China’s Citic finally in the black from Pilbara’s iron ore project

China’s most expensive foray into the Australian resources sector has finally turned a profit, almost six years after its first shipment.

Citic’s Sino Iron magnetite project in Pilbara, Western Australia.

China’s most expensive foray into the Australian resources sector has finally turned a profit, almost six years after exporting its first shipment of iron ore, as surging commodity prices in the first half of 2019 finally float Citic’s boat.

Citic’s Sino Iron magnetite pro­ject in the Pilbara cost more than $16bn to build and has been better known for the bitter legal battles it spawned between China’s biggest privately owned company and landlord Clive Palmer than for its operational performance.

But this year’s tailings dam disasters in Brazil and operational and weather issues at Australia’s iron ore exporters pushed up the iron ore price, allowing the project to declare its first half-year profit.

Sino Iron had its best result last year, according to the results filed with ASIC by the Citic subsidiary that operates the mine, booking a $US218.7m ($322.5m) after-tax loss for the year, and only $US42.9m in operating losses.

In 2017 Sino Iron declared a $US1.7bn net loss, after booking $US997.7m in asset impairments, on the back of a $US554.2m operating loss. Citic’s half year financial report, released to the Hong Kong stock exchange, does not break out the mine’s profit from the rest of its energy and resources division, and the company declined to comment on the half-year result on Wednesday.

But its 2018 accounts show the mine exported 19.1 million tonnes of magnetite concentrate at an average cost of about $US94.40 a tonne, and received about $US89.50/t for its product — roughly in line with average benchmark prices for ore grading 65 per cent iron in 2018.

Iron ore grading 65 per cent was worth an average $US105/t in the first half of the year, peaking at about $US137/t in late June, suggesting Sino Iron booked an operating profit — before interest, tax, depreciation and amortisation — of about $US100m for the half.

In comparison, Rio Tinto’s Pilbara iron ore division booked underlying EBITDA of $US7.5bn on the export of 129 million tonnes of iron ore in the first half, or about $582.3m if it had exported equivalent volumes.

With benchmark prices dropping off — iron ore grading 65 per cent is now worth about $US97/t and traded as low as $US90/t in early September — it is not clear whether the mines profitability can be sustained for the full year.

Citic chairman Chang Zhenming noted the achievement in his letter to shareholders accompanying the half-year results, saying it was made possible by the high iron ore price, as well as by cost measures at its operations.

But despite celebrating the result, he warned the future of the mine and its 3000 local workers was still at risk from the company’s running legal brawl with Mr Palmer.

“Nevertheless, threats to long-term viability remain, including the need to secure critical life-of-mine approvals as well as related tenure,” he said.

Citic’s epic legal struggle with Mr Palmer fundamentally centres on a dispute about royalty payments owed to the Queensland businessman under the 2006 agreement that allows the Chinese corporate giant to mine on tenements he controls.

Citic lost the early rounds of that battle — it had argued the rate should be revisited or scrapped as the benchmark pricing structure in the agreement no longer exists — and now pays Mr Palmer $US9 to $US10 for every tonne it exports as it waits to see whether Australia’s High Court will hear a final appeal in the case.

But the sprawling legal brawl has spiralled well beyond its starting point, and now includes a fight over whether Citic has the right to expand its tailings dam and waste dumping facilities at the mine without the support of Mr Palmer’s privately owned resource company, Mineralogy, which he has so far withheld.

Citic argues the issue threatens the viability of the mine and the WA government had previously threatened to intervene in the dispute and modify the State Agreements covering the project to allow expanded facilities be built.

But with the matter still before the courts, and court ordered mediation listed for October 16 and 17, a spokesman for Premier Mark McGowan said on Wednesday the state government remained hopeful the matter could be resolved between the parties.