ONE broker, attempting to sum up the challenge facing Kingstream Steel’s Oakajee project, suggested: “it’s a bit like a shipyard with the resources to build fishing boats attempting to launch the QEII”.To some degree, the principles of Kingstream probably agree that it may have been a piece of corporate impertinence for a small Perth company to attempt to launch what will be a steel project of world rank.The many times when this seemed imminent has given the market “project fatigue”, and increased the ranks of sceptics who have heard several reports from Kingstream’s directors that progress is likely “in the next three to six months”.However, the optimism persists, with a new voice, that of chief finance officer Laurie Fitzgerald, adding a long-term perspective.He worked on two of Rio Tinto’s most successful projects – the Bougainville copper venture and the Argyle Diamond project – recalling that these, along with the North West Shelf complex, took many years to commission, with disappointments and doubts emerging a number of times.He agrees that Kingstream, led by Nik Zuks, is a small company to have attempted launching a project worth $1.6 billion (with a further $600 million to be spent by others in the venture) and that it urgently needs a major international partner to accelerate its development.At least five potential participants are in discussion with Kingstream at the moment, and efforts to raise project finance continue simultaneously. Mr Fitzgerald is confident Oakajee will be in production by 2004, a view shared by an international industry analyst.This latest prediction is delivered with more authority than perhaps some of the previous ones, given Mr Fitzgerald’s long experience in the resource industry and, in particular, in project development.Mr Fitzgerald, who has been with Kingstream for about 18 months, says independent feasibility studies –and there have been a number of them – confirm that Kingstream will be among the lowest cost steel producers in the world, with some figures suggesting it will be the very lowest.Given its almost ideal geographic position, Kingstream is expected to play a major role in filling the growing need for steel in Asia in the next decade.Mr Fitzgerald argues that its position half way between the North West Shelf and Perth provides the best combination of natural resources, capital spending and geography available anywhere in the world, with the possible exception of Venezuela.Studies commissioned by Kingstream show the project should produce steel with operating costs of $220 per tonne and less than $320 a tonne with all costs included.Both these figures are about half the average for the world steel industry as a whole, with the previous generation of steel capacity – blast furnaces – now regarded as dinosaurs.Although two thirds of the world’s steel is still produced this way, the ratio will change, with electric arc furnaces and direct reduction, the technologies to be employed at Kingstream, replacing the blast furnaces.p From page 14Mr Fitzgerald says he can understand the weary scepticism of the market as it surveys 10 years of effort to launch Kingstream, but he returns to the analogies of the projects he has worked on.He points out that Bougainville took 14 years to come into production, yet proved to be a highly profitable operation until political and social issues closed it.Argyle, while seen by the market at the time to be a bonanza, had dubious economics until its scale was increased to the point where it produced 50 per cent more diamonds than were being turned out throughout the world at that time.The North West Shelf also had a long gestation, with many disappointments along the way.In the case of Kingstream, the major recent setback was the Asian crisis of nearly three years ago, which swept away the major participant in Kingstream, the An Feng Steel Co of Taiwan. The company was in the midst of an ambitious expansion program when the market for its steel collapsed. It had held 80 per cent of Kingstream’s shares, and poured millions of dollars into studies and preparatory work.At that time, Kingstream was close to securing the support it needed for the Oakajee project, and it has taken the intervening years to recover the lost ground.Mr Fitzgerald quotes an independent assessment which claims that, when Kingstream is close to commissioning, its shares will be worth at least $2.50 (against the current figure of 15 cents) and it will rapidly reach high profitability.He is particularly sensitive to the claim that the Oakajee port was approved by the previous government (a commitment which appears to be honoured by the current one) as a “favour” to Kingstream.Mr Fitzgerald says the company’s first choice for a port was Geraldton, but that site was rejected by the government, which insisted on Oakajee, noting that it wanted a port in the mid-west of the coast, since there was none between Dampier and Fremantle to stimulate regional development.Thus Oakajee, is a port chosen by the government, and to be used by Kingstream under normal commercial terms.Mr Fitzgerald would not comment on previous optimistic forecasts by Kingstream directors, but a number of brokers have said that enthusiastic and premature, although well-meaning predictions, had certainly damaged Kingstream’s credibility.Mr Fitzgerald says there is a more sober tone in Kingstream’s thinking these days, with the possibility that, if support cannot be found for the entire project, it could initially launch a pelletising plant and export its output while still pursuing the direct reduction electric arc furnace phase.Such a compromise would give heart to Kingstream supporters, although this should not be interpreted as defeatism.At present Kingstream is in discussion with those five possible strategic partners, at least several of them in the international steel industry, and also has had commitments to equity from a number of the companies which will build and operate the plant. An Indonesian steel plant already has indicated its willingness to be an equity participant.The wish to participate as shareholders is seen by Mr Fitzgerald as a final endorsement of Kingstream’s viability.He also emphasises that the processes to be used do not embrace any risky new expertise, but employ direct reduction technologies which have been in use for 50 years and are widespread throughout the world.Anxious to emphasis the care which has gone into the project’s planning, Mr Fitzgerald points out that the company has examined up to eight possible locations, three technologies and three levels of capacity, with each stage of the feasibility having been double checked.Mr Fitzgerald is comfortable with Kingstream’s recent capital push to keep the company in operation – a $10 million in convertible note debt raisings and another $15 million, to be provided over several years, for working capital while partners and funding are found.These sums are small compared with the total cost of the project and the likely cashflow.The project’s supporters say the current problems and delays will be seen in the future as minor obstacles in the long period taken to launch such ventures.
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