Shares in Gindalbie Metals sunk by nearly 60 per cent after the embattled iron ore producer admitted it may face collapse should China's state-run Ansteel pull its funding support for the $2.5 billion Karara project in Western Australia.
Karara's chief executive Zhang Zhao Yuan cast doubt over the viability of the project last week, saying its parent company might no longer provide funding because of the prolonged iron ore price slump.
Sources said the Karara mine, a joint venture between Ansteel and Gindalbie, could be shuttered in the coming weeks should Ansteel cut its support for the development.
Gindalbie said in a statement to the market on Tuesday, it was concerned about its future.
"A decision by Ansteel to withdraw funding support could lead to claims under various operating and financing guarantees against Gindalbie, which if successful could cast doubt on Gindalbie's ability to continue as a going concern," Gindalbie chairman Keith Jones said.
"Gindalbie has requested a formal notification from Ansteel on their decision regarding ongoing funding support for the Karara project and has yet to receive a response."
Shares in Gindalbie plummeted 57 per cent on Tuesday to .009¢, giving the mining producer a market value of $13 million. The company entered a trading halt on Friday as it sought information about the Ansteel report.
Mr Jones added that Ansteel, China's fourth-biggest steel maker, has hired an adviser, thought to be EY, to review the future of Karara.
"As part of efficiency and cost reduction measures, Ansteel has engaged a third party to review the viability of operations as well as potential options for Karara Mining, it is our understanding that this review is ongoing," Mr Jones said.
Karara, 200 kilometres east of Geraldton, produces magnetite iron ore but has been losing money after the price of ore fell by nearly half in 2015 and was trading at $US41.30 a tonne on Monday.
The Karara project received 12 months of royalty relief from the state government under a plan devised by Premier Colin Barnett. However, that year-long deal is thought to have expired on September 30.
It is understood Transport Minister Dean Nalder held talks with Ansteel and Gindalbie in late December to look at other ways of helping the miner.
The government is looking to lower port charges for the Karara development from the Geraldton Port and is also considering how it can help with power charges for the two companies. Karara hauls its iron ore through rail group Aurizon.
Australia already has two other magnetite export projects: the Sino Iron project owned by Citic, and the Savage River project run by Grange Resources in Tasmania.
Citic is mired in legal disputes with troubled mining entrepreneur Clive Palmer, while Grange warned last week of job losses because of the low iron ore price.
Investment bank Citi expects iron ore to fall back to $US30 a tonne, driven by poor Chinese demand for steel.
Iron ore stockpiles at ports in China have headed into 2016 at the highest level in more than seven months, a recent Bloomberg report said, putting further pressure on prices.