roy hill 'amounts to suicide'

Today's update (if correct) sez the Roy Hill contract 'amounts to suicide' and would have finished FGE anyway. Looks like the 830m job will be re-tendered. Does anyone want a 'fixed-price' contract these days?

PAUL GARVEY THE AUSTRALIAN FEBRUARY 12, 2014 12:00AM
Forge collapse hits Rinehart hopes.

THE collapse of mining contractor Forge Group will complicate construction at Gina Rinehart's $10 billion Roy Hill iron ore mine just as the project begins to gather real momentum.

Perth-based Forge went into administration yesterday after its financiers ANZ withdrew its support for the company. The collapse comes just five months after it and Spanish group Duro Felguera were awarded a $1.47bn contract to provide engineering, procurement and construction services at Roy Hill, with the contract worth around $830 million to Forge.

With Forge slipping into administration, the direction of that Roy Hill contract now looks uncertain.

It's unclear how long subcontractors working on the contract will be able to continue if Forge is unable to pay its bills, but many would be likely to walk away if cash dries up.

The blow comes just as Ms Rinehart's Hancock Prospecting and its partners in Roy Hill prepare to finalise the project's multi-billion-dollar debt financing. Securing the financing has taken longer than expected but the package is now said to be imminent, and will represent a major milestone for the project.

While the Roy Hill contract was hailed by Forge as a major win at the time it was first unveiled, it has been the subject of much discussion in Perth contracting circles.

Industry sources have been questioning the merits of the contract for months. Forge is said to have tendered at a fraction of the price of several larger groups, while the contract is also said to include a number of performance guarantees that would see Forge forced to pay penalties if the mine missed certain operational milestones.

One source said the performance guarantees and the fixed-price nature of the Roy Hill contract amounted to "suicide" by Forge.

Those guarantees could well generate penalties in the hundreds of millions of dollars if the mine doesn't perform as expected.

It is unclear what role if any Forge's Roy Hill contract played in its downfall, but one theory yesterday was that any close inspection of the contract -- and the potential liabilities associated with it -- could have helped ANZ in its decision to withdraw support for Forge.

It may also explain why no trade buyer has emerged to snap up Forge at a dramatically discounted price in the past few months.

Forge signed the Roy Hill contract at a time when competition was increasing for the limited number of significant projects available. But it did so on the assumption its balance sheet was much stronger than it actually was, with the company committing to the contract just months before the ultimately fatal issues with its power station contracts became apparent.

http://www.theaustralian.com.au/business/mining-energy/forge-collapse-hits-rinehart-hopes/story-e6frg9df-1226824095901