UPDATE 1-Australia's Aquila mine project costs swell to $7.6 bln

* Could save A$2.3 bln by outsourcing port, rail

* Project awaits state approval for port

* Aquila and partner need to resolve budget dispute

* Aims to start construction in mid-2013

(Adds details)

SYDNEY, Oct 8 (Reuters) - Aquila Resources isscrambling to cut the cost of its long-delayed iron ore projectafter spending estimates jumped by almost a quarter to A$7.4billion ($7.6 billion), in a bid to save one of a series ofAustralian mine plans threatened by cooling Chinese demand.

Aquila's half-owned West Pilbara Iron Ore project, whichincludes a mine, rail and port in Western Australia is targetingannual production of 30 million tonnes, but is seen at risk dueto a weaker outlook for steel demand in China, soaring capitalcosts and a strong local dollar.

Progress on the project, previously estimated to cost $6billion, has slowed due to delays in final approvals andfinancing, compounded recently by a fall in iron ore demand andprices.

The project has been further set back by a dispute betweenAquila and its partner AMCI (WA), a joint venture betweenprivate mining investment and trading group American Metals andCoal International (AMCI) and South Korean steel giant POSCO.

They had been in talks to conserve funds but the partnerswere unable to agree on a budget for the 2012/13 financial year,a dispute that now needs to be resolved by an arbitrator andcould result in one of the partners being bought out.

Aquila has around A$500 million in cash and no debt as ithas been shedding assets to raise funds to help cover its shareof the West Pilbara Iron Ore project, where it hopes to beginconstruction in mid-2013.


Final environmental approval from the state of WesternAustralia for a port to export the iron ore is expected beforethe end of this year, a key hurdle the project needs to clearbefore it can raise funding.

The state had been encouraging joint development of theproposed port, Anketell Point, involving Aquila and Australia'sno.3 iron ore miner Fortescue Metals Group , butdebt-ladened Fortescue has slowed down its expansion plans anddoes not see a near-term need to use Anketell Point.

In an effort to lower capital spending, Aquila said onMonday studies had identified up to A$2.3 billion of possiblesavings by outsourcing the operation, ownership and funding ofsuch things as ore processing, rail freight, ports, power andfuel.

Outsourcing those elements would add about A$15 a tonne inoperating costs, currently estimated at A$24.20 a tonne, Aquilasaid, adding that no decision has yet been made on therecommendations of its capital spending study.

Shares in Aquila, 14 percent owned by China's biggest listedsteelmaker, Baoshan Iron & Steel Co , eased 0.4percent to A$2.67, having tumbled from a 12-month high of A$6.83in December.

($1 = 0.9767 Australian dollars)

(Reporting by Lincoln Feast and Sonali Paul; Editing by RichardPullin and Ed Davies)