Cost Blow-out Hits Onesteel's Whyalla Project
The Age
Wednesday May 18, 2005
Wage increases and skyrocketing prices for construction materials add $50 million
CAPITAL cost blow-outs affecting new resource project developments of all flavours are forecast to have caught up with OneSteel's $250 million plan to convert its Whyalla steelworks to magnetite feedstock.Broking house CSFB estimates that the capital cost for the project - dubbed Project Magnet - was now likely to be $300 million after taking into account labour cost increases, brought on by the national skills shortage, and skyrocketing prices for construction materials, ironically enough, including steel.CSFB said it believed a formal go-ahead for the project was imminent. The OneSteel board met this week and an analysts' tour of the South Australian operation is planned for next Tuesday.OneSteel yesterday confirmed the tour, but said the company had not signalled any intention to tie it to an announcement on Project Magnet. The company said that if it had, the market would have been told.But OneSteel acknowledged it had led the market to believe a decision on the project would be made before the end of June. That follows on from last August's announcement that the project had cleared the feasibility study stage, with a final go-ahead conditional on certain regulatory approvals and board approval for construction and marketing contracts.Project Magnet involves mining OneSteel's magnetite ore resource in SA's South Middleback Ranges. The magnetite (35-40 per cent iron) will replace the use of hematite (65 per cent) iron ore.The effect of capital expenditure will be to extend the life of the Whyalla steelworks from 2020, based on the group's hematite resources alone, to at least 2027.It will allow OneSteel to increase exports of hematite sales, cashing in on the 72 per cent US dollar price increase recently awarded to the big Pilbara hematite producers, BHP Billiton and Rio Tinto.CSFB estimates Project Magnet will generate improved returns for OneSteel, even at the higher cost of $300 million. The broker forecast earnings before interest and tax of $50 million, a 16.6 per cent return. "However, we expect the iron ore price and slab prices to still be above their long-term average in (financial year) 2008, generating a peak EBIT in that year, potentially approaching $134 million, or a return of nearly 45 per cent."CSFB said the $300 million cost could be financed off OneSteel's balance sheet without the need for an equity raising. Whyalla produces about 1.2 million tonnes of steel a year, when it is not suffering from the sort of blast furnace problems it suffered in the December 2004 half. OneSteel is the biggest local producer of steel long products - structural, rail, rod, merchant bar, cold finished bar, chrome-plated bar, reinforcing, wire, tube and pipes.The shares gained 2 ? to $2.38 yesterday. They peaked at $3.18 in September 2004 and were at $2.14 a year ago.
© 2005 The Age
