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FMG admits to Solomon blowout
FMG admits to Solomon blowout

Fortescue Metals Group's claim it can expand its Pilbara assets at almost half the cost of Rio Tinto and BHP Billiton has been thrown into question after the miner yesterday admitted to a $US600 million ($582 million) cost blowout for its Solomon development.

Just 12 months out from a self- imposed target of operating at a run rate of 155 million tonnes a year - Fortescue is producing at a rate of 71mtpa - the miner admitted yesterday it was likely to raise an additional $US1 billion in debt.

Fortescue developments director Peter Meurs blamed the cost blow-out on a closer examination of the Solomon ore body, which had forced a redesign of the ore processing facilities. "In this case the risk really came through, with better definition of the ore body and the need to modify the process to suit that, and we've seen increases in the tonnes in the ore processing facility and we've seen other changes and challenges in just implementing the program," he said.

The rethink at Solomon has added $US500 million to Fortescue's costs, with the port and rail budget each expanding by $US100 million for a total capital cost increase of $US700 million, offset, however, by a $US100 million cut to the expansion price of the Christmas Creek mine.

The blowout, the first Fortescue has conceded since approving the big-ticket $US8.4 billion, 100mtpa expansion in late 2010, may not end at $US600 million.

Mr Meurs said there was contingency for further cost rises in the now $US9 billion budget, and a fifth berth at Port Hedland would cost an extra $US250 million.

Fortescue has said since January said it was nearing the close of negotiations with the State Government to secure the fifth berth, and while the miner has said it could work around the loss of the space, some analysts believe it would be necessary to achieve the full 155mtpa export rate.

Fortescue chief financial officer Stephen Pearce said the miner would go back to the debt markets for an extra $US1 billion in funding. The cost increases could leave Fortescue with as much as $US9 billion debt, Mr Pearce said, and would almost certainly push back a ratings agency reassessment of its debt to investment grade by a year to 2014.

While Fortescue's major rivals have blamed rising wages as a major factor in increasing costs in the Pilbara, managing director Nev Power said the miner was comfortable with the average 5 to 6 per cent wage inflation it was seeing amongst its operational staff. "It's certainly not the very high numbers that people have been talking about as disaster scenarios," he said. "We think labour inflation in that range is manageable." <div class="endnote">

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