Citic Pacific

Beware of offshore rules, titan warns

PUBLISHED : Monday, 12 March, 2012, 12:00am
UPDATED : Monday, 12 March, 2012, 12:00am


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Mainland companies need to be alert to regulatory differences on employment and project management when operating in the mining industry overseas, or risk budget overruns and delays, warns the chief of one of the nation's biggest engineering and construction firms.

'Mainland enterprises are not familiar with regulations in overseas markets, so they need to pay some tuition fees to learn how things work,' Jing Tianliang, chairman of Hong Kong-listed Metallurgical Corporation of China (MCC), told the South China Morning Post on the sidelines of the Chinese People's Political Consultative Conference.

Jing said the caution was particularly relevant when working in developed nations where mainland companies had little experience, rather than developing countries where mainland firms had built various infrastructure in exchange for access to resources.

MCC has been criticised for completion delays and a doubling of the construction budget for Hong Kong-listed Citic Pacific's iron ore mining facilities in the Pilbara region of West Australia.

When MCC was contracted to build the facilities in 2007, the budget was US$1.75 billion, but four years later the expected outlay ballooned to US$3.41 billion.

Citic Pacific blamed this on surging costs of material, labour, and the rising Australian dollar, as well as miscalculations by MCC.

Trial production of the facilities is expected from late August, delayed from an original target of late last year.

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

Anil Daswani, head of conglomerates research at Citi Investments, estimated Citic Pacific's total outlay could reach US$9.3 billion.

Citi also changed its forecast on the mine from an operating profit for this year of HK$662.2 million to a loss of HK$274.6 million, and slashed next year's profit estimate from HK$2.17 billion to HK$26.6 million, after factoring in higher depreciation costs from the budget blow-out and commissioning delay.

Jing said part of the reason for the 'miscalculations' was a lack of understanding about Australia's labour rules and project management procedures. 'For example, we are allowed to take our mainland staff over there, but they have very high standards on workers. They required our technical staff to be proficient in English and have specific qualifications, and we only found out about this after we signed the engineering contract,' he said.

Jing said there were also differences in project management procedures. 'But when we signed the contract, it was based on how we do construction projects on the mainland.'

MCC had done overseas projects, particularly in Africa and the Middle East, but Australia was its first foray into a developed nation.

Citic's Chang said earlier that MCC would consider using local contractors to assemble the last four of six production lines. Jing said MCC was open to talks on this but its priority was to get the first two lines operating smoothly.


The value in US dollars of the contract MCC signed with Resourcehouse to build infrastructure for a coal mine in Queensland