Slowly but surely the idea that the Pilbara iron ore mines of BHP Billiton, Rio Tinto and, lately, Fortescue Metals might be challenged by the Midwest area, further south in Western Australia, is crumbling.
Backed by the WA Government and Premier Colin Barnett, the Midwest region idea of a series of mines, a railroad and a port near Geraldton, on the coast north of Perth, is dying as costs rise and the prospective miners from Australia and China are forced to redo budgets, find more money, or suspend work and try and find cost cuts.
A couple of weeks ago Sinosteel Australian paused its Weld Range iron ore project because of cost blowouts and delays in the railway and Oakajee port project.
Ten days ago there were reports that Murchison Metals’ plans for a mine and the Oakajee port and railroad, were in doubt.
Murchison asked for its shares to be suspended pending a statement, which came last week with the news that the company was looking for more money.
The suspension was continued and Murchison promised another statement, which came yesterday.
The news wasn’t good, the Oakjee port and railroad project (with Mitsubishi of Japan as a 50% partner) has seen its costs soar by around a third to almost $6 billion ($5.94 billion).
And the first ore won’t be delivered until 2015, at least three years late. The deliveries will come when world iron ore prices are expected to be much lower than the current $US170 – $US180 level as production from existing and new mines rise.
Murchison’s shares plunged nearly 20% on the news, from 76.5c when they were suspended, to a low of 60.5c.
But then, in a surprise they recovered to be down 1.5c at 75c, a fall of just 2% on the day.
Market sources said much of the rebound was driven by short sellers covering themselves at lower levels and making profits by buying their sold shares at lower prices.
The Oakajee project, is supposed to be a 45 million-tonne-a-year port near Geraldton in Western Australia and a railway built to a capacity of 100 million tonnes a year.
But the iron ore mines it will be servicing are based on magnetite, an inferior type of iron ore compared to the high grade hematite mined in the Pilbara.
Magnetite needs to be upgraded (usually into pellets) and is a higher cost business to be in, along with a greater sensitivity to input costs, such as energy.
Hematite is far more cost-effective and has a higher iron content and is a lower cost in all situations for steel mills.
The projects have been a major initiative of the Western Australian government of Premier Colin Barnett, which hopes to use it to open up the Mid West region as a rival "iron ore province" to the Pilbara.
The WA government has committed almost $680 million to the project. If the cost blowouts are any guide, more will have to come from the government to make the project attractive to the miners and to Sinosteel in particular.
China’s Sinosteel blew the whistle on this ambitious idea earlier this month when it put its $2 billion Weld Range project on hold because of delays and worries about cost blowouts.
There have also been media reports (denied) that Mitsubishi intends to pull out of the deal after becoming worried about the cost increases.
It would create a second major iron area, with the Western Australian and federal government having committed $678 million to the port.
Murchison said it’s continuing to review its funding options and opportunities and will continue with a strategic review.
Murchison also revealed major board and management changes which indicate that blame is being shared at the top level for the cost problems and blowout.
Long time executive chairman Paul Kopejtka has stepped down and will now be a non-executive director of the Company; Ken Scott-Mackenzie has been elected by the Board as the Company’s new Independent non-executive chairman.
Greg Martin, currently a non-executive director of the company, has been appointed Murchison’s managing director; and Murchison said Trevor Matthews will assume the title of chief operating officer after previously being the CEO reporting to executive chairman Paul Kopejtka.
Murchison spun the changes this way: "The changes reflect Murchison’s move into a critical period in its evolution, following receipt of the feasibility studies for Oakajee Port & Rail ("OPR") and Jack Hills Expansion Project ("JHEP") and the continuation of the Board’s review of strategic options".
Oakajee port and the railway are needed. There is more than 13 billion tonnes of iron ore resources in the mid-west region.
But the port and railway will have to be built for the billions of dollars in investment to happen in coming years.
The project will eventually proceed – providing the costs don’t continue to blow out – but whether Murchison is involved is another thing.
The company has a market capitalisation of less than $300 million at the moment and is trying to develop projects with combined capital costs of almost $10 billion. A big ask.
