oakajee port project faces huge cost blowout

If Paul wrote to the Premier back in January why wasn't that information given to shareholders about cost blowouts then??

Oakajee port project faces huge cost blowout and could hit $6.7bn EXCLUSIVE: Andrew Burrell From: The Australian March 22, 2011 12:00AM

West Australian Premier Colin Barnett, left, is handed a feasibility study for the Oakajee port and rail project by John Langoulant Source: The Australian
THE capital cost of the Oakajee port and rail project in Western Australia has ballooned from $4.4 billion to as much as $6.7bn, potentially crippling attempts by Murchison Metals and Japan's Mitsubishi to build the critical infrastructure.
A series of confidential letters and financial documents obtained by The Australian also show that Mitsubishi now believes its Jack Hills magnetite project, which it is also developing with Murchison in WA, will cost a higher-than-expected $3.9bn.

And the documents reveal that Murchison and Mitsubishi are highly uncertain about their ability to meet tough new deadlines imposed on the Oakajee project, telling WA Premier Colin Barnett it will be "extremely difficult" to finalise key implementation agreements by March 31.

"It follows that any delay beyond March 31 could significantly delay the achievements of other key project milestones," Murchison executive chairman Paul Kopejtka and Mitsubishi Development vice-president Saburo Takeuchi wrote to Mr Barnett in January.

In March last year, Murchison estimated the total capital cost for Oakajee, about 30km north of Geraldton, at $4.4bn, including a $565 million contribution from the state and federal governments to fund the common-user infrastructure at the port.

But in documents marked "Mitsubishi Development", the total capital cost of the project is now estimated at $6.7bn.

This appears to include about $930m for the common-user infrastructure.

One source suggested last night Mitsubishi had made an error in its sums and the $930m should not have been included, meaning the real cost of the project would be closer to $5.8bn.

A Murchison spokesman said any reference to costs was premature and speculative, given its bankable feasibility study was not due to be completed until June 30.

But speculation has been mounting in recent weeks that design changes to Oakajee, combined with the spiralling costs of steel and equipment that have hit the resources sector, would drive up the project budget beyond $6bn.

There are fears the blowouts could push up tariffs for mines intending to sign up as customers of OPR, which could make individual projects unviable.

Mr Barnett, who has championed the development, last month gave Oakajee Port & Rail, which is owned 50-50 by Murchison and Mitsubishi, until the end of the year to prove it could develop Oakajee.

He cast doubt on Murchison's ability to develop the project and warned that big Chinese companies may need to be brought in as equity investors to boost its viability.

Chinese entities are the main investors in the Mid-West mines and China will be the biggest market for the iron ore due to be exported from Oakajee from early 2015.

According to a "funding envelope" document, believed to be written by an external consultant to OPR, the capital cost of Oakajee has grown to $5.76bn, while the cost of the common-user infrastructure is estimated at $928m.

This would mean the total cost of the project has risen from $4.4bn to $6.7bn in the past year.

The Mitsubishi document estimates the cost of developing Jack Hills at $3.9bn. UBS analyst Glyn Lawcock said in a report to clients last week that he believed the mine would cost about $3bn.

The Barnett and Rudd governments agreed in 2008 to contribute as much as $678m to develop the common-user infrastructure at the planned Oakajee port.

But fresh funding estimates obtained by The Australian show that the estimated cost of that infrastructure has ballooned from $565m to $930m since the last official estimate was published in March last year.

Mr Kopejtka and Mr Takeuchi wrote to Mr Barnett in January to warn him that costs were rising rapidly.

They told Mr Barnett that government payments for the infrastructure beyond $678m was a "key issue" to resolve so they could finalise implementation agreements with the port's customers as well as a bankable feasibility study by June 30.

But West Australian Department of State Development executive director Brett Sadler wrote to OPR chief executive John Langoulant to warn him the state was opposed to raising its contribution.