Citic Pacific

Citic's Australian project 2 years from finish line

Hong Kong flagship's net profit drops by a quarter as more losses bleed from iron ore

PUBLISHED : Thursday, 28 February, 2013, 12:45pm
UPDATED : Friday, 01 March, 2013, 5:45am

Citic Pacific, the Hong Kong flagship of state-owned conglomerate Citic Group, yesterday reported a 25 per cent decline in net profit to HK$6.95 billion last year.

Excluding non-operating income and gains on asset disposals, profit before interest and taxes fell 43.1 per cent to HK$6.57 billion.

The operating loss from iron ore mining jumped to HK$1 billion from HK$444 million.

Operating profit from special-steel production plunged 86 per cent to HK$376 million, while that from mainland property development and investment fell 55.9 per cent to HK$1.48 billion.

The company said it would have difficulty making a profit from its Australian iron ore project in the short term, because construction might not be finished for two years.

But chairman Chang Zhenming said the firm was still confident of the project's long-term prospects.

"As long as developing nations' economies are still growing well, it should be favourable to the demand, price and profits of our iron ore," Chang said.

As long as developing nations' economies are still growing well, it should be favourable to the demand, price and profits of our iron ore

A Citi research report in September estimated the Australian project would break even at US$108 per tonne of ore sold, after interest costs.

In a research report last week, HSBC analysts forecast the price of iron ore arriving at mainland ports would average US$123 a tonne this year, down 7.5 per cent from US$133 last year.

They projected it would fall a further 6.5 per cent to US$115 next year.

The first production line of Citic Pacific's project in Western Australia started producing processed ore in November, three years behind schedule.

The second line is due to come on stream in May.

Some US$9.1 billion had been spent by the end of last year, including US$6.8 billion on construction of the first line and ancillary infrastructure, and the rest on mining rights and interest expenses.

The project's engineering, procurement and construction contractor, Metallurgical Corporation of China (MCC), said in late January the US$3.4 billion budget agreed with Citic Pacific just over a year ago was insufficient and MCC had advanced the project US$858 million to complete it.

The budget has been raised three times from US$1.1 billion six years ago owing to the appreciation of the Australian dollar and rising labour and management costs.

Four more lines will be built by the second half of next year. Chang said responsibility for the latest cost overrun would be settled through negotiations after the expenses were independently audited.