reuters) - Mining company Rio Tinto has agreed to sell its stake in Guinea's Simandou project to Chinalco, it said on Friday, potentially kickstarting the long-stalled scheme to develop the world's largest untapped iron ore reserves.

For all the project's huge potential, Rio has voiced frustration over the difficulty of drumming up financing, though industry sources said that the change of ownership could open up access to Chinese funding.

China, the world's largest iron ore consumer, provides an obvious market for Simandou, which Guinea is counting on to spur economic growth after the West African (Stuttgart: W25.SG - news) country was hit by a crippling Ebola epidemic.

When fully operational, Simandou could double Guinea's GDP, project partners have said.

Rio has a 46.6 percent stake in the project, while state-owned Chinese metals producer Chinalco has 41.3 percent and the Guinea government 7.5 percent.

If the deal to sell out to Chinalco goes ahead, Rio Tinto (LSE: RIO.L - news) will receive payments of between $1.1 billion and $1.3 billion based on the timing of the project's development, it said in a statement, adding that the aim was to seal a final deal in less than six months.

Rio Tinto CEO Jean-Sebastien Jacques said in August that there had been no progress on finding infrastructure funding for Simandou and in October the International Finance Corporation (IFC), an arm of the World Bank, said it was withdrawing from the the project.

Rio's London-listed shares were up nearly 0.5 percent at 28.10 pounds at 1219 GMT, outperforming a less than 0.1 percent gain for the wider sector.

Analysts said the deal was bullish for Rio, citing the diffculty of financing the project and uncertainty about when production would start.

David Butler, analyst at Barclays (LSE: BARC.L - news) , said the prospect of recovering more than a $1 bln from their stake "is a great outcome".

One of the many issues for the project has been doubt over demand for iron ore because of the steel market, the main user of the raw material, is chronically oversupplied.

Rio's new boss, who took over in June from a CEO with a track record in iron ore, has earned kudos for his Oyu Tolgoi project in Mongolia, which when completed will be the world's third-biggest copper mine.

Analysts and investors have interpreted Jacques' background as suggesting a shift from iron ore and Jacques has said that the copper market is likely to be the first industrial commodity to go into a supply deficit. (Editing by David Goodman)