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Clive Palmer and the Sino Iron Project: the Disaster that Keeps on Giving

By  +Follow September 19, 2013 2:52AM
Tickers Mentioned:

When reading about Australian multi-millionaire Clive Palmer, one could perhaps be forgiven for receiving the impression that the man is an Australian version of Donald Trump.

Indeed, the mining tycoon-cum-politician is often described, by himself and others, as a successful businessman who has made a fortune from a number of shrewd moves in Australian hard commodities, particularly through his Mineralogy Pty Ltd.’s holdings in coal, nickel, and iron-ore. For what it is worth, Forbes Magazine estimates the 59-year old’s fortune at just shy of a billion dollars.

But Palmer’s very public and frequently bizarre outspokenness, especially when it comes to personal beef with various rivals, is also a significant aspect of the mythology that surrounds the man.

It doesn’t help matters that his performance during these high-profile incidents often takes on a distinctly unsavory quality. For instance, only two weeks ago, Palmer threatened to sue Rupert Murdoch, whose newspaper The Australian published a piece questioning just about every aspect of the man’s claims about his own success. The article’s author unequivocally characterized Palmer’s most recent foray into Australian politics during the current election cycle as nothing less than a threat to the country’s democratic process.

In a riposte that would likely garner scant attention had it originated from Donald Trump himself, Palmer took to Australia’s morning talk-show circuit the next day to blast Murdoch, referring to him as “this foreigner who tries to dictate what we do.” And then, as if to make sure that everyone was clear about the deliberately xenophobic nature of this remark, he took it an improbable step further by claiming that Murdoch divorced his wife after discovering that she was spying for the Chinese. The scenario reads like a strange photonegative of Trump’s dalliance with birther theology during last year’s presidential election.

Another incident from recent memory involves last year’s accusation that the well-known environmentalist organization Greenpeace was actually on the payroll of the Central Intelligence Agency. According to Palmer, who perhaps fittingly has made his fortune in part off of this most pollutant of energy sources, the most feared group of spooks in the world was keenly interested in destroying Australia’s coal-mining sector (Greenpeace called the accusation “ludicrous,” while the CIA for its part issued the standard denial).

But this synopsis of the unsavory actions of one man in the public eye becomes relatively insignificant when considering Palmer’s oft-vaunted business acumen. The story here stretches a little further back, to 2006, when he sold the mineral rights to a magnetite iron ore site to Hong Kong’s Citic Pacific Ltd. for $391 million and royalties.

Citic Pacific is actually the Hong Kong-based segment of China’s largest state-owned steel-centric investment vehicle. The prospective iron-ore mine, located in the country’s rugged northern Outback region, is called the Sino Iron Project. China is the world’s largest consumer of iron ore, and Sino Iron is its largest foreign magnetite iron-ore mining and production venture.

Iron-ore production has boomed in recent years, primarily as a response to astronomical Chinese economic growth that has lifted untold thousands out of poverty, and been a mainstay of the global economy since the turn of the millennium. The construction boom in the world’s most populous nation has vacuumed up large amounts of natural resources, particularly hard commodities such as copper and iron-ore, and has been one of the main reasons that the world’s biggest mining companies, such as Vale SA (VALE) , Rio Tinto (RIO) , and BHP Billiton (BHP) have recalibrated their production strategies to focus on these two metals in particular.

Thus, the 2006 deal between Citic Pacific and Palmer can be seen in the context of China’s desire to become more independent in terms of natural resources; currently, the country relies on the major miners for its commodities as those companies are on China for their revenues and profits. The only problem, however, is that the Sino Iron project has yet to produce one ounce, much less one ton, of magnetite iron ore.

Sino Iron, in actuality, has been an unmitigated disaster for the Chinese government in terms of its ostensible goals in entering the deal, as well as from the perspective of public relations. The project has been hampered by all manner of complications. Repair work for construction of the mine’s first two production lines should have been complete months ago, though it is now estimated that the necessary fixes will take at least another two years, at an estimated additional cost of some $1 billion.

But this extra billion brings the total spent on Sino Iron to some $8 billion. Unfortunately for the Chinese Government, it would be impossible, from the standpoint of public perception, to have abandoned the mine at any point after having shelled out $2.5 billion, so the project continues. Citic Pacific has at least taken the step of taking Palmer to court in Australia over the royalties agreement they signed with him.

The bad news doesn't end there for China however. After several years druring which the mining industry has directed its efforts towards the iron-ore rush, we are now in a situation where the metal is expected to hit record surplus by next year, which many banks, including Deutsche Bank (DB) and Goldman Sachs (GS) , have predicted will force prices lower for the foreseeable future. If an when Sino Iron does start producing metal, it is doubtful the project will ever really be able to pay for itself.


***correction: the original version of this article stated that Citic Pacific bought the mineral rights to Sino Iron for $2.5 billion. In fact, that figure was much lower, at $391 million. The article has been amended to reflect the correct figure***

DISCLOSURE: The views and opinions expressed in this article are those of the authors, and do not represent the views of equities.com. Readers should not consider statements made by the author as formal recommendations and should consult their financial advisor before making any investment decisions.

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By  +Follow September 19, 2013 2:52AM



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