Ann: Yilgarn Acquisition , page-10

China can afford WA rail project, but will they want to share?

* Bryan Frith
* From: The Australian
* January 28, 2011 12:00AM

A SMALL but potentially significant development occurred yesterday which underscores the threat to Murchison Metals and its Japanese partner Mitsubishi in retaining control of the $4.3 billion Oakajee project, which involves building a new deepwater port and rail line to enable development of WA's Mid-west iron ore region.

Almost two years ago the former WA Labor Government controversially chose Oakajee Port and Rail (OPR), owned 50-50 by Murchison and Mitsubishi, to develop the Oakajee port ahead of Yilgarn Infrastructure, a consortium half-owned by five Chinese state-owned enterprises, and half by Australian investors.

OPR got the nod despite Yilgarn already having $3bn of debt funding essentially committed by China's Exim Bank, and signed letters of intent from prospective Mid-West miners to rail and ship at least 30 million tonnes of iron ore per year.

Yilgarn also had an agreement with Midwest Corp, which claimed to have a longstanding legal agreement with the WA state government, which gave it the right develop a port and rail infrastructure network, but which needed some amendments to make it functional, as parts had become outmoded by the passage of time. But the former Labor government tore up the agreement, labelling it archaic and unworkable.

OPR was required to submit a bankable feasibility study (BFS) by March 31 this year but late last year admitted it would be unable to meet that deadline and sought an extension to June 30.

That prompted a frustrated Barnett to suggest that the project may need some "modest restructuring" and that he would welcome Chinese participation.

Barnett on Wednesday revealed that he had written to OPR stating that any extension of the BFS deadline would subject to be OPR meeting some "exacting conditions".

Barnett declined to disclose the conditions but he did say that he would like to see some Chinese involvement and for it to be an Australia, Japanese and Chinese project -- the first of its kind in this country. OPR is said to be resisting any such restructure.

One of the problems for OPR is that funding of the port and rail infrastructure is dependent on the success of Murchison's Jack Hills project. Jack Hills was originally predicated on railing and shipping at least 25 million tonnes of direct shipping ore (DSO) a year but reserves fell well short of expectations.

Murchison is now pinning its hopes on its 3.2 billion tonnes Jack Hills magnetite prospects but doubters question whether it will be viable, suggesting it would require more than $3bn to develop, and would require a huge amount of overburden to be removed because it dips so sharply.

Sinosteel owns Midwest, while Anshan Iron and Steel is a major shareholder in Gindalbie and its Karara magnetite project. Sinosteel and Anshan are both shareholders of Yilgarn.

The Chinese have sufficiently deep pockets to fund the rail line but they are likely to want majority ownership to enable them to control the costs of the infrastructure.

The small but emerging iron ore hopeful Padbury Mining yesterday entered the mix by announcing that, subject to shareholder approval, it had agreed to acquire for $2.25 million all of the intellectual property of Yilgarn relating to building an open-access multi-user rail line to the Oakajee port. Padbury is evaluating promising magnetite mineralisation at its Peak Hill iron ore project in the Mid-west. The company says it is keen to ensure it will have the necessary infrastructure in place to commence production in 2015 and has entered into the agreement to purchase Yilgarn's IP as part of that "exploitation strategy".

Padbury says it recognises the current "conditional" mandate of OPR but also recognises its need to have an infrastructure solution that will meet its timetable.

That is likely to create speculation that Yilgarn's IP could form the basis for the development of an alternative infrastructure proposal involving Chinese interests.

Significantly, John Saunders, who came on as chairman of Padbury, was formerly the chief executive of Yilgarn when it was pitching for the Oakajee project. And he is well-connected in Beijing.