Palmer IPO Failures Show Hong Kong Prefers Profit to Promise

Clive Palmer
Clive Palmer, chairman of Mineralogy Pty Ltd., speaks to the media at a Committee for Economic Development of Australia (CEDA) lunch in Brisbane, Australia, on April 7, 2011. Photographer: Eric Taylor/Bloomberg

Australian billionaire Clive Palmer’s much-touted ties with China weren’t enough to convince Hong Kong investors to put up $3.6 billion for shares in his unprofitable iron ore and coal company Resourcehouse Ltd.

Resourcehouse dropped its fourth attempt in two years at an initial public offering in the city on June 4, citing negative global market conditions. The axing came after the company cut the price as much as 30 percent the day before.

Palmer, who says he’s been to China more than 50 times and in 1962 met Pu Yi, the last emperor, marketed the float around his ties to China and Asia’s demand for the raw materials he plans to mine. Glencore International Plc, the world’s largest commodities trader that listed in Hong Kong last month, had to scale back investors’ share requests because the offer was oversubscribed.

“It is a blow to his reputation,” Cameron Peacock, a market analyst at IG Markets in Melbourne, said by phone. “He’s always talking about how strong his relations are with Asia and China. It is going to leave some people wondering ‘are the depths of your relationships as strong as you’ve made them out to be?’”

Hong Kong IPOs have raised at least $8.9 billion so far this year, up 55 percent on a year earlier, according to data compiled by Bloomberg.

The number of basic material companies worldwide conducting IPOs has risen by 32 percent. They’ve raised $17.3 billion so far this year, up 77 percent on last year, led by Glencore. Resourcehouse is the biggest IPO this year to be canceled, according to data compiled by Bloomberg.

Unprofitable Outlook

Glencore, which has a 34 percent stake in mining company Xstrata Plc, grew its profit nearly fourfold since 2008 and last year had net income of $3.8 billion, according to data compiled by Bloomberg. It may report 2011 net income of $7.3 billion, according to Nomura International Plc.

In contrast, Brisbane, Australia-based Resourcehouse, said in its prospectus that it won’t turn a profit until output at its coal and iron ore projects begins in 2014 or 2015.

“Glencore is a fantastic business and it has been well-managed and it will do well over the medium to longer term,” Gavin Wendt, a senior resource analyst at Mine Life Ltd. in Sydney, said by phone. “With Resourcehouse, the constant ‘will they, won’t they?’ and the withdrawing of the issue just does nothing for their market credibility.”

Price Declines

The pulling of the IPO follows iron ore prices falling 11 percent from their peak in China this year and a plunge on global stock markets. Commodities prices have fallen 8 percent from this year’s high on April 8, according to the Standard & Poor’s GSCI Spot Index of 24 raw materials.

Palmer, who ran full-page color ads in Hong Kong’s English-and Chinese-language papers for the share sale, stressed his connections when marketing the IPO of the company that he stood to draw A$1.1 billion ($1.2 billion) in payments from in the three years before it turned a profit.

Following the failure of the share sale, Export-Import Bank of China approved a credit facility for 85 percent of the total construction cost for the $8 billion China First coal project in Queensland, up from 70 percent previously. The renewed commitment means the bank will now cover $6.8 billion of construction costs, up from $5.6 billion, Resourcehouse said in an e-mailed statement today.

The facility includes a further $600 million funding option in return for equity, the statement said.

Potential Partners

“We also have a number of international companies who wish to make direct investment into Resourcehouse for equity in the company, giving us confidence that we will fully fund the project,” said Palmer, a 57-year-old law school dropout who made his fortune in real estate.

The company may also renew the IPO when market conditions improve, Palmer said in a phone interview from Hong Kong yesterday.

Resourcehouse wants to develop an iron ore mine in Western Australia that will cost at least A$2.7 billion and and the $8 billion coal mine in Queensland state. Mineralogy Pty and Waratah Coal Inc., both owned by Palmer, remain the owners of the mines and Resourcehouse only has an agreement to extract specific quantities.

“If they are floating high quality assets then even in this sort of market there should be takers for the IPO,” Wendt said. “The whole thing seems to have been conducted with very poor planning and you just wonder whether Clive wielded too much power and he was the one making these ad-hoc decisions.”

Production Assets

Resourcehouse’s main assets are the rights to mine 1.4 billion metric tons of coal and 10 billion tons of iron ore. The two commodities are used to make steel. China’s demand for the metal may rise by as much as a quarter by 2015 from last year, according to the China Iron & Steel Association, which represents producers.

“Of course I wield the power at the company because I own the company,” Palmer said yesterday. “The assets are nobody’s but mine. The banks were the ones responsible for the advice to go to the market at that time. But I don’t hold them responsible for the IPO’s failure because nobody can predict what happens in the market from one day till the next.”

Price Cut Considered

BOC International Holdings Ltd., HSBC Holdings Plc, Royal Bank of Scotland Group Plc and UBS AG managed the Resourcehouse offering.

The company had originally sought to sell 5.7 million shares at between HK$4.48 to HK$4.93, before cutting the price to HK$3.45, according to a term sheet. That would have raised the company $2.5 billion. As late as the afternoon before the offer was pulled Palmer said he hadn’t made any decisions.

“We still have options and we need to consult our directors,” he said by phone from Hong Kong before pulling the deal. Palmer was ranked last month by BRW magazine as Australia’s fifth-richest man with a fortune of A$5.05 billion.

Following the IPO, Resourcehouse’s payments to Palmer’s closely held companies would have included A$930 million over the three years to 2014 as well as royalties on iron ore and coal output.

“It’s absolutely a turnoff for investors because how can you be sure how those fees are going to be spent? It is unusual,” Michael McCormick, fund manager at Belvedere Share Managers Pty in Sydney, said by phone.

China Railway Group Ltd. and Metallurgical Corp. of China Ltd. had both agreed to invest about $200 million in Resourcehouse. The company said the IPO may be followed by a A$1.9 billion debt sale to a Chinese company.

Resourcehouse said it wanted at least one Chinese company to provide or arrange debt to fund about 70 percent of the cost of building the initial stage of the China First iron ore project, the company said in the prospectus. Any financing deal would have needed the approval of Mineralogy.

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