The Australian Securities Exchange is expected to closely examine Gindalbie Metals' disclosure practices after the Mid West iron ore company warned investors in a presentation of a cost blowout at its $1.97 billion Karara magnetite development - just two weeks after stating the company-defining project was on budget.
In a passing reference in a wide-ranging corporate presentation released to the ASX on Monday, Gindalbie admitted that "cost escalations from the May 2010 estimate will be reflected in a revised cost estimate, which will be dependent on completion of detailed design and award of construction contracts".
No guidance on the cost blowout was given but it is expected that Gindalbie will update the market by next month.
Already UBS analysts led by Glyn Lawcock have tipped a "conservative" 30 per cent increase in Karara's budget, or an additional $600 million, which may require Gindalbie to raise an additional $90 million in equity.
Gindalbie owns half of the Karara project, with its biggest shareholder AnSteel owning the other 50 per cent. Construction of the project began last year.
Mr Lawcock left his stock recommendation unchanged at "buy" with a $1.65 price target.
But Royal Bank of Scotland's Todd Scott downgraded his recommendation from "buy" to "hold" and cut his price target from $1.85 to $1.40 in response to the cost blowout warning.
It is not clear when Gindalbie realised that Karara would not meet its already-revised budget of $1.97 billion, up from the original forecast of $1.65 billion before project scope changes and cost inflation had to be factored in.
In its December quarterly report, Gindalbie's first line of the "key points" summary stated that "the budget and schedule for the Karara Iron Ore Project remain in line with previous forecasts".
The company went on to declare that "commitments have been made for a total of $1.26 billion worth of work at or below the corresponding period".
Although analysts would not have been surprised by the Karara cost blowout warning, given most resources projects in WA breached their budgets and timetables, the disclosure so soon after the quarterly report is likely to have surprised them.
Gindalbie management are in New York addressing investors and could not be reached for comment last night.
The company's shares eased 1 to $1.33 yesterday, extending a week of losses.
On January 17, when Gindalbie released its quarterly report, the shares were trading at $1.34 before racing to $1.47 in the ensuing days.
GBG Price at posting:
$1.30 Sentiment: None Disclosure: Held
