Construction costs at Gindalbie Metals Ltd.'s (GBG.AU) Karara iron ore project will rise around 30% to an estimated 2.63 billion Australian dollars (US$2.6 billion) the company said Wednesday, as prices for labour, fuel and materials rise amidst booming development of Australian resources projects.

The announcement is the largest cost blow-out announced for a major resource project in Western Australia, where some of the world's biggest miners and energy companies have around A$93 billion currently committed to major capital projects.

"All projects in Western Australia are currently subject to significant cost escalations and this situation is almost certainly going to get worse as the resources boom strengthens," said George Jones, Gindalbie's chairman in a statement. The early ramp-up of the project was necessary to avoid "what will almost certainly be an even more damaging inflationary environment for construction projects as the West Australian resources boom gathers momentum", he added.

The company said that expansions to port and power lines alone would raise capital costs by A$125 million, while other costs were rising as a result of higher costs for materials, labor and fuel.

Gindalbie plans to ship its first hematite ore from the port of Geraldton midway through this year from its project in the Mid-West region of Western Australia. Production would rise to 2 million tons a year of hematite production and 8 million tons a year of processed magnetite pellets by mid-2012.

The company said it had also launched a study over a second phase of construction raising that initial figure to 16 million tons a year and replaced managing director Garret Dixon with Tim Netscher, a non-executive director at the company and a senior vice-president at gold miner Newmont Mining Corp. (NEM).

"By moving now to assess this expansion project ... (we will achieve) significant cost savings in the current inflationary environment," said Jones.

In its initial 2007 bankable feasibility study the Karara project, which is eventually expected to produce 30 million tons a year of iron ore, was expected to cost A$1.65 billion. The latest revision will raise an already upgraded A$1.95 billion estimate for the project in May last year by around A$658 million to A$2.63 billion, a 60% increase over the original 2007 figure.

Gindalbie is 36% owned by Angang Steel Co. Ltd. (000898.SZ), or Ansteel, China's second biggest steelmaker and biggest iron ore miner, which has agreements in place to take all the miner's production.

Debt funding is being provided by China Development Bank and Bank of China Ltd. (601988.SH). In a presentation in January, Gindalbie said that it had already spent around A$700 million of its A$1.2 billion committed funding

The company said it was currently expecting to sell its 68% iron magnetite pellets for US$220 a ton, against a production cost of US$42 at Geraldton port.

-By David Fickling, Dow Jones Newswires; +61 2 8272 4689; david.fickling@dowjones.com
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