Delayed Iron Ore Production in Western Australia

Delayed Iron Ore Production in Western Australia The first production line was suspended for maintenance On May 31, the owner of the SINO iron ore project in Western Australia and the listed company of the Hong Kong Stock Exchange, CITIC Pacific (00267, HK) issued an announcement of project progress. The company stated that the first production line of the project started the trial run and production of concentrate powder at the end of last year. In April, CITIC Pacific announced that the above production line was not able to continue operating due to technical and operational problems. It is estimated that the maintenance work will take about two months, that is, the first production line will not be put into production until at least the end of July.

In addition, CITIC Pacific also disclosed that the slip ring motor used to drive the mill in the second production line of the project needs maintenance.

In April of this year, CITIC Pacific had announced the progress of the project, stating that with the resolution of the failure during the commissioning process, the stability of the production line of the first production line will be improved. The company expects that the first batch of concentrate powder will be shipped and exported in late May. Today, as the production line is stopped for maintenance, the plan to produce concentrate powder and export will undoubtedly become a bubble.

It is worth noting that the short-term return or hopelessness of China's A-share listed company, China MCC, will also be affected by the delayed production of the Sino Iron Ore project.

According to statistics, the Sino iron ore mine in Western Australia is the largest magnetite project in Australia. In January 2007, China Metallurgical's controlling shareholder, China Metallurgical Group, took over the project's first two project lines of general contracting contracts from CITIC Pacific, with a contract value of US$1.10615 billion. In August of the same year, both parties increased the amount of the contract by 644.35 million U.S. dollars. In October, China Metallurgical Group transferred its rights and obligations in the contract to China Metallurgical Western Australia, a subsidiary of China Metallurgical. Since then, the parties agreed to increase the contract amount to 3.407 billion U.S. dollars.

However, due to the repeated delays in the construction schedule of the Sino Iron Ore Project and the continuous increase in engineering costs, China MCC has advanced a large amount of funds for the project. As of December 31, 2012, the company is expected to achieve total revenue of US$4.357 billion on this project, and the estimated total cost is approximately US$4.9 billion. Therefore, the company expects the contract loss to be approximately RMB 3.1 billion***. In view of this, China Metallurgical Group made a total of 3.1 billion in contract losses in 2012.

In January 2013, the CITIC Group, the controlling shareholder of CITIC Pacific, issued a written letter to China Metallurgical Co., Ltd. agreeing that the relevant construction cost for the completion of the second main production line with the load linkage test at the Sino Iron Mine on April 15 should be controlled at US$4.357 billion. At the same time, the total cost actually incurred for project construction is confirmed as the final contract amount after the third-party audit is confirmed, and is resolved through various legal compliance methods. The specific method is determined through consultation between the two parties.

Regrettably, China Metallurgical issued an announcement on April 20 that the original plan was for key engineering equipment during the final commissioning of the second line, including self-grinding mills and slip ring motors, and preparation of the entire line of belt-produced tests. The failure test of the slip ring motor of the self-grinding machine was not successful, resulting in the failure of the follow-up plan to be realized on schedule. The second line of the project could not achieve full-line load-coupled commissioning in mid-April.

Some people in the industry believe that the delay in the production of the Sino Iron Ore Project will no doubt be a good news for China Metallurgical. On the one hand, the delay in project production means that the project may increase additional costs; on the other hand, the delay in commissioning time means that the third party will delay the time for auditing the project construction, even if CITIC Pacific agrees to increase. With the total amount of the contract, the huge accrual of China MCC is also hopeless in the short term.

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