Clive Palmer, the mining magnate planning a Titanic replica, once said rivals called him “mad” to consider mining low-grade iron ore in Australia’s outback. Then China agreed to build the project for $2.5 billion.
Seven years later, the world’s biggest magnetite iron ore mine has yet to start shipments. Its estimated cost has jumped to $8 billion, and the first two production lines are mired in repair work. Owner Citic Pacific Ltd., the Hong Kong-traded unit of China’s biggest state-owned investment vehicle, may have to sell more debt to fund some $2 billion in extra costs to complete the project, Standard Chartered Plc said in May.
“They’ve done the hard yards,” Palmer, 59, said in an interview. “It’s cost them more money and it’s taken them longer, but that’s the learning curve.”
Delays keep China, the world’s biggest iron ore buyer, from securing more independent supplies and leave it reliant on Vale SA, BHP Billiton Ltd. and Rio Tinto Group, which control a majority of global exports of the steelmaking ingredient. Citic Pacific told Bloomberg its Aug. 14 earnings statement will come with a status report on the Sino Iron project, whose extra costs already include HK$14.6 billion ($1.9 billion) in currency-hedging losses.
The project, in which Citic Pacific acquired mining rights under a 2006 accord with Palmer, “has been a disaster,” said Michael Komesaroff, managing director of Brisbane-based metals industry consultant Urandaline Investments Pty and a former Rio Tinto president for Japan. “It will operate, it will cover its cash costs and it will make a contribution to the capital. But it will never pay off the capital.”
Royalties to Cruiser
Palmer, who stands to earn royalties on Sino Iron when it’s running, owns a nickel refinery, a tourist resort and plans an A$8 billion ($7.2 billion) coal project all in Australia’s Queensland state. The Australian also plans to build a 21st-century replica of the Titanic with Nanjing-based CSC Jinling Shipyard and sail it from England to New York by the end of 2016.
Premier Li Keqiang’s moves to tighten money supply and crack down on asset bubbles to smooth economic growth aren’t expected to hinder continued financial support from the government and parent group.
“The bottom line is still the parent support from Citic Group given the importance of the project and its status as China’s largest overseas iron ore project,” said Kai Hu, a Beijing-based senior analyst at Moody’s Investors Service. “The uncertainty is the company still hasn’t provided the market with clear estimation of the remaining capital expenditures.”
Repair work on the first two production lines was due to be completed by about the end of July, Citic Pacific said in a May 31 statement. Completion of its six lines may take as many as 26 months and may cost as much as $1.2 billion, it said in February.
“We remain focused on moving into production as soon as possible,” the company said last week in the e-mailed statement. The stock is down 27 percent this year, heading for its fourth annual decline.
Further delays mean Sino Iron will be ramping up just as prices are forecast to decline until at least 2016, according to data compiled by Bloomberg. Goldman Sachs Group Inc. sees prices dropping to $80 a metric ton in 2015 as the market goes into oversupply in the first half of next year. It traded at $130.20 on Aug. 5.
“In hindsight, if you knew what would happen by now, I doubt anyone would really have gotten into this project,” said Rong Li, an analyst with Jefferies Group LLC in Hong Kong. “It has the potential to be a really big earnings driver, but if the iron ore price goes the other way, it can certainly be a drag.”
The Australian dollar provides a glimmer of good news for Citic Pacific. The Aussie is the worst performer among the Group of 10 major developed currencies in the past six months, boosting margins of miners such as Rio that pay costs in the local currency and sell their product in dollars, according to Credit Suisse Group AG.
Citic Pacific’s relations have become strained with Palmer, with both parties suing each other in Australian courts over the project situated in Australia’s remote northwest. The dispute extends to the local port and calculating ore royalties due to be paid to Palmer.
“I went out there living in a tent while BHP and Rio said that we were mad,” Palmer said last year. “That’s unfortunately been extended to general community thinking.”