(Corrects CITIC interpretation of royalty scheme in paragraph 5 to when ore passes the primary crusher, not when exported)
SYDNEY, April 22 China's CITIC Pacific is delaying completion of its $8 billion Sino Iron project in Australia until late May because of engineering problems, the latest in a series of setbacks to plague China's single-largest foreign mining investment.
Sino Iron had already missed a February start date for the project, which was originally expected to ship its first ore in 2010 to Asian steel mills eager to cut reliance on mega-suppliers Vale, Rio Tinto and BHP Billiton
CITIC Pacific is set on Tuesday and Wednesday to face Australian mining magnate Clive Palmer's company Mineralogy Pty Ltd, which holds lease rights to the project, in the Supreme Court of Western Australia in a dispute over royalty payments.
Mineralogy believes CITIC Pacific should already be paying royalties, distilling the case down to a clause in the right-to-mine pact that states a royalty must be paid when the ore is taken.
Mineralogy contends "taken" means when ore is mined. CITIC Pacific's interpretation of the term is when ore passes the primary crusher.
Palmer says CITIC Pacific owes him as much as A$200 million in back royalties, including penalties. CITIC Pacific has denied the accusations.
Iron ore prices are showing greater resilience amid a wider outflow of capital from commodities, such as copper, which saw its biggest weekly loss last week since late 2011.
Iron ore is benefiting from restocking of inventories by steel mills in China, suggesting any supply disruptions could have a greater impact on market fundamentals than would happen in a softer market.
Chinese steel production rose by just over 10 percent in the first three months of 2013, while the three major suppliers managed collective annual production growth of just 1.4 percent in the first quarter.
"As defects are exposed and repaired during the commissioning process, future stability of the production line will be improved," CITIC Pacific said in a statement late on Friday. "First shipment of iron ore concentrate is expected to be in the second half of May 2013."
Metallurgical Corp of China , the firm building the project, is sticking to an eventual production rate of 24 million tonnes of iron ore concentrate, which is used to make high-iron content pellets fed to its own steel mills and those of other producers in China.
CITIC Pacific and MCC were in a separate dispute over delays and cost increases after CITIC Pacific last year revealed a four-fold increase in the budget, to $8 billion.
MCC has since agreed to contribute $858 million to complete the project. (Reporting by James Regan; Editing by Clarence Fernandez)