Citic Pacific said a start-up delay and a second major cost blowout for a major iron-ore project in Australia will dent the project's profitability.
But it was difficult to change the project's contractor, China Metallurgical Group Corporation, which was considered one of the most experienced in this type of mine, chairman Chang Zhenming said after announcing that the firm's net profit had risen 24 per cent year-on-year to HK$6.01 billion.
'We have been trying to find a reasonable resolution to Metallurgical Group's cost overrun problem' he said. 'The delay will certainly hurt the project's profitability, but we believe completing its construction as soon as possible would serve our shareholders' interests best.'
Due to higher labour and material costs, an appreciating Australian dollar, and extra costs to meet Australian technical standards, Citic Pacific agreed in May last year to pay Metallurgical Group US$835 million more to finish the mine.
Last month, Citic Pacific said the contractor had asked for an additional US$900 million, partly citing changes in design and scope of work requested by Citic Pacific. Chang said it was still negotiating with the contractor, and declined to quantify by how much the cost overrun would dent the project's return rate. Expected completion has also been pushed forward to next year's first half from this year's end.
Chang declined to comment on Goldman Sachs Securities' estimate that the latest cost blowout would cut the return rate to just over 6 per cent from around 10 per cent, saying any return rate estimate was subject to accuracy of the forecast of many parameters, such as iron-ore prices.
A Commerzbank research note yesterday said China's iron-ore price had bucked a fall in many commodity prices, climbing to around US$178 a tonne, the highest since mid-May on strong steel demand.