Costs hit delayed Citic Pacific mine

PUBLISHED : Friday, 02 March, 2012, 12:00am
UPDATED : Friday, 02 March, 2012, 12:00am
 

Citic Pacific, which has suffered major cost overruns at a major Australian iron ore project, says it is confident it can start up its first two production lines on time this year but will not rule out further rises in overall project costs.

Chang Zhenming, chairman of the Hong Kong-listed steel-to-property conglomerate that is controlled by state-owned Citic Group, said the full extent of engineering challenges would only be known when the first two of six planned production lines came on line and successfully boosted production.

'Our project is three to four times the size of China's largest iron ore mine, with a high degree of automation... it is also the first large-scale magnetite iron ore mine to be commercialised in Australia,' he added. 'It is only natural for such an unprecedented project to have difficulties.'

Magnetite contains lower iron content than conventional ore mined by Australia's mining companies, and needs processing before it can be used by steelmakers. The mines with the best quality ore had been snapped up by the mining giants by the time Citic Pacific joined the fray, Chang said last August. It amassed a portfolio of iron ore mining rights in West Australia's Pilbara region six years ago. In 2007, it contracted state-owned construction contractor China Metallurgical Corp (MCC) to build ore mining and processing facilities for US$1.75 billion.

The project has strategic value to rapidly industrialising China, which depends on imports for 59 per cent of its iron ore consumption, compared to 15 per cent in 2000. Domestic ore contains much lower iron content than imports, which means it requires expensive processing to match the quality of imports.

MCC's four-year budget doubled to US$3.41 billion, hit by surges in the costs of material, labour, and management and by the rising Australian dollar, and also reflecting miscalculations by MCC.

'MCC told us that they under-estimated the complexity and the amount of work involved in constructing and commissioning a project in Australia,' Chang said, adding that Citic Pacific had so far sunk US$7.1 billion into the project, including mining permits, construction, interest costs and management.

He declined to say how much it would have to sell its ore for to make the project profitable. But he said he was confident the first production line would enter trial production by the end of August, compared to the original schedule of the end of 2011, and the second one by year-end.

He said Citic Pacific was considering engaging another company to install the last four production lines. It was also pondering whether to cancel construction of an ore-pelletising plant near the mine, given rising construction costs and a new carbon tax in Australia.

Citic Pacific yesterday posted a net profit of HK$9.23 billion, up 3.8 per cent from 2010, but 8 per cent below the average estimate of 13 analysts polled by Thomson Reuters.

Its net borrowings amounted to 83.7 per cent of shareholders' equity at the end of last year, down from 86.5 per cent a year earlier. Chang said the company was considering issuing bonds or raising a syndicated bank loan to refinance maturing debt.

US$88b

The approximate value of the global seaborne iron ore market in 2010

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