10/23/2012 10:33 EDT | Updated 12/23/2012 05:12 EST

Cost of New Millennium's iron ore project in Labrador Trough rises 18 per cent

MONTREAL - New Millennium Iron Corp. says creeping construction costs has forced it to increase the projected cost of its iron ore project in Quebec's Labrador Trough region for a second time in nearly three years, with the latest price tag growing 18 per cent to $560 million.

The Calgary-based company said Tuesday that the cost to produce 4.2 million annual tonnes of ore has increased because of various factors, including soil conditions, engineering and construction costs. Part of the additional costs are related to the installation of a large dome structure that will house its plant in Timmins, Newfoundland and Labrador.

A feasibility study in February 2011 pegged the gross capital costs of the project at $475 million for four million tonnes per year of production. The initial estimate a year earlier was $300 million.

The project is expected to be financed with 30 per cent equity and 70 per cent debt.

New Millennium (TSE:NML) said it will contribute 20 per cent of the equity portion related to capital costs exceeding $300 million.

The joint venture between Tata Steel Minerals Canada Ltd. and New Millennium has produced about 250,000 tonnes or 63 per cent iron to date and is on track to 300,000 tonnes of production in 2012. It estimates that production will increase to two million tonnes next year and 4.2 million tonnes in 2014.

New Millennium added it is developing plans to increase production to six million tonnes per year in 2015 to maximize the use of the current facilities.

Chief executive Dean Journeaux said the project has reached an important milestone with stripping in August and ore production a month later.

"This will allow Tata Steel to prepare the mines to feed the processing plant next year," he said in a statement. "Tata Steel's plans for a potential increase in capacity are also an important step for the future."

Most of the necessary agreements are in place and work is underway to invest $8.5 million on track rehabilitation, order 505 ore cars, invest $12 million in a deep water dock at Sept-Iles, Que., and conclude an interim transportation arrangement between the port and an existing terminal at Pointe-Noire until the deep water dock is available in mid-2014.

Jackie Przybylowski of Desjardins Capital Markets lowered her one-year target price for New Millennium by 20 cents to $2.30 per share over concerns about rising costs and the possibility that production will be delayed.

"Given the relatively early stage of the plant construction and the growing potential that work will be required over the winter months, we believe the project cost could continue to exceed company guidance," she wrote in a report.

The analyst estimates the project will cost $610 million and that it will only achieve 500,000 tonnes of its two million tonne production target in 2013.

"Today's report highlights the risk that the DSO plant will not be completed within the company's guidance of production start-up in late 2012."

The Millennium Iron Range located in Quebec and Newfoundland and Labrador holds one of the world's largest undeveloped magnetic iron ore deposits.

Tata Steel Limited owns about 26.5 per cent of New Millennium and is its largest shareholder.

On the Toronto Stock Exchange, New Millennium's shares lost four cents, or 2.74 per cent at $1.42 in morning trading.

Note to readers: This is a corrected story. A previous version incorrectly eliminated "million" from the current and previous production cost guidance.