barnett was warned of oakajee risk

FYI

Barnett was warned of Oakajee risk and of 'ambitious' approval date

Andrew Burrell From: The Australian March 23, 2011 12:00AM

MURCHISON Metals and Mitsubishi Development warned in January that their plan to approve the contentious $6 billion-plus Oakajee port and rail project by March next year was "ambitious" and might need to be delayed.

But in a sign of the mounting pressures facing the companies, West Australian Premier Colin Barnett responded by ordering Murchison and Mitsubishi to fast-track the approval process and commit to the project by next December -- three months before their "ambitious" original target.

The revelations -- in confidential documents obtained by The Australian -- will spark fresh doubts over the ability of Oakajee Port & Rail, owned by Murchison and Mitsubishi, to deliver the key infrastructure project in WA's Mid-West on time and on budget.

Under the tough deadlines imposed by Mr Barnett, OPR must start construction in the first quarter next year to allow the iron ore miners of the Mid-West to begin exports by 2015.

Miners with Mid-West projects, including China-backed Gindalbie Metals and Sinosteel Midwest, need the Oakajee project developed rapidly amid forecasts the iron ore market will move from deficit to surplus by 2015, which would slash prices.

Murchison shares fell almost 7 per cent to $1.115 yesterday after reports in The Australian that the estimated capital cost of Oakajee had ballooned from $4.4bn to as much as $6.7bn in the past year.

The reports quoted documents by Mitsubishi and external consultants that referred to the $6.7bn estimate.

Mr Barnett, who has personally championed Oakajee, said yesterday he would refuse to pour any more taxpayers' money into the project despite OPR's insistence that extra government funding was a "key issue" for the development's viability.

The commonwealth and state governments agreed in 2008 to provide $678 million to build the common-user infrastructure for the Oakajee port, 30km north of Geraldton.

But the documents suggest the cost of the infrastructure has since grown to $930m.

In a statement to the Australian Securities Exchange yesterday, Murchison said any reference to Oakajee's capital estimates before OPR finalised a bankable feasibility study by June 30 was "premature and entirely speculative".

But the Perth-based miner revealed that a budget and engineering study completed for OPR last November had resulted in an indicative capital cost for Oakajee of $5.2bn.

That represents a 20 per cent increase within eight months since the previous disclosed estimate of $4.4bn in March last year.

Murchison said the estimate was preliminary and subject to review, optimisation and value engineering to identify potential savings.

In the January letter to Mr Barnett, Murchison executive chairman Paul Kopejtka and Mitsubishi Development vice-president Saburo Takeuchi spelled out a series of challenges faced by OPR before a final investment decision could be made by the original target of March 31 next year.

"We confirm that we are targeting a project go-ahead decision and financial close by 31 March 2012," they told the Premier. "It must, however, be said that this date is ambitious as well and we seek the state's understanding of the considerable volume and complexity of the issues which will need to be addressed to enable this to occur."

Mr Kopejtka and Mr Takeuchi said implementation agreements and supply chain agreements with potential customers would run to "several hundred pages" and would involve more than 26 major construction and procurement contracts worth more than $100m each.

More than 100 financing documents would be needed with at least 10 financiers.

"On this basis we seek the state's understanding that the date for a project go-ahead decision/financial close should be capable of being extended in certain circumstances," Mr Kopejtka and Mr Takeuchi wrote to Mr Barnett.

The letter said those circumstances could include force majeure events, delays in signing supply-chain agreements with foundation customers and delays in securing final approvals from credit agencies.