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.
The US$6 billion project under construction in West Australia state is the world's largest magnetite iron-ore project in development.
Magnetite ore has much lower iron content than the more widely-extracted haematite ore, and is more expensive to refine, although Cheng said some customers had shown an interest in paying a 15 per cent price premium for its magnetite product, which could be sold in powder form.
CLSA analyst Paul Kalogirou has questioned the economics of Citic Pacific's project, saying magnetite ore can be more than twice as expensive to produce.
But Chang said it was difficult to make a fair cost comparison, saying mining giants like BHP Billiton and Rio Tinto had lower costs partly because they had obtained their mining rights as early as the 1960s.
'New investors are pretty much shut out from the best quality resources,' Chang said, adding that Citic Pacific's project, being closer to ports than many new projects inland, had a logistical advantage.
Citic Pacific's first-half profit rise was mainly driven by a 473 per cent jump in profit from property sales in China, to HK$1.71 billion, although slower sales this year due to sales restrictions in some cities would affect the booking of profits next year and beyond. First-half special-steel profit grew 21 per cent to HK$1.4 billion.
The amount of global iron-ore production that is used by the steel industry
95 per cent of metal used yearly is steel