16/04/2008 - 22:00

Rising costs a gas for Pilbara project

16/04/2008 - 22:00

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To an outsider a $US1 billion blow-out in project costs seems horrific, but to Chinese-based conglomerate CITIC Pacific Ltd the rising expenses are far outweighed by the huge jump in commodity prices

Rising costs a gas for Pilbara project

To an outsider a $US1 billion blow-out in project costs seems horrific, but to Chinese-based conglomerate CITIC Pacific Ltd the rising expenses are far outweighed by the huge jump in commodity prices.

The Hong Kong-listed company’s annual results reveal it is revelling in its decision to invest in a Pilbara iron ore project to supply its Chinese steel mills.

Operating in Western Australia as Citic Pacific Mining Management Pty Ltd, it has been quietly proceeding with a big magnetite iron ore development south of Dampier, in the Pilbara.

Illustrating the massive scale of the project, CITIC Pacific has bought 12 bulk carriers to ship ore, ordered a new 450 megawatt power plant and is thought to be negotiating a ground-breaking gas deal as it sets itself a 2009 production deadline.

In its annual report to the Hong Kong stock exchange, CITIC Pacific was upbeat about the project capital costs which it said had risen to a forecast US$3.5 billion ($3.76 billion) at its December 31 reporting date, up from a previous $2.5 billion figure. Overall the cost is expected to be $5.2 billion.

While the blow-out was blamed on the depreciation of the US dollar and rising costs in Australia, CITIC Pacific was eager to point to the upside.

“Since the commencement of our project in the second quarter of 2006, the global iron ore price (fines) has increased from 61.7 US cents per dmtu (Dry Metric Ton Unit) to 132.7 US cents/dmtu, amounting to a 115 per cent increase, which is more than sufficient to cover the capital cost escalation,” the company said in a recent announcement in Hong Kong.

“Given the current price trend of iron ore, we believe there will be further positive impact on our business model.

“Our steel plants would also benefit from the stable supply.”

As for the gas deal, sources have named Adelaide-based Santos Ltd, which is known to have been seeking oil price-linked tenders for gas from its share of the North West offshore Reindeer project, a joint venture with Apache Energy as majority partner.

Santos would not comment.

WA Business News confirmed the plan for a link to the oil price but was unable to confirm that an agreement had been made.

Such a deal, if struck, would be a first for the supply of domestic gas in WA, and could set a benchmark that would pave the way to reducing supply constraints for the state’s gas users.

A gas deal makes sense given that, in late March, Citic Pacific Mining announced it had appointed Vienna-based Austrian Energy & Environment to build a 450MW combined-cycle, gas-fired, power plant at its Sino Iron Ore Project.

In addition, a processing plant for Reindeer gas is to be located at Devil Creek, close to Citic Pacific Mining’s operations.

However, Citic Pacific is planning to have the power plant up and running by the end of 2009, 12 months ahead of the proposed first gas production from Reindeer.

STANDING BY BUSINESS. TRUSTED BY BUSINESS.

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