NZOG unfazed by Pike River cost hike

The Pike River mine will be producing coal by the end of next year

The cost of building the Pike River coal mine has ballooned but with a new bank loan, a market float yet to come and good coal prices, New Zealand Oil & Gas isn't worried about the West Coast project's future.

New Zealand Oil & Gas (NZOG) - majority shareholder with about 60 per cent stake - said higher steel and fuel costs caused the construction budget to grow from about $100 million to $144 million, with $40 million spent by the end of September.

NZOG general manager Gordon Ward said the cost increases were not out of line with those experienced internationally.

"I think in this market we've seen construction costs continuing to increase over time and a chunk of that was because of the New Zealand dollar dropping, and we'd expected that the Kiwi dollar would drop over time.

"I guess the speed at which it dropped was a little surprising."

Since new budget numbers were finalised the dollar had kicked back up, "but we still see that on a long-term basis the New Zealand dollar will be a little bit weaker even than it currently is now".

However, Ward said increased coal prices would more than offset the increase in development costs.

With mining due to get under way in the December quarter next year, another $29 million would be needed in working capital until planned full-scale production in 2009.

"In order to fund part of this investment, PRCL [Pike River Coal] has mandated a major Australasian bank to arrange a $65 million project loan, of which $60 million is to be available for capital expenditures," NZOG said.

Two facilities within the loan covered working capital and cost overruns totalling $10 million.

It was intended that the remaining $80 million needed to fund the mine's development, plus working capital, would be met through new equity and $20 million held in cash by PRCL at the end of September.

The loan was not prompted by a delay in a planned market float of the mine, Ward said.

"That [loan] is all part of the intended funding package for the project."

With debt financing firmed up the focus was now on getting the listing done with "optimal timing", he said.

NZOG shares closed at 88c yesterday.