Energy & Resources

Hill for sale

Another Chinese takeover in Australia goes sour


Still feeling the chill

“China currently owns less than 10% of its imported iron ore,” a top official with the China Iron and Steel Association told state media back in 2011. His goal: “We should seek 50% of ore to come from Chinese-invested overseas resources in the next five to 10 years.”

Larger government-backed companies heeded the call, although Citic Pacific did so with famously disastrous consequences. Its foray into Australia’s Pilbara faced massive delays and overruns, with the cost of the iron ore mine surging from a forecast $2.5 billion to $10 billion.

More recent news from Chongqing is that another state-backed firm will have to curtail its ambitions. Indeed rather than mine Australian iron ore independently, it has been ordered to bring in much-needed cash from outside investors.

The firm in question is Chongqing Iron and Steel (CISC), a lossmaking steelmaker that produces about six million tonnes of steel per year. When it bought control of the Extension Hill magnetite mine its financials had been buoyed by the central government’s massive stimulus plan in 2008 and the construction boom that it entailed.

It also looked to have been a particularly savvy purchase. For A$258 million ($277 million) CISC acquired a resource with an estimated 5 billion tonnes of iron ore (of which 1.66 billion had already been proven up in surveys) and with grades as high as 68.5% (the percentage of ore versus rock).

As Economic Information Daily points out: “No one would have thought that a project with such an excellent resource would have caused CISC a quandary.” The problem, it notes, is that the sheer scale of the mine’s potential resulted in escalating construction costs. About $3 billion is required to put it into production, and this is before Australia’s high labour costs add further expenses once it is operational.

For CISC the project looks increasingly tricky to finance. In the first five months of the year its sales were down 34% and it lost almost Rmb600 million ($96 million), compared with a loss of of Rmb2.5 billion for the whole of 2013. Even by the standards of China’s beleaguered steel industry it occupies an unattractive spot, with half its output in the form of steel plate – demand for which has been hit by the downturn in the shipbuilding industry.

CISC has also racked up debts of Rmb20 billion, calculates Economic Information Daily, much of which was used to relocate its mill on environmental grounds. The chill in the steel industry means getting access to fresh bank loans is tough too. A company insider confided that even China Development Bank was reluctant to approve further loans for the Extension Hill mine.

All of which explains why Chongqing’s local government has included CISC’s mine on a new list of projects that require private sector investment. This tallies with recent initiatives to encourage ‘mixed ownership’ within state-owned firms (see WiC230), but it also relates to the funding gap faced by the city’s steelmaking giant.

CISC’s vice chairman Guo Deyong acknowledged in an interview with the West Australian, a newspaper, that the extensive delays have seen locals lose faith in the project’s future. However, Guo told 21CN Business Herald that “if funds are available, construction on the mine could start by the end of the year, and within three years from thence iron ore can be shipped back to China.”

The company acknowledges that new debt is not the answer to the funding problem. Instead it must seek new investment and Guo says he hopes five or fewer outside investors can be found. They will all be taking a view on the price of iron ore after 2017, the earliest date that the mine – which should have a production life of about 40 years – could become operational.

However, with BHP Billiton, Rio Tinto and Vale all expanding their iron ore output, some feel a glut in the coming years could drive down prices. That may deter some investors and make it harder for CISC to sell stakes in Extension Hill.

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