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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 is scrambling to cut the cost of its long-delayed iron ore project after spending estimates jumped by almost a quarter to A$7.4 billion ($7.6 billion), in a bid to save one of a series of Australian mine plans threatened by cooling Chinese demand.

Aquila's half-owned West Pilbara Iron Ore project, which includes a mine, rail and port in Western Australia is targeting annual production of 30 million tonnes, but is seen at risk due to a weaker outlook for steel demand in China, soaring capital costs and a strong local dollar.

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

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

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

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

PORT DELAY

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

The state had been encouraging joint development of the proposed port, Anketell Point, involving Aquila and Australia's no.3 iron ore miner Fortescue Metals Group , but debt-ladened Fortescue has slowed down its expansion plans and does not see a near-term need to use Anketell Point.

In an effort to lower capital spending, Aquila said on Monday studies had identified up to A$2.3 billion of possible savings by outsourcing the operation, ownership and funding of such things as ore processing, rail freight, ports, power and fuel.

Outsourcing those elements would add about A$15 a tonne in operating costs, currently estimated at A$24.20 a tonne, Aquila said, adding that no decision has yet been made on the recommendations of its capital spending study.

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

($1 = 0.9767 Australian dollars)

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

((Lincoln.Feast@thomsonreuters.com))

Keywords: AUSTRALIA AQUILA/IRONORE