Metallurgical Corp loses $3.1b in Australia mine

Shares of Metallurgical Corp of China (MCC), the country's leading metallurgical conglomerate, dropped by 2.7 percent Thursday in Shanghai trading after the company reported an expected loss of 7.2 billion yuan ($1.2 billion) in 2012, including a loss of 3.1 billion yuan in Australia's largest magnetite iron ore mine project.

MCC was hired by CITIC Pacific, a steel and property company controlled by State-owned CITIC Group, to build the Sino Iron project in Western Australia. But MCC said in a statement late Wednesday that construction costs have surpassed the budget allowed by the project contracts, causing a loss of 3.1 billion yuan for MCC.

The original contract for the $1.1 billion Sino Iron project was signed between MCC and Sino Iron Pty, a subsidiary of CITIC Pacific, in January 2007. The project, designed to produce 24 million tons of iron ore annually and supply it to Chinese steel producers, was originally slated to begin output in the first half of 2011, but saw several postponements. Its first production line did not start operation until November 2012.

CITIC Pacific responded in a statement Wednesday that it had already signed two new agreements with MCC to increase the contract sum to the current total of $3.4 billion, given the sharp rise in construction costs of mining projects in Australia and in the spirit of completing the project as early as possible.

Speaking about MCC's loss, CITIC Pacific said "a third-party independent assessment of MCC's work on the Sino Iron project will be conducted to audit and verify the actual costs incurred by MCC."

Previous reports said CITIC Pacific would likely seek claims from MCC of up to $450 million for project delays.

"The nature of most large-scale projects usually results in certain claims by both the contractor and the employer, and these are typically resolved at the completion of the project," CITIC Pacific said.

According to CITIC, iron ore output from the project's first production line is expected to ship in February. Construction of the second production line is expected to be completed in May.

"CITIC Pacific has already invested a lot in the project, but it has missed the golden years when iron ore prices rose dramatically. Although iron ore prices have rebounded in recent months, it is uncertain whether the trend will continue because of the slow recovery of domestic demand," Zhang Lin, an analyst from Beijing Lange Steel Information Research Center, told the Global Times.

Before Wednesday's statements, CITIC Pacific and MCC had long publicly blamed each other for the delay and rising costs of the Sino Iron project.

"Both MCC and CITIC Pacific lacked experience in the operation of overseas projects. They did not consider potential risks, such as Australia's safety standards and labor shortages, during the preparation process," a consultant who declined to be named at Beijing-based HejunConsulting told the Global Times.

"If CITIC had appointed a local contractor rather than a Chinese State-owned company without enough experience in Australia, the project might not have seen so much trouble," he said.