Australia's first Chinese-run iron ore operation, CITIC Pacific's Sino Iron project south of Karratha, has just got more expensive after its owner admitted to more project delays and flagged a potential $US900 million cost blowout.
First production from Sino Iron, which will be Australia's biggest magnetite mine and WA's first, is now slated for the first half of next year, compared to CITIC's last guidance in January of "the latter part of this year".
At the same time CITIC said it was "clearly disappointed" with the performance of its engineering, procurement and construction contractor, China Metallurgical Group Corporation (MCC), which it blamed for the latest delays.
CITIC said it was still evaluating a "proposal" by MCC of claiming another $US900 million to reflect "design and scope of work changes made by CITIC Pacific".
The MCC claim would bring Sino Iron's development cost to $US6.1 billion, compared to CITIC's original budget of $US3.5 billion.
It is the latest chapter of disappointment for the troubled Pilbara project, which was supposed to be a milestone move by China's steel industry into WA's iron ore sector.
However, a combination of approving construction at the peak of the mining boom, before the inflationary pressures plaguing the WA resources industry became known, and a disastrous performance by MCC as Sino Iron's lead contractor conspired against CITIC.
CITIC had originally targeted the middle of 2010 for first production at Sino Iron, at Cape Preston about 100km south-west of Karratha.
In a statement today, CITIC said the latest delay was the result of MCC still not having completed the first magnetite production line. Commissioning could therefore not start by the end of this year.
"Although CITIC Pacific is clearly disappointed with the performance of MCC and any cost increase, additional expenditure is necessary to complete the project," CITIC said.
"The capital expenditure on building the mine is not a small sum, but compared to the total cost of operating the mine over its 25-year life it is not very significant."
At full production, Sino Iron is slated to produce 21 million tonnes of magnetite concentrate a year and 6mtpa of pellets at what will be WA's first new pellet plant.
CITIC also hinted it had considered axing MCC from the project.
"(CITIC) believes that, among the possible options, continuing to employ MCC to complete its work as fast as possible at a cost within reason is in the best interest of CITIC Pacific and its shareholders," CITIC said.
"At the same time, CITIC Pacific will also consider and assess other alternatives.
"Although CITIC Pacific is clearly disappointed with the performance of MCC and any cost increase, additional expenditure is necessary to complete the project.
"The capital expenditure on building the mine is not a small sum, but compared to the total cost of operating the mine over its 25-year life it is not very significant.
"The project is the largest magnetite iron ore project under development in the world. The amount of work involved and its complexity far exceeded original expectations."
ARH Price at posting:
20.0¢ Sentiment: None Disclosure: Held
