Magnetite racers eye chequered flagTuesday, 17 April 2012
IT HAS hardly been a sprint, more like a dogged marathon. But the race to ship WA’s first magnetite is finally nearing the finishing straight. The Metal Detective by Stephen Bell
The road to promised riches has been filled with quite a few potholes for WA’s two advanced magnetite projects – Citic Pacific’s $US6.1 billion Sino Iron venture in the Pilbara and Gindalbie/Ansteel’s $2.6 billion Karara project in the Mid West.
At the start, many people refused to believe either would get off the ground.
Thanks to China’s eagerness to snaffle more iron ore supply, both projects did – despite a few early wobbles partly caused by the global financial crisis.
But cost blowouts, major delays and doubts about their ultimate profitability continue to provide plenty of fuel for the critics.
Nevertheless, in the next 4-5 months, the state should witness its first magnetite cargo sailing off to China – six years after Hong Kong-based Citic paid Clive Palmer US$215 million for the rights to a chunk of his magnetite holdings near Cape Preston.
After announcing yet another delay in December, Citic said it would ship first concentrates by August 31. Gindalbie, meanwhile, confirmed last week that Karara would ship its first “test” cargo by September. Given Citic’s record of major delays, it would not surprise the Metal Detective if Karara pipped Sino Iron at the post.
Embarrassingly for Citic, Karara (admittedly a smaller project) may be finished inside three years, which is roughly equal to the amount of time Citic is behind on its original schedule.
A third contender, Asia Iron’s $3 billion Extension Hill, is a comparative late-comer, having broken its first ground late last year.
Already its target for first exports has slipped a couple of times and is now listed as late 2014.
But it is the sheer scale of the various misfortunes at Sino Iron that has captured the attention of the industry.
Having been caught up in the Pilbara’s cost inflation, Citic badly misjudged the amount of capital required for the huge venture, and the difficulties in sourcing labour.
Its latest cost estimate is more than three-times the original $US1.75 billion forecast in August 2007.
The poisoning of relations between Citic and major contractor MCC, which also owns 20% of the project, hasn’t helped matters.
In its last major update, Citic said it would pay MCC an additional US$822 million to complete the construction and commissioning of the first two production lines.
The first is due on stream August 31, and the second by December 31.
Citic has put no estimate on when the remaining four lines will come on, but industry insiders say they will likely take several years to finish, given the massive scale of the ball mills needed to process the ore.
It adds up to a very expensive start to operations for the seemingly jinxed project.
In fact Sino Iron is likely to bleed money for some years, given it will be operating at just one-third of its design capacity: 21Mtpa concentrate and 6Mtpa pellets.
This is because much of the operating costs – power and the like – are fixed.
And the company is up for royalties to Palmer, the state, and whatever impacts flow through from the carbon tax and MRRT.
So you have to wonder how long Citic and its mainland backers will be prepared to subsidise their great experiment in Australian magnetite production.
If operating losses keep mounting, Citic might have to follow the lead of BHP Billiton at its disastrous HBI plant from last decade and mothball WA’s latest downstream processing plant.
That would be a sad outcome for China’s biggest ever direct investment in WA’s iron ore sector and one that Citic and the WA Government will be very keen to avoid.
Gindalbie, meanwhile, has had its own share of problems – it is running around a year behind schedule and 50% over its original budget.
But Gindalbie pleads some mitigating circumstances. The original $1.7b forecast from 2007 was for a fixed 8Mtpa plant, whereas in 2010 the scope was changed to cater for the eventual stage two expansion.
So the company argued that its cost increase was “only” 30% on the revised capex estimate from 2010.
For the reasons mentioned above, namely high fixed costs, Gindalbie and Ansteel will be extremely keen to get their projects at full tilt as soon as possible.
Gindalbie predicts a six-month ramp-up, and $65-68/t operating costs at peak production.
In the meantime, shipments of stockpiled hematite will start from July as the Karara partners try to utilise their upgraded port and rail facilities as much as possible ahead of the bigger magnetite operation.
For both mines, first magnetite on ship will be a massive relief after so many said it would never happen.
But the achievement won’t mean much if they can’t rapidly reach design capacity.