PERTH (miningweekly.com) – Australian iron-ore miner Fortescue Metals on Wednesday announced that it would place $15-billion worth of expansion projects in the Pilbara region on hold owing to the financial impact of the proposed super profits tax (SPT).

Fortescue CEO Andrew Forrest told reporters that the company’s flagship Solomon Hub project was one of the affected projects, along with the Western Hub project.

The planned 160-million tons a year Solomon Hub project, which would cost $9-billion to develop, and create around 20 000 jobs, would be placed on hold until the financial impact of the tax was fully determined.

This project has been four years in development, Forrest said, and includes the development of a new Pilbara port at Anketell point.

To develop Solomon Hub, Fortescue had planned to establish a debt funded capital platform using equity derived from the cash flow from the company’s Chichester Hub. This financing plan will be severely impacted as a result of the new tax impost.

The $6-billion Western Hub project, which would have created around 10 000 jobs, was part of Fortescue’s longer-term planning, and was designed to supply product for export along with other western Pilbara region products.

Forrest said that the impact of the SPT would be felt through the erosion of cash flows that were required to finance major project developments. Owing to the federal government’s intention to impose the tax after a business starts to derive a return above the risk-free bond rate of the proposed 6%, compared with Fortescue’s weighted average cost of capital of about 15%, the economics of the leveraged project development were substantially impaired.

“I am a very experienced project financier, and my team is the best project finance people in the country, but we cannot find a way to maintain our Australian equity in these projects and still develop them under this new, highly theoretical tax,” Forrest said.

He noted that the proposed SPT would cut into profits before interest and capital could be repaid to investors. “So, the bankers who were excited about the Solomon Hub and who were excited about the Western Hub are no longer excited. They are all scratching their heads, telling me to find another way [to finance the project], but I’m not aware of another way.”

“After very careful deliberations and careful internal reviews, we have to announce that we cannot finance these projects under the existing strategies, without selling those projects overseas.”

Forrest noted that should the SPT pass into legislation, Fortescue would not be able to rely on its own revenues to develop these projects.

Should that happen, the Solomon Hub would wind down. “We will not stop midstream, but if the tax is not off the table by the time the feasibility study is complete, we will have to wind down. Holding a project is a very expensive exercise, and Fortescue, big as it is, couldn’t afford to hold a project like Solomon Hub for long.”

Forrest added that the company had already received overseas interest to purchase the project, but Fortescue was wary about making a decision before the SPT had been set in stone. However, he said that should it be passed, “we would have to return those phone calls”.

However, the planned $4,5-billion investment into the development of the Chichester Hub would proceed, Forrest said. The expansion of the hub from 55-million to 95-million tons a year would proceed, as financing of the projects would be generated from internal cash flows to be provided from existing operations, over the next two year, prior to the implementation of the SPT in 2012.

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