The Roy Hill project, racing to come on line in late 2014 to beat a risk of iron prices sliding, is looking to raise between $6 and $7 billion in project financing, with more than half seen coming from export credit agencies in Japan, South Korea and China, four sources with knowledge of the deal said.
Roy Hill and potential lenders are concerned about the risk of costs escalating further, as has happened at other Australian resource projects, driven by a scramble for staff and equipment.
"The chances of Roy Hill getting first iron ore production in 2014 would be less than 20 percent," said Michael Evans, an analyst at investment house CLSA.
"The main factor is it takes a lot of time and lot of money to build railway lines and ports in a market that has finite capacity of construction resources," he said.
Roy Hill, targeting 55 million tonnes a year of iron ore in the Pilbara region in Western Australia, will make Rinehart's Hancock Prospecting Pty Ltd Australia's fourth-largest iron ore miner, behind Rio Tinto (>> Rio Tinto plc), BHP Billiton (>> BHP Billiton Limited) and Fortescue Metals Group (>> Fortescue Metals Group Limited).
It may also cement Rinehart as the world's richest woman. Forbes in February estimated her to be worth $18 billion, making her the richest woman in Asia. Australia's BRW magazine subsequently named her the richest woman in the world, worth an estimated $29 billion.
Hancock Prospecting is talking to contractors about sharing the risk of cost escalation to avoid the "cost-plus" deals under which clients bears the full burden of any rise in costs.
"The main reason for the delay is the cost blowouts (on other projects)," said one of the banking sources, who declined to be identified citing confidentiality agreements.
Costs for Roy Hill have already soared to at least $10 billion, according to sources, from its publicly announced cost of $7 billion. However, with uncertainty over iron ore demand and prices, smaller rival projects have been put on ice, which could help limit further cost pressures.
"We're on the other side of a commodities boom and a lot of froth has come out of the sector. That has been good for Roy Hill," the same source added.
Roy Hill declined to comment for this story. However, Roy Hill Chief Executive Barry Fitzgerald said in a recent speech the company aims to secure funding approval before the end of 2012 with financial close in early 2013.
EXPORT CREDIT AGENCIES
Loan financing is now increasingly dependent on the export credit agencies such as the Japan Bank for International Cooperation and the Export-Import Bank of Korea, which tend to be slower to sign off on deals.
Commercial banks are already heavily committed to the monster $20 billion project financing for the Ichthys LNG project, led by Japan's Inpex Corp (>> INPEX Corp).
European banks, traditionally been big lenders to such projects, are also less active given the debt crisis at home.
China is planning to lend against the construction of port facilities already under assembly, with Chinese steel mills in line to sign agreements to buy iron ore from the mine, one banking source said.
"It's unusual to have a private borrower borrowing for a resources project of such size," said Michael Blakiston, a partner at law firm Gilbert + Tobin, who is not involved in the Roy Hill project.
"But given the quality of the earnings which the Hancock Group has through Hope Downs and royalty income streams, that places her in a position where banks would look at her credit," he said.
The Hope Downs iron ore mine, which produces high quality iron ore, is 50-50 owned by Hancock and world no.2 iron ore miner Rio Tinto (>> Rio Tinto Limited).
Lenders are keen to see Roy Hill lock in buyers for its iron ore. Chief executive Fitzgerald said the company is in talks with a number of steel mills to convert letters of intent into firm sales contracts.
FEUD DELAYED STAKE SALES
On top of the project financing, the Roy Hill partners have committed $4 billion in equity, led by 70 percent stakeholder Hancock, with South Korean steel giant POSCO (>> POSCO), Japanese trading company Marubeni, South Korea's STX Corp <011810.KS>, and Taiwan's China Steel Corp (>> China Steel Corporation).
A legal battle between Rinehart and her three eldest children over control of a multi-billion-dollar family trust had initially delayed the equity deals for Roy Hill, Rinehart told the Australian Broadcasting Corp last month.
She did not elaborate on why the family feud led to the delay, but it may have been due to uncertainty over whether Hancock Prospecting's assets would be caught up in the dispute.
Roy Hill has a big advantage over several other proposed iron ore projects in Western Australia as it has an approved rail route and port access, with two dedicated berths.
Thanks to the funding raised from equity stake sales, Roy Hill has already completed dredging at Port Hedland and has begun work to build housing villages for the mine, rail and port. If the debt financing was sealed by early 2013, Roy Hill could still start producing in late 2014.
However, some analysts see the risk of the timeline slipping. Funding and construction could still prove to be tricky at a time when commodity forecasters are slashing their outlooks for iron ore prices and construction costs are soaring.
If the project fails to start producing by 2015, it could come on stream just as iron ore prices start falling below $100 a tonne, by some analysts' forecasts, which would make lenders nervous even if all of its output has buyers.
Benchmark iron prices <.IO62-CNI=SI> are currently trading at about $135 a tonne.
"The key risk is the pricing risk post-2015," said Standard & Poor's director May Zhong. "I would question the margin they can make, taking into account that we expect iron ore prices to come down post-2015."
(Additional reporting by Sharon Klyne in Sydney and Wakako Sato in Tokyo; Editing by Ed Davies)
By Lincoln Feast and Sonali Paul