HONG KONG - Citic Pacific Ltd, an arm of China's biggest State-owned investment company, plunged in Hong Kong after saying the development of its $2.6 billion iron ore mine in Australia may cost 35 percent more than expected and also be delayed.

The stock fell 8.5 percent, the biggest decline since January 2009, to close at HK$16.84 ($2.16).

Hong Kong's benchmark Hang Seng Index fell 0.3 percent.

China Metallurgical Group Corp, contracted to build the mine, is seeking $900 million more because of "design and scope of work changes made by Citic Pacific," according to a July 15 statement to the Hong Kong stock exchange after the market closed.

Citic Pacific is considering the payment and will negotiate with the contractor, it said.

Citic Pacific faces rising construction costs in Australia as labor and equipment expenses surge, coupled with an appreciation in the Australian dollar, Goldman Sachs Group Inc analysts led by Simon Cheung wrote in a report on Monday.

The company expects production of iron ore would be delayed to the first half of 2012 from the end of this year, it said.

Higher capital expenditure "could also be applicable to its production costs when the project starts next year," according to Goldman Sachs. "Our estimated internal rate of return for the project is now 6.8 percent, versus 10.2 percent prior."

Goldman Sachs downgraded Citic Pacific to "neutral" from "buy," with a target price of HK$21.40, it said.

Citic Pacific agreed in May 2010 to pay China Metallurgical an additional $835 million to build the mine, raising the construction cost to $2.59 billion from its 2007 estimate of $1.75 billion.

Once operational it will be the biggest magnetite mine in Australia, according to the company's website.

The company also plans to sell its 50 percent stake of cable television-network owner Citic Guoan Co to parent Citic Group for 3.51 billion yuan ($543 million), it said in a separate statement to the Hong Kong stock exchange filing on July 15.

The sale is part of a plan to focus on steelmaking, iron ore mining and property development in China, it said.

The Hong Kong-based company said it expects to book a gain of about HK$2.35 billion from the sale.

Bloomberg News