Oakajee doubts spark sell-off in Murchison Metals stock

SHARES in Murchison Metals plunged 23 per cent over the Oakajee project.

SHARES in troubled junior miner Murchison Metals plunged 23 per cent yesterday as investors savaged the company over its admission that it cannot meet its funding commitments for the $5.9 billion Oakajee port and rail project in Western Australia, which is facing damaging cost blowouts and long delays.

Analysts said the sell-off, in which Murchison suffered its biggest single-day fall to close at 57.5c, was caused by a series of significant broker downgrades as financial estimates released on Monday were questioned and the company's credibility remained under scrutiny.

Murchison's shares traded above $6 in June 2007 when it struck an infrastructure and iron ore mine joint-venture agreement with Japan's Mitsubishi, but they have been hammered in recent months amid doubts over the company's ability to deliver the project.

The sharemarket carnage came as China's Sinosteel yesterday hardened its opposition to the corporate structure and business case for Oakajee, saying there was nothing new in Murchison's feasibility studies.

The state-owned metals giant last month effectively killed off Murchison's chances of participating in the Oakajee project, which it is meant to be developing with Mitsubishi, when it shelved its planned $2 bn Weld Range mine, citing rising tariffs and long delays.

Murchison's new managing director, Greg Martin, held out an olive branch to Sinosteel on Monday, saying he was confident "common sense would prevail" and the company would become a foundation customer of infrastructure developer Oakajee Port & Rail.

But Sinosteel Midwest Corporation chief operating officer Julian Mizera, whose job is being abolished as part of the Weld Range suspension, said Murchison's release of the feasibility studies on the infrastructure, and its Jack Hills mine expansion, had not provided any real update.

"The final infrastructure tariff will be derived not only from the capital cost but from the total development cost of the project, ongoing operating costs and most importantly, the cost of finance and the terms on which that finance is to be made available," he said.

"Unfortunately, given OPR's current business case, the tariff simply doesn't work."

Mr Mizera said Sinsoteel had not completely closed the door on reaching a supply chain agreement with OPR.

But for the negotiations to re-start OPR would need to clearly articulate the details of a revised tariff structure that was viable and to clarify what changes to the project will be made to achieve this.

Gindalbie Metals, which is developing the Chinese-backed Karara iron ore project in the Mid-West, is also a foundation customer of Oakajee and is also yet to sign a supply chain agreement with the infrastructure group.

"To date, the Karara joint venture has been unable to reach an agreement with the Oakajee proponents and they are a long way from where they need to be," Gindalbie chairman George Jones said.

"I look forward to engaging in discussion with them to try to see where the project is going."

Industry insiders said Murchison was aware of the critical state it was in and was attempting to recover as much value for the company as it could, which would prove difficult with the market aware of the situation it was in.

"Given the elevated capex, and uncertainty around users and tariffs, we do not expect Murchison to realise significant value in any selldown," RBC Capital Markets analyst Chris Drew said.

The miner has admitted it will be unable to meet its share of the equity commitments for its interest in OPR and the mine expansion, and that a residual payment expected from Mitsubishi will fall significantly short of expectation. "While the stock has underperformed, as the market has to some extent anticipated disappointment with the feasibility results, the greater clarity we now have around project economics adds more to the downside risk than upside in our view, and we continue to see material uncertainties around the development projects," Mr Drew said.