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* Funding woes hit West Pilbara Iron Ore project
* Soaring costs and volatile commodity prices take toll on new mine developments
* Strengthen hand of mega producers BHP Billiton and Rio Tinto
* Aquila shares tumble nearly 10 percent to one-month low
By Sonali Paul
MELBOURNE, Feb 4 (Reuters) - Australia's Aquila Resources Ltd has put a A$7.4 billion ($7.7 billion) iron ore project on ice at least through June due to funding difficulties, as soaring costs and volatile commodity prices take a toll on new mine developments.
The West Pilbara Iron Ore project in Western Australia is one of a number that have stalled since the mining boom cooled last year in the world's top iron ore exporter after Chinese demand slowed.
Aquila's project required billions to be spent on rail and port access, stretching funding prospects when benchmark ore prices hit three-year lows last year, although prices have since partially rebounded.
Troubles facing new projects have cemented the power of mega miners Rio Tinto and BHP Billiton, the world's No.2 and No.3 producers, who dominate the iron-ore rich Pilbara and can crank out supplies more cheaply using existing rail and port infrastructure.
Aquila and its partners American Metals and Coal International (AMCI), a mining investment firm, and South Korean steel giant POSCO effectively froze the project last September, as they failed to agree on a budget for the year to June 2013.
The dispute went to arbitration, and the process had been due to begin on Feb. 18, but Aquila said on Monday it had bowed to its partners and would continue the project suspension for the rest of this financial year.
"Aquila will continue to focus its efforts on how best to progress the project," executive chairman Tony Poli said in a statement.
The company said last week the project's director, Kevin Watters, had quit. He will join a competitor, Brockman Mining , working on the Marillana iron ore project also in the Pilbara, which has more options to export its ore.
Aquila and its partners have yet to agree on a replacement for Watters.
Shares in Aquila, 14 percent owned by China's biggest listed steelmaker, Baoshan Iron & Steel Co (Baosteel) , sank to a one-month low of A$2.82 and last traded down 4.8 percent at A$2.97.
Securing funding for the West Pilbara project, owned by the API joint venture, grew tougher last year as the cost estimate on the project soared 28 percent to A$7.4 billion and forecast operating costs also increased by about a quarter.
Assuming the project was 40 percent equity funded, Aquila's share of the equity funding would be around A$1.5 billion.
As of December, the company had A$441 million in cash, thanks to recent asset sales, and will receive a further A$170 million by the end of March from the sale of its stake in a coal project to Brazil's Vale.
One solution to ease Aquila's share of the funding burden would be to sell down its stake in the project to Baosteel. Aquila's Poli, who owns 29 percent of the firm, was not immediately available to comment on options to advance the project.
The West Pilbara Iron Ore project won state environmental approval last week for its proposed Anketell Port, but still needs rail and port construction approvals, key to its plans for exporting 30 million tonnes a year of ore.
The Western Australia state government has said it will not approve construction of Anketell Port until it is certain the project's backers have the funds to build a mine, a 282 km rail line and the multi-user port, which will depend on what has become an increasingly volatile iron ore market.
Rio Tinto, in contrast, has no such problem, having won approval on Monday from the state to expand its Nammuldi mine and build a 130 megawatt power station, a $3 billion iron ore project that is part of its plans to increase annual capacity to 360 million tonnes by 2015.
Aquila has been shedding assets over the past two years to build up its 50 percent share of equity funding for the West Pilbara Iron Ore project.
The API joint venture, 50 percent owned by Aquila, 25.5 pct by AMCI and 24.5 pct by POSCO, has wound down all engineering and design work for now, Watters told Reuters last week.
He said that with the heat having coming out of the construction market as several projects have been put on hold, the joint venture should be able to negotiate lower construction and engineering costs when it comes back to the market.
"It's certainly a keener market now in the engineering space and in the construction space," Watters said.