China's Citic Pacific announced it has been hit by a cost blowout and has to pay an extra $US835 million to its contractor in its Australian iron ore project.

Citic said in a statement that it will pay $US835 million to Metallurgical Corp. of China for the project in August 2007. The contract price was $US1.75 billion; however, the demand for iron ore has changed significantly since then.

According to the statement, contract price of iron ore has risen almost 140 per cent, and costs related to mining projects, including labour, equipment and construction materials have increased substantially.

"We are clearly unhappy about this cost increase," Chairman Chang Zhenming said in a statement.

"However, we are confident that we have identified the problems, which have been substantially due to the changing cost environment at what is a pioneering iron ore development project in many ways," said Chang Zhenming.

"We have enhanced management controls to better manage costs and the performance of contracts going forward."

In 2006, Citic Pacific acquired the rights to 1 billion tonnes of iron ore from Queensland mining entrepreneur Clive Palmer for $US215m.

Citic bought rights to a second billion tonnes for $US200m in 2007. In mid-2009, the company had started construction on the project, which will be Australia's first magnetite project.