Fortescue Metals Group review says Iron Bridge blowout could hit $US900m
Fortescue Metals Group says the true extent of blowouts at its troubled Iron Bridge magnetite mine could hit $US900m, almost 35% above initial cost estimates.
Fortescue Metals Group is facing a billion dollar blowout at its Iron Bridge magnetite mine in the Pilbara, after the company upped its estimate of the project by as much as $US900m ($1.17bn) in the wake of a full-scale review of the cost and progress of the major construction project.
Fortescue said it now expects Iron Bridge to cost $US3.3bn to $US3.5bn to complete, up from a $US3bn estimate in February and an original cost of $US2.6bn when it was approved in 2019.
The company said it now expects to complete construction of Iron Bridge by the end of 2022, a delay of 6 months from its initial timing, with the ramp up now set to take 12 to 18 months – meaning the project’s full capacity could be delayed by as much as a year from initial estimates.
The final figures come after an internal review of the project’s schedule, cost and timing. In February, when Fortescue Metals Group first gave details on the extent of the problems, it tipped the likely cost increase at about $US400m ($516m) in February, as it launched what it said was a major rethink of the project.
After putting a three month “pause” on major work at the project as it conducted the review, which focused on “contractor selection” and whether it would be cheaper to use its existing rail line to transport the ore to port, Fortescue said on Friday it had left the original plans largely intact and still plans to build a 135km slurry pipeline to move magnetite concentrate to Port Hedland.
“The increase in capital expenditure compared to the investment decision in early 2019 reflects project-specific and market factors impacting materials and installation costs, including inflation, foreign currency exchange rates and labour constraints,” the company said.
Fortescue chief executive Elizabeth Gaines defended the company’s initial cost assumptions on Friday, telling reporters the company had stuck with its original plans for the development of the mine after the review, and that surging labour costs in WA and the stronger Australian dollar were to blame for the blowout.
“Without feeling defensive on it, I would not acknowledge that mistakes have been made,” she said.
“In terms of where we are today and capital estimates, market conditions have changed since we announced (the details) in April 2019. Both in terms of iron ore supply, which is where we are today with the current iron ore price, but then it‘s also had some impact on costs and other materials – so it’s a function of the current market conditions.”
Iron Bridge was originally planned to include an ore processing facility capable of producing 22 million tonnes of concentrate a year, an airstrip and accommodation camp, as well as a 135km pipeline to Port Hedland to pump magnetite slurry to its port facilities, and return water to the mine, as well as another 195km pipeline to source water from borefields in the Canning Basin.
Ms Gaines said those elements remained largely unchanged after the internal review, which concluded shifting to using the company’s existing rail and port infrastructure would cost more than a slurry pipeline.
Iron Bridge represents a key element of Fortescue’s strategy to move its iron ore up the value chain by producing higher grade products and shifting its average shipment grade above 60 per cent.
Fortescue has said it expects the concentrate produced by the mine to grade 67 per cent iron, with lower impurities than ore produced from mines in Brazil and Australia, and sell for a premium to benchmark prices of ore grading 65 per cent.
The company originally said it expected the mine to have an all-in sustaining cost of production of about $US45-$US55 a tonne, with sustaining capital of $US4-$US6 a tonne, and additional costs for royalties, administration and shipping.
Fortescue did not give a new all-in sustaining cost in Friday’s update, but said it expects cash production costs of $US33 to $US38 a tonne from the mine, up from earlier estimates of $US30 to $US35 a tonne.
Chief financial officer Ian Wells told reporters the all-in sustaining cost includes estimates of royalty payments and freight costs, and would depend on the iron ore price when Iron Bridge began selling iron ore.
He said the bottom end of the cost range would likely begin at $US55 a tonne, on current assumptions.
The blowout cost the jobs of three key executives associated with the project, including chief operating officer Greg Lilleyman and projects director Don Hyma, and the Iron Bridge project director.
In March Fortescue began cancelling major construction contracts at Iron Bridge as it grappled with cost blowouts at the project, retendering sections of work at the mine.
Ms Gaines said only a small number of contracts had been cancelled, and the company was working with its contractors to revise the scope of work in tenders that had already been granted. She would not comment on how many contracts were still to be awarded, however.
The Iron Bridge Magnetite project is an unincorporated joint venture between FMG Magnetite Pty Ltd (69 per cent) – 12 per cent owned by Chinese steel major Baowu – and Taiwan’s Formosa Steel IB.
Fortescue shares closed down 15c to $22.12 on Friday.
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