The cost pressures and shortages of resources have caused work on a half billion dollar mining explosives plant in Queensland to be halted.
Dyno Nobel (DXL) yesterday pulled the plug on its Moranbah ammonium nitrate plant project in the central Queensland coal fields with the half a billion dollar-plus plant just half finished.
The company said it was suspending work indefinitely because: "The project no longer meets Dyno Nobel’s internal financial criteria".
The news saw the shares fall more than 13%, or 33c to $2.19, while the shares of its 13% shareholder, Incitec Pivot jumped by $5.51 to $106.51.
More than 68 million DXL shares were traded as investors bailed out of the stock which had been on most lists to be a takeover situation given IPL’s stake. The market now thinks IPL will get it cheaply because of the loss it will have to take on the decision to shut down the project uncompleted.
The question is now whether DXL will expense the entire cost so far, or capitalise some in the hope of re-starting it in the medium term.
The news was unexpected, even though it was known Dyno Nobel was having problems with the project and had made a long reference to those concerns in the interim profit announcement in late August.
Dyno Nobel Chief Executive Officer Mr Peter Richards said yesterday "The Company continued to face substantial delays in the project and difficulty in reliably forecasting the project costs in a tight Queensland construction market".
Moranbah Project’s estimated gross sunk costs to date are $280 million, meaning there was a substantial $240 million of work to be done by main contractor, United Group. United Group shares rose 10c to $20.67 on the back of an upbeat presentation about another part of its business.
Dyno Nobel said it "is investigating options to satisfy obligations to those customers that agreed to purchase ammonium nitrate contemplated to be supplied from the proposed Moranbah facility. Dyno Nobel has retained a project team to consider alternative options for the project."
Dyno Nobel warned in August the plant project would cost significantly more than the original estimate of $520 million and that production would be later than expected.
Moranbah is the in the heart of the coal mining rich Bowen Basin in Central Queensland and it would have seemed to have been an ideal place to locate an explosives manufacturing operation.
It was to have a production capacity of 330,000 tonnes of ammonium nitrate a year and was originally due for completion in the last quarter of 2009. In August that was pushed back to the first half of 2009. And now, not at all.
It was the second attempt at building a Queensland plant for DXL Earlier it and the Wesfarmers’ subsidiary, CSBP Ltd. decided not to build a new 250,000 tonne a year ammonium nitrate plant at the existing Queensland Nitrates plant in Moura, Queensland.
The two companies cited high steel prices and labour costs as reasons for the decision.Nothing seems to have changed.
Dyno Nobel continued to look at the construction of an ammonium nitrate complex at Moranbah, Queensland.
The project would include an ammonia plant, nitric acid plant, and ammonium nitrate plant.
In August last year, Dyno Nobel signed a heads of agreement with United Group Ltd. for engineering, construction, and precommissioning of the 330,000-tonne a year Moranbah plant. This agreement included a plant completion date of the fourth quarter of 2008
In late August DXL said "The anticipated development costs of Moranbah, the proposed ammonium nitrate manufacturing facility in Queensland, have substantially increased due to a delay in detailed engineering, increased project management costs, increased costs for critical trades and labour, and significant additional contingencies.
"The principal project construction contract is to be an "alliance" contract which will have a risk and reward sharing component and is currently under negotiation.
"Until engineering design and the construction contracts are finalised it will not be practical to estimate the likely final capital cost. However, it is now evident this will be significantly higher than the previous estimate which was in the vicinity of A$520 million.
"The Company is nonetheless confident the IRR of the completed project, including pull-through, will exceed the Company’s current cost of capital.
"The project is now expected to be completed in the first half of 2009.
"We are obviously very disappointed with the increased costs for the Moranbah project. We are not alone in being caught up in the tight labour and construction market, however, we have taken actions to help mitigate the extent of the additional costs. The project remains a strategic priority for the Company and the economics of the Moranbah project remain attractive, despite these increases, and are underpinned by long-term customer commitments to ammonium nitrate volume," said Mr Richards.
To date considerable progress has been made at the Moranbah plant: the ammonia tank foundation is complete, ammonia plant foundations ahead of schedule and 60% complete, relocation of ammonia plant to Moranbah 55% complete and direct man hours and procurement costs are in line with original project estimates.
The news of the overruns and the delays saw the DXL share price weaken and Incitec Pivot swooped, picking up a 13% stake at an average cost of $2.35, and now poised to grow the stake, according to the market.
