Citic Pacific May Face Sino Iron Write Downs in Coming Years

Citic Pacific Ltd. flagged future write downs on its Australian iron ore mine after saying spending to date on the project had increased to $9.9 billion.

“The ironic fact is that in meeting the major milestone of first export shipment our company’s financial results will suffer in the short term,” Chang Zhenming, chairman of the Hong Kong-based company, said in a statement today. “I want to prepare you for these realities.”

Citic Pacific is focusing on increasing output at its Sino Iron project in Western Australia, the single largest foreign mining investment by a Chinese company. It shipped its first concentrate in December. Further spending will be needed to finish all production lines by the end of 2016, President Zhang Jijing said today in Hong Kong.

Depreciation and interest expenses will rise significantly this year, in addition to potential “impairment pressure” in coming years, Chang said in the statement. “The only remedy for this effect is to scale up production,” he said.

Of the $9.9 billion spent as of the end of last year, $7.4 billion was on construction and $500 million was for mining rights, Zhang told reporters. Citic Pacific sees iron ore prices supported at around $120 to $130 per metric ton, he said.

Iron ore with 62 percent content delivered to the Chinese port of Tianjin has slid 22 percent in the past year and last traded at $123.90 a ton yesterday.

Stock Gains

The stock gained 0.9 percent to HK$10.70 at the close in Hong Kong. Citic Pacific has declined 10 percent this year, exceeding the 4 percent fall in the benchmark Hang Seng index.

Citic Pacific’s second-half profit more than doubled to HK$3.1 billion ($400 million) in the six months ended Dec. 31, according to Bloomberg calculations based on the company’s full-year results released today. The company declined to confirm the calculations.

Full-year profit rose 9 percent to HK$7.6 billion, Citic Pacific said in the statement, beating the HK$5.8 billion average estimate of three analysts compiled by Bloomberg. Sales decreased 6 percent to HK$88 billion.

The full-year loss at its iron ore unit widened to HK$1.6 billion from a loss of HK$781 million a year earlier, Citic Pacific said. Sino Iron is currently operating the first of six production lines. When completed, the project will be able to produce 24 million tons of iron ore concentrate annually.

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