When an Englishman or an Indian hears the acronym MCC, he’ll probably think of cricket and the venerable Marylebone Cricket Club. Founded in 1787 the MCC served as the sport’s governing body for centuries and it still owns Lord’s, the spiritual home of a game once described by playwright Harold Pinter as “the greatest thing that God ever created on earth”. (Not everyone agrees: Robin Williams’ take on cricket is that it is “baseball on valium”.)
But in Australia – another cricket-loving nation – the MCC tag will resonate with executives in the resources industry for another reason. That’s because it’s the name of a company that’s experiencing some of the worst cost overruns and delays in completing a mine in history.
MCC also stands for Metallurgical Corporation of China, the state-owned group that owns projects in places as far flung as Afghanistan and Papua New Guinea. In WiC41 we described the company as a ‘behemoth’. Aside from operating mines, MCC is also a huge construction and engineering firm. For example, it is thought to have built around 90% of China’s steel plants.
This construction prowess has taken a heavy blow in Australia’s Pilbara region where MCC is the contractor on the Sino Iron project, a magnetite iron ore mine. Complicating matters it is working for another state-owned giant from China, Citic Pacific, which is far from happy about the crippling delays. To return to cricketing metaphors, Hong Kong-listed Citic has been ‘hit for six’ by MCC’s failure to deliver the project not only to schedule, but also well over budget too.
The massive open-cast mine was originally slated to cost $2.47 billion when Citic Pacific bought the site in 2006. MCC was supposed to deliver a mine capable of shipping 27.6 million tonnes of ore per year by 2009. However, the mine is still not open and pre-opening costs have escalated to nearly $8 billion. The 21CN Business Herald says the outlay now equates to 16 times the cost of Beijing’s Bird’s Nest Olympic Stadium. And it’s still not ready: some industry experts think the final costs could top out nearer to $10 billion.
Needless to say this has been financially disastrous for Citic Pacific. Clinton Dines, former president of BHP Billiton in China, told Reuters the mine has “the potential to be a company killer, that’s for sure”.
For China Inc, Sino Iron was part of a move to buy a quality asset and reduce reliance on foreign iron ore miners like BHP, Rio Tinto and Vale (a subject WiC has written about comprehensively, see issue 121). MCC would bring its acknowledged world class magnetite mine construction techniques to Australia. Citic Pacific then planned to operate the mine for 25 years.
What went wrong? Pretty much everything, it would seem. First off, the Chinese firm wasn’t able to ship its experienced (and cheap) workers to the Pilbara. So it had to hire locals, a situation which led to complaints from the Chinese side about ‘work culture differences’. Even these were in short supply, and shortages of experienced technicians saw labour costs soar too. The Chinese also complain that local regulations slowed the construction process, while a series of hurricanes prevented the delivery of vital materials.
An exasperated Citic Pacific then signed a new agreement with MCC specifying the mine had to be operational by August 31 this year or else it would receive compensation. That has now kicked in, with MCC on the hook for $5 million a day. Under the current schedule, MCC could end up paying $450 million before the mine finally opens later this year.
Because of the delays, Citic Pacific has missed out on much of the ‘golden era’ for iron ore sales, when prices went as high as $200 per tonne. Current pricing has sunk to $90, which means the Sino Iron project will be altogether less profitable.
To tough out the financial pain, Citic Pacific has sold a 50% stake in real estate firm Citic Guoan to its parent. The Chinese government also looks likely to endorse a $575 million loan.
Arguably the biggest winner from the whole episode has been Australia. As well as fleecing the Chinese on construction costs and requiring the employment of 4,000 locals, the completed mine stands to make the economy an estimated $75 billion in export income over the next quarter of a century.
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