Mon Jul 4, 2011
By James Regan
* Oakajee study ups capital cost to A$5.43 bln, from A$5.24 bln
* Murchison says still seeking help to fund its share of project
* Murchison shares drop 20 percent, then recover
SYDNEY, July 4 (Reuters) - A multi-billion-dollar plan for a new Australian deepwater port and rail project to ship iron ore appeared in danger of collapse on Monday due to cost overruns and a funding shortfall, threatening to slow expansion by the world's top exporter of the mineral.
Murchison Metals , a 50:50 joint venture partner of Japan's Mitsubishi Corp , said its outback Oakajee port and rail project in Western Australia will cost at least A$5.43 billion ($5.85 billion), up by A$190 million from a November estimate, leading to speculation that it will need fresh investors to survive.
Australia already accounts for 39 percent of the global iron ore trade and the Oakajee plan was designed to open a second major iron ore province to challenge the dominance of global giants Rio Tinto and BHP Billiton mining 1,000 km (620 miles) away.
Doubts over the viability of Oakajee surfaced this month after China's Sinosteel , a cornerstone user at Oakajee, placed its Weld Range iron ore mine project on hold, citing uncertainty over when the port and rail would be available for use. .
"We acknowledge this has been a setback," Greg Martin, who was named Murchison's managing director on Monday, said in a conference call with journalists.
Shares in Murchison dropped as much as 20 percent on Monday after the company unveiled its difficulties and by the afternoon shares were down 5.8 percent at A$0.72
Murchison was also "reviewing its funding options", Martin said, after last month warning it faced challenges coming up with its share of the cost and had opened discussions with potential investors to help shoulder the cost.
"Nothing here is sacred and nothing is sacrosanct," Martin said.
However, he said the fresh investment was "more than likely" to come from a so-called strategic investor -- one that would use the ore, such as a steel company.
South Korean steelmaker Posco is Murchision's largest shareholder, although in the past Murchison has hinted at "Chinese parties" being interested.
COST OVERRUNS
Australia has faced cost overruns on a number of resource projects recently, but with strong demand from Asia set to continue, some analysts see the need for more ports to handle exports still in place.
"There is no shortage of demand for new port and infrastructure of this type in Australia," said Heather Zampatti, head of wealth management at Bell Potter Securities in Perth. "And Murchison is certainly no orphan when it comes to cost overruns and delays to projects."
Escalating costs have already started to hit A$200 billion worth of energy and mining projects underway in Western Australia, where global miner BHP Billiton and Woodside Petroleum recently announced cost blowouts.
Sinosteel's withdrawal leaves Gindalbie Metals' Karara iron project and the Jack Hills mine owned by Murchison and Mitsubishi as the two remaining customers for Oakajee.
Gindalbie has said it was not relying on Oakajee to produce up to 16 million tonnes of iron ore per year, though expansions beyond that will require the construction of Oakajee.
Gindalbie faces its own financial strains. Last week it said it will consider an equity raising with the help China's Angang Steel Co to fund a 30 percent leap in construction costs.
The mid-west region of far west Australia is viewed as fresh hunting ground for foreign prospectors, many from Asia, hungry to tap Australia's abundant cache of minerals but virtually barred from the Pilbara by Rio Tinto and BHP Billiton, the world's No. 2 and 3 producers of iron ore.
Murchison must now submit the revised cost estimates to the Western Australia state government, which has been critical of delays and cost overruns surrounding the project.
Western Australia's state leader, Colin Barnett, who has been pushing to open the mid-west to mining for more than a decade, in March insisted construction had to begin by the first quarter next year to allow the mid-west iron ore miners to begin exports by 2015.
Martin said at this point that timetable still stands.
Martin also said that the Oakajee partners were pursuing a more favourable tariff structure for Sinosteel.
Sinosteel could not be immediately reached for comment.
The mid-west region's iron ore mines to date remain undeveloped due to the massive iron ore reserves discovered further north in the Pilbara during the 1960s.
But other factors have since emerged to make the region more viable.
The main one is a proliferation of steel mills located along the Yangtze River in China limited to smaller sized transportation vessels. Ports used by these mills cannot accommodate the super-sized iron ore freighters that regularly dock to fill up in Pilbara ports.
($1 = 0.928 Australian dollar) (By Thomson Reuters)
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