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Anaconda settles with Lloyd's, starts Fluor talks


PERTH, Australia -- Australian mining company Anaconda Nickel Ltd. has tapped insurance to cover production delays stemming from problems with a newly built mine, and now is seeking additional compensation from the mine's contractor.

ANL is seeking as much as $1 billion Australian ($588.9 million) from project contractor Fluor Australia Pty. Ltd. for delays and problems associated with Fluor's construction of part of the nickel and cobalt mine in Western Australia. ANL already has drawn down a $45 million Australian ($26.5 million) letter of credit issued by Fluor to cover some of its costs.

Fluor Australia, formerly named Fluor Daniel Pty. Ltd., contends that it met the terms of its contract and that the delays encountered are little more than "teething pains" associated with making the new mine operational.

Under the terms of their contract, the two parties must submit their dispute to arbitration, which could begin as soon as next month.

Perth-based ANL last month settled a claim with underwriters at Lloyd's of London for some of the cost of fixing problems on the project and losses from lack of production. The settlement, which followed lengthy arbitration proceedings in London, was for $113 million Australian ($66.5 million) on an "extended liquidated damages" policy with limits of $150 million Australian ($88.3 million). The coverage was designed to pay $10 million Australian ($5.9 million) for each month the project's completion was late, up to $150 million Australian. Mr. Dennis declined to name the syndicates that wrote the coverage.

The mine, named the Murrin Murrin Nickel Cobalt Project, is located about 450 miles northeast of Perth in Western Australia. ANL is a specialized producer of nickel and cobalt using a technology called acid pressure leaching. The metals are refined through the acid leaching of mixed metals in large, pressurized autoclaves.

Construction of the Murrin Murrin project began in May 1997, with the signing of a $1.2 billion Australian ($706.6 million) contract with Fluor Daniel Pty. Ltd. for engineering, procurement and construction of stage one of the new mine. The company is a unit of Irvine, Calif.-based Fluor Corp.

Stephen Dennis, ANL's general manager, said that after Fluor completed the project, it became apparent that part of the processing plant was not operating, including more than 40 separate failures of the system for moving metals from the autoclaves, which is central to the acid pressure leaching process.

Fixing the problems caused production delays of up to 12 months and "unlimited" rectification costs, he said.

"Fluor Daniel was hired to complete a task, for which we paid a huge amount of money, and the result was extremely disappointing," Mr. Dennis said.

"The facility was delayed for about 12 months. The costs of the losses from that, together with other extensive rectification costs, make up the bulk of our claim against (Fluor Daniel)."

To date, ANL has lodged claims of more than $300 million Australian ($176.7 million) against Fluor, but Mr. Dennis said total claims of up to $1 billion Australian are "not unreasonable."

Fluor Australia executives suggest that such a claim is unlikely to succeed.

Richard McDonald, company secretary of Perth-based Fluor Australia, said the terms of its contract were fully completed and that ANL should have expected there to be "teething problems" at the completion of the project.

"As far as we are concerned, we met our contractual obligations with ANL. The startup problems are issues for ANL to take up," Mr. McDonald said.

"You can't expect a billion-dollar plant to start perfectly at the flick of a switch. There are always teething problems to overcome," he said.

Mr. McDonald said Fluor is prepared to take its argument through the arbitration process, where it also hopes to reclaim the $45 million Australian ($26.5 million) letter of credit.

Australia's High Court last December declined to hear an appeal of a Victoria State Court of Appeal decision that upheld ANL's right to draw down the funds.

Mr. McDonald said he "completely rejected" the likelihood of a $1 billion claim against Fluor Australia by ANL being successful.

Stage two of the Murrin Murrin project is now in progress, with an additional capital cost of $1 billion Australian.

When the project is completed, it will be the third-largest nickel producer and the largest cobalt producer in the world.