Shares in Gindalbie Metals shot up more than nine per cent after the company announced an expansion of its Karara iron ore project and the appointment of a new chief executive.
Shares in Gindalbie Metals shot up more than nine per cent after the company announced an expansion of its Karara iron ore project and the appointment of a new chief executive.
However, the company also said on Wednesday that costs at the Karara Iron Ore Project in Western Australia would rise by nearly a third.
The company announced it would investigate expanding the project from its start-up production level of 10 million tonnes of iron ore a year to 16 million tonnes a year.
Gindalbie's joint venture partner and largest shareholder, China's Angang Steel Company (Ansteel), has a 50 per cent stake in Karara.
Gindalbie shares close up nine cents, or 9.47 per cent, at $1.04.
Gindalbie chairman George Jones said: "This shows how robust a project Karara is and why we believe this investment in an immediate expansion of production capacity is clearly justified with the additional capital outlay to be rapidly repaid."
The costs of the project would increase by 30 per cent due to the resources boom pushing up material and labour costs.
"All projects in Western Australia are currently subject to significant cost escalations and this situation is almost certainly going to get worse as the resources boom strengthens, pushing up the price of both labour and materials," Mr Jones said.
An increase in the scope of some of the project would account for $125 million in extra costs, the company said.
Ansteel remained supportive, Gindalbie said.
The company's new chief executive is to be Tim Netscher, a non-executive director, with current boss Garret Dixon ending his five-year tenure.
Mr Netscher is currently the senior vice president for Newmont Mining Corporation's Asia-Pacific region, a role that is due to end this month.
He is also a non-executive director of mining products and services company Industrea and a director of the Minerals Council of Australia.
Mr Netscher has previously served as managing director of Vale Australia, as an executive director with QNI Ltd when it was a publicly-listed subsidiary of BHP Billiton Ltd and also on the boards of Jakarta Stock Exchange-listed PT Inco and Johannesburg-listed Impala Platinum.
Employed on a two-year contract, Mr Netscher will receive an annual salary of $1 million, bonus payments of up to 20 per cent of his salary and up to three million share options, which are dependent on performance targets.
Gindalbie's cost blowout announcement is pasted below:
UPDATED KARARA PROJECT CONSTRUCTION COST ESTIMATE
Key Points
- Review of the Karara Project construction cost estimate is reaching advanced stages of assessment and is expected to be completed by mid year, as previously announced
- Scope expansions relating to port and power line are expected to account for $125 million of the increase in forecast capital cost, which sets the project up for its first expansion phase
- In addition, current indications suggest the total Karara Project construction cost estimate is expected to increase in the region of 30%
- Increase reflects higher cost of materials, labour and fuel, and increases in quantities of materials used for construction of the magnetite concentrator
Gindalbie Metals Limited (ASX: GBG - "Gindalbie") advises that industry-wide cost pressures currently affecting construction and infrastructure projects in Western Australia have resulted in a review of the construction cost estimate of the Karara Iron Ore Project.
The ongoing review process is reaching advanced stages of assessment and is expected to be completed by mid year, as previously announced, together with an update of the operating costs and development schedule.
A portion of the overall construction cost includes investment in the provision of additional infrastructure capacity for an ultimately larger project at Karara. This up-front investment in infrastructure is expected to result in substantial cost savings over the long term as the Project increases production from an initial 8Mtpa of concentrate to its long-term potential of +30Mtpa.
At this stage, in addition to this scope expansion, it is anticipated that the Karara construction cost is likely to increase in the region of 30 per cent. Once finalised this revised cost estimate will be announced to the market together with an appropriate funding arrangement.
These increases are emerging as the detailed design work nears completion and implementation contracts are awarded. Some of these increases in material quantities stem from Gindalbie's strategic decision to undertake part of the final detailed design work in parallel with the on-site development of Karara, which commenced in late 2009 as soon as final environmental approvals were received. Gindalbie believes this approach will result in substantial benefits, with first production of magnetite scheduled about two years earlier than would have been the case had Gindalbie slowed the pace of development at Karara pending final design of the concentrator.
As a result, Gindalbie and its Karara Project partner Ansteel stand to benefit significantly from the extremely strong demand for magnetite, which has seen prices rise to about $220 a tonne for Karara's premium-quality 68% magnetite concentrate ensuring the Project will enjoy robust cash margins.
"All projects in Western Australia are currently subject to significant cost escalations and this situation is almost certainly going to get worse as the resources boom strengthens, pushing up the price of both labour and materials," Gindalbie Chairman George Jones said.
"I have no doubt that despite the need to increase some quantity estimates for construction of the concentrator, our decision to expedite the development of Karara by proceeding with approvals and site works at the same time as carrying out the design work will ultimately deliver substantial benefits for the Project and for our shareholders.
"This decision will see Karara shipping magnetite two years earlier than would otherwise have been the case had we waited until final design of the concentrator was completed. This will enable Ansteel and Gindalbie to capitalise on buoyant demand and prices for our product.
"It will also mean that the Karara Project will largely avoid what will almost certainly be an even far more damaging inflationary environment for construction projects as the West Australian resources boom gathers momentum. Karara will, I believe, be spared the worst of this costly environment while at the same time generating strong revenues and profit margins."
"Ansteel remains supportive of the Karara project and is working closely with the Karara Project team and Gindalbie and gives the company its fullest support," said Mr Yu Wanyuan, Gindalbie Director, and the Chief Financial Officer of Ansteel.
