28/03/2012 - 11:03

Chinese keen to stem Sino Iron bleeding

28/03/2012 - 11:03

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The backers of the iron ore facility at Cape Preston have some tough decisions ahead.

The backers of the iron ore facility at Cape Preston have some tough decisions ahead.

IMAGINE trying to make a profit in a business that has suffered a 250 per cent construction cost blow-out, seen its completion deadline extended by three years, and is walking into a period of fierce cost increases, falling prices for the end product, and a half-baked export system better suited to a third-world country than Australia.

‘Too tough’, is what most sensible business people would say; best to walk away now before embarking on mission impossible.

Unfortunately for the management team at Sino Iron, the ill-fated iron ore processing plant being built at Cape Preston on the coast south of Dampier, walking away is not an option, yet.

Once construction is complete and the technically complex and highly automated project is operating, however, it will be very tempting for the owner to re-assess the economic viability of what was supposed to have been a glorious example of China and Australia working together.

Citic Pacific, the Chinese company behind the Sino Iron project, has suffered repeated setbacks that have been reported in an erratic way for the past three years.

Issues to hit the headlines include an original construction cost estimate of $2.5 billion, which quickly doubled to $5.2 billion but is now being reported as high as $7 billion, although a final figure of $9 billion was mentioned in conversation by iron ore executives on the sidelines of a mining conference in Hong Kong last week.

First product – high-grade iron ore pellets – was supposed to have left the project in mid-2009. The latest estimate is sometime after the middle of this year, but with no guarantees.

And when iron pellets are ready for export that will be via the utterly bizarre use of ‘trans-shipment’, code for barging the material out to ore carriers anchored offshore because Sino Iron has failed to develop the port planned for Cape Preston.

If that list of issues is not sufficiently grim there are internal cost problems that have been steadily worsening.

Since the 2009 deadline came and went, mining costs in Australia have exploded as the skills shortage has bitten. Fuel costs for the energy intensive pellet-making process have also risen sharply, and the tax take has soared thanks to the double whammy of the Minerals Resource Rent Tax and the Carbon Tax – with the high energy used in pellet making sure to hit Sino hard.

Just how hard remains to be seen, as do the critical financial factors underpinning Sino Iron given its status as a wholly-Chinese project that has been receiving the closest attention at the highest political level in Beijing because it has been an acutely embarrassing disaster.

There are two sets of precedents for what mining companies do when the economics of a business run off the rails.

The first precedent is the case of two pellet-making plants caught in the oil shocks of the 1970s, when war in the Middle East caused the price of fuel to triple overnight. It was energy that caused BHP Billiton and Rio Tinto to shut and then tear down their pelletising plants.

A second local precedent can be seen in the Windimurra vanadium and Ravensthorpe nickel projects, where high costs, poor operating performance, and falling commodity prices caused both Xstrata and BHP Billiton to close, and then sell, the projects.

No-one is yet saying that Sino Iron will face the same appalling choice, but it is a possibility that should not be dismissed.

The process over the final stages of the development of the Cape Preston project will be a dour affair.

Construction work cannot stop because an incomplete mineral processing facility has no value whatsoever. Production must start, but within a few months the plant operators will be challenged by the financial controllers at Citic Pacific (and by the government of China, which has bankrolled the project) to prove that it is operating both efficiently and profitably.

It is in the financial phase of the Cape Preston project that the games will really start because of the potential for direct government-to-government action on the question of the new taxes, and the question as to whether ‘China Incorporated’ will run the project at a loss (and pay no tax here) in order to get the iron pellets for its steel mills in China.

Three years late and $6 billion over budget is bad enough, but now comes the test of whether it actually works as promised.

The place to be

THE Hong Kong Mines & Money conference, where Sino Iron was mentioned in many conversations, was newsworthy for another reason – it moved to within striking distance of being Australia’s biggest mining conference.

Kalgoorlie’s annual gabfest, Diggers & Dealers, retains that title ...  just, but the numbers are becoming quite interesting.

Diggers last year hosted around 2,300 paying delegates, both long-stay and day visits. Hong Kong M&M hosted 2,800 last week, double the head count from last year.

More interestingly, Australian delegates or those giving Australian addresses, made up 57 per cent of the delegates at the Hong Kong event, about 1,600 people.

Early indications of bookings for the Hong Kong event next year point to it rising through the 3,000-delegate mark, a measure of the classic appeal of the city, a place where East really does meet West – normally in a bar, or at the rugby sevens tournament that just happens to coincide with the mining talk show.

The rise of Hong Kong as a place for Australian mining companies to meet customers and investors is actually not that unusual if you also consider that Africa’s second biggest mining conference (Africa Down Under) is held in Perth.

Cheque this out

CONSUMERS who cling to their cheque books as a means of paying bills will become an oppressed minority, if not extinct, in the next six years, according to a British study.

The UK Payments Council calculated that in 1999 the once-dominant personal cheque had dropped to 6 per cent of all personal transactions. By 2009 the rate was 2 per cent, and by 2018 just 0.8 per cent of personal financial transactions will be by cheque.

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“Only with a new ruler do you realise the value of the old.”

Burmese proverb


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