Unexpected costs, legal battles and extended timelines of development are threatening to derail Western Australia’s nascent magnetite industry, less than five years after the first magnetite concentrate was produced in the state.
In November 2012, Karara Mining, which is majority-owned by Chinese steelmaker Ansteel, produced the first magnetite concentrate at its $2.5 billion project, located 200km east of Geraldton in the Mid West.
First production was a significant milestone, not only for Ansteel and its Karara Mining partner, Gindalbie Metals, but for the entire iron ore industry in WA.
Magnetite differs from the traditional hematite iron ore mined in the north of the state, in that it has a lower percentage of iron and needs to be beneficiated to be suitable for steel production.
Because of the cost of beneficiation, magnetite deposits had previously been thought of to be low value.
However, technological advancements, and commitment by Chinese companies, gave promise that a new sub-sector of WA’s iron ore industry could be a viable proposition.
But producing a high-grade export product has proven to be a significant challenge for Karara, which in the 2015-16 financial year reported an after-tax loss of $1.7 billion, including a $1.2 billion impairment to the value of its assets.
For 2016-17, Karara reported a $400 million operating deficit and, according to documents lodged with the Australian Securities and Investments Commission, the company has three loans due over financial year 2017-18 totalling more than $1.2 billion.
Against that backdrop, analysts have suggested the project has a bleak future, with Ansteel now having to decide whether to keep investing in a business taking significant losses.
China’s largest conglomerate, CITIC Limited, has also run into significant challenges in developing the Sino Iron magnetite project at Cape Preston, around 100 kilometres south-west of Karratha.
Sino Iron is a fully integrated, pit-to-port mining, processing and export operation and includes the first new port to be built in the Pilbara for more than 40 years.
But CITIC’s Australian subsidiary, CITIC Pacific Mining, has faced mounting cost blowouts – now estimated to be more than four times the project’s initial forecast, and ongoing legal battles between the mine’s operator, CITIC Pacific Mining, and Queensland businessman Clive Palmer’s Mineralogy.
Back in 2006, CITIC Pacific, reached a deal with Mineralogy to develop the Cape Preston deposit, to mine 2 billion tonnes of magnetite ore from Cape Preston for $US415 million and ongoing royalty payments on the ore mined as well as the products being exported.
At the time, CITIC Pacific expected it would cost around $2.5 billion and take around five years to get the mine up and running to its capacity of 24 million tonnes per year.
However, six years after it was meant to reach capacity, CITIC Pacific expects to produce 15 million tonnes of magnetite concentrate in 2017, while its final budget is estimated to have blown out to more than $US12 billion.
As well as the huge capital outlay, CITIC Pacific’s efforts in ramping up production to the project’s nameplate capacity have been hampered by a dispute with Mr Palmer over the Royalty B, the ongoing payments on each tonne of magnetite concentrate produced at the mine.
It was agreed Royalty B was to be based off annual benchmark iron ore prices negotiated between Australian and Brazilian iron ore producers and their customers in Asia.
But that system ceased in 2010, and CITIC Pacific and Mineralogy have not been able to reach an agreement on an arrangement to replace it.
A WA Supreme Court hearing was held on the matter in June, but it is not clear when the court will hand down its decision.
CITIC Pacific and Mineralogy are also at loggerheads over the need to expand the mine’s waste and tailings storage facilities, with CITIC saying Mr Palmer’s company has refused to assist it in obtaining environmental and other government approvals.
In the company’s latest financial accounts, lodged with the Hong Kong Stock Exchange in September, CITIC chairman Chang Zhengming said there was a real risk the mine could be shut down if a favourable resolution was not reached on both matters.
“There’s a misconception that companies with a state-owned background or ownership are not commercially driven and our resources are assumed to be unlimited,” Mr Chang said.
“This is not true. Chinese companies all have individual characteristics.
“I can assure you that CITIC is very much its own corporate commercial entity, with its own approach and very cle ar commercial objectives and constraints.
“While CITIC has its roots as one of China’s largest state-owned enterprises, we are a listed company accountable to an increasingly diverse shareholder base.
“Any investment we make has to be economically viable and provide our shareholders with a return on their investment.
“For Sino Iron to be sustainable, it must be able to demonstrate long-term commercial viability now.
“This means that we not only need to operate efficiently, but, most importantly, operate profitably.”
Notwithstanding the cost blowouts and the court battles, CITIC Pacific has made a significant contribution to the WA economy by developing the Sino Iron mine.
CITIC Pacific directly employs 1,500 people and there are around 1,100 permanent contractors working on the minesite.