The future of Western Australia's $5 billion-plus Oakajee port and rail development has been dealt a further blow, after a major foundation customer closed its mid-west iron ore operations.
The future of Western Australia's $5 billion-plus Oakajee port and rail development has been dealt a further blow, after a major foundation customer closed its mid-west iron ore operations.
Sinosteel says it will immediately shut down the $2 billion Weld Range iron ore project near Cue in WA, laying off 43 staff, due to ongoing delays in the development of the Oakajee deepwater port and rail lines.
The Chinese steel major said the project, anticipated to produce 15 million tonnes per annum for 15 years, was too costly to maintain while awaiting the Oakajee port green light.
The news will be a blow to the WA government which has anointed Oakajee as one of a handful of key projects. The Sinosteel decision comes just two days after the market was advised that the federal government had given environmental approval for the developments rail link.
However, there has been speculation that Murchison Metals, a direct partner in Oakajee, was preparing to divest itself of as much as 25 per cent of the infrastructure company in which it effectively holds a half share.
Last week, in response to media reports on the subject, Murchison stated simply that it was looking at its options with regard to funding its share of the project.
The Sinosteel move is expected to increase the pressure on the Oakajee partners to spread the equity in the project.
Market bears, though, are expected to see the Sinosteel decision as something worse - a signal that China is struggling to continue underwriting the development of resources.
"We are certainly not closing the door on Weld Range, however we must make the right business decisions in order to protect our assets and ensure a realistic future for our organisation," Sinosteel Midwest Corporation chief operating officer Julian Mizera said in a statement.
Sinosteel, one of China's largest iron ore traders and a joint venture partner with Rio Tinto in the Channar iron ore mine in the Pilbara, said the mine would remain closed until uncertainty around the Oakajee development was resolved.
Oakajee was originally due for completion by 2012 but that had stretched out until 2015, costing the company $100 million a year, Mr Mizera said.
"Unfortunately we have now had to draw a line in the sand."
Oakajee Port and Rail (OPR), a joint venture between Murchison Metals and Japanese company Mitsubishi, has come under increasing scrutiny following cost blow-outs and reports that Mitsubishi intended to pull out of the deal.
Murchison told investors in March the estimated capital costs to develop a deep-water commodity port at Oakajee had blown out by $1 billion.
The port was expected to unlock the value of several new iron ore mines in the Mid-West region.
Murchison Metals shares were placed in a trading halt today, after its stock shed more than five per cent on the news to close down 4.5 cents, at 76.5 cents.
Murchison said it expected to make a statement to the market before the start of trading on Monday about the implications for the Oakajee project.
Premier Colin Barnett said he was not surprised by Sinosteel's announcement.
"They have not abandoned or cancelled or walked away from the project, but clearly the timetable for the port and rail development is not where it was," he said.
The WA government in April committed $339 million to build the bulk of the port component of the OPR project, a figure matched by the federal government.
Another foundation customer lined up for Oakajee, Gindalbie Metals, said the project was fundamental to its plans to develop the Karara iron ore project.
"For production beyond 16mtpa, Karara requires the development of Oakajee Port and has signed an MOU (memorandum of understanding) as a foundation customer of the project.
"We continue to support the development of Oakajee and continue to be engaged in constructive negotiations with all parties involved."
Gindalbie shares lost 5.5 cents, or 6.15 per cent, to 84 cents.