MELBOURNE (Reuters) - Chinese steel giant Baosteel Group is counting on slashing the A$7.4 billion ($6.90 billion) cost estimate for the West Pilbara Iron Ore project in Australia to justify building a new mine, rail and port that will add to a global glut of iron ore.
Baosteel Resources, working with Australian rail operator Aurizon Holdings Ltd, took control of the West Pilbara Iron Ore project in July after sealing a $1 billion takeover of Aquila Resources.
In buying into West Pilbara, Baosteel shrugged off the disastrous experience of state-owned rival CITIC Pacific Ltd on the $8 billion Sino Iron project. China's biggest iron ore investment in Australia began exporting in 2013, three years behind schedule and more than three times over-budget.
Baosteel and Aurizon managed to buy into the West Pilbara project during a downturn in the industry, while CITIC Pacific and other Chinese entities invested at the peak of the commodities boom, when Beijing was racing to secure supplies of iron ore and coal.
That fueled a construction boom in coal and iron ore mines, which came on top of mega projects in Australia's gas sector that drove up labor and equipment costs. Those have now dropped as commodity prices have cooled and projects have been completed or shelved.
"We will learn from CITIC and other Chinese enterprises' practices," Baosteel Resources Chief Financial Officer Wu Yiming told Reuters in her first interview after the Aquila takeover.
Aquila is 50 percent owner of the Australian Premium Iron (API) joint venture that owns the West Pilbara project. The other half is owned by resources investor AMCI Group and South Korean steel giant POSCO.
Wu said Baosteel expects to build a low cost, direct shipping ore (DSO) mine by 2018 that will be profitable even if the global iron ore market remains in oversupply as it is now.
"API is a DSO mine, which can directly ship, so from the competitiveness side it's quite different from other mines."
Direct shipping ore mines are cheaper to develop as the ore can be shipped as is. In contrast, miners digging magnetite ore, like CITIC Pacific at the Sino Iron project, have to build huge plants to extract iron before it can be exported.
The bulk of the A$7.4 billion capital cost of the West Pilbara project estimated in 2012 stemmed from the port and rail at A$4.6 billion. Aurizon, now in control of the infrastructure, sees those costs falling sharply.
Costs on one of its rail projects in Central Queensland, due for completion in roughly the same time frame as the West Pilbara project, have dropped 40 percent, Aurizon Chief Executive Lance Hockridge said. If the port and rail component of West Pilbara fell by the same amount, that could bring the infrastructure cost down to about A$2.8 billion.
"We can't quantify it at the moment. But our expectation is that the numbers will be very materially different, i.e. better, than the ones that were anticipated in those 2012 numbers," Hockridge told Reuters in a joint interview with Baosteel's Wu.
Baosteel is confident the 30 million tonnes-a-year mine will be profitable even if iron ore prices remain at around $95 a tonne, where they are now, just above a 21-month low hit in June.
"Of course they can make money," Wu said. "It's a hard market. But the winners will be the low cost mines. So we'll try to build API into a low cost and competitive mine."
No decisions have been made yet about who will build the mine. Baosteel has never built an iron ore mine and has not built any mine the size of the West Pilbara project.
The company expects to split the mine's iron ore supply with South Korea's POSCO, but they have not negotiated an agreement yet, Wu said.
($1 = 1.0725 Australian Dollars)
(Editing by Christopher Cushing)