Sizing up Clive Palmer's assets

The Conversation

So how much is a modern mining magnate worth? Well it depends on what they really own. Consider Clive Palmer.
After an early career in real estate development on Queensland’s Gold Coast, Palmer, who has today expressed political ambitions, used much of his wealth as seed money to spread his tentacles into the rapidly expanding coal and iron ore mining sectors.

His timing was impeccable. Thermal coal prices spiked to unprecedented levels allowing miners to experience profit margins beyond their wildest expectations.

Instead of earning margins of $2 to $10 a tonne as they had for decades, coal miners were earning margins of $50 to $100 a tonne which in turn increased asset values to levels rivalling well-established and brand name top 50 firms.

Similar ballooning values were observed in the iron ore sector. But Palmer was not the only investor to benefit from this escalation in asset values. Almost all firms and other visionary (or lucky) entrepreneurs who held valuable tenements – which included Aston Resources, New Hope Coal, Hancock Coal and Linc Energy – realised huge capital gains from the sale of their mining rights. These incredible gains were derived from the right to explore and mine certain tenements, rather than as a result of any tangible mining activity.

Palmer carries the moniker in the media of mining magnate but strictly speaking, to earn this title one should really be involved in some form of mineral extraction. Palmer owns no mines. His only producing asset is Queensland Nickel, a nickel and cobalt refinery near Townsville that he picked up for a song from BHP Billiton in 2009.

BHP Billiton were happy to see the back of this asset after inheriting it from the Billiton merger, only to discover that production costs were twice initial estimates. Nickel prices have since improved and this is now a profitable asset – but only just. His other assets may one day become producing mines but there are significant challenges to convert an empty paddock into an operating mine.

So the term mining magnate may be a little stretched. The same goes for Nathan Tinkler.

Palmer’s own privately-held firm Mineralogy is the umbrella corporate entity through which all of his main interests are held. The company has secured access to several billion tonnes of iron ore reserves in the Pilbara Ranges as well as several billion tonnes of thermal coal in several tenements in Queensland. The cost viability of extracting these ores however is questionable.

Palmer’s flagship coal venture at Alpha North and Alpha West in the Galilee Basin comprise his great white hope of reaching true billionaire status. Unfortunately, these tenements are 500km from the coast and the quality of the resource is such that it will only suit Chinese and Indian buyers, who are not very reliable importers of thermal coal.

Around $6 to $8 billion will be needed to build a rail line and a deep water port, not to mention the mine itself, plus the costs and legal hurdles associated with regulatory approvals, environmental studies and land use compensation.

In an attempt to hasten his wealth trajectory Palmer launched the so-called China First Coal project, with him as the inaugural chief executive. China First, underwritten by a consortium of banks with a Chinese bank as the lead, attempted to list on the Hong Kong Exchange.

This float was a thinly veiled pitch to the sentiments of Chinese investors seeking an easy entry to the global resources sector. The trouble with it was that the average Chinese investor is a shrewd judge of value.

Firstly, Chinese investors would want more than around 40 per cent control of the company which Palmer was offering. Secondly, expectations of the first shipment of coal in 2014 were extremely ambitious, bordering on ridiculous, and most Chinese investors with experience in their own mining industry would easily spot the low probability of real positive cash flows for ten years or so.

Finally, what ultimately killed interest in the float was that there was considerable doubt about the management team; put simply, there isn’t one. For an investment of this magnitude they would want an experienced miner at the helm.

While Palmer may be one of Australia’s national living treasures, he has no operational mining credentials, especially in developing a mine producing 40 million tonnes annually, which would be one of the world’s biggest mines.

At first glance the way Palmer positioned and marketed the China First vehicle made it attractive to Chinese businesses searching for profitable foreign assets. This created the initial interest. However once investors dug a little deeper, they found there wasn’t a viable business model underlying the float. Understandably they left in droves.

As a result the China First project is now a stranded asset. It is located in a remote location with no corridor established for the rail line and no agreement by the state government on port allocation at Abbott Point, already crowded by BHP Billiton and GVK/Hancock Coal. There is considerable doubt about the value of the asset. He might as well propose to mine passing asteroids, as some visionary yet fanciful executives have suggested is feasible.

So Palmer has one income-earning asset and a whole bunch of tenements offering nothing but promises of future wealth. Mineralogy and its subsidiaries reported net losses of $58.5 million in 2008-09, $29 million in 2009-10 and $11.4 million in 2010-11. It received a tax benefit of $874,599 in 2010-11, against revenues of $5.6 million, and paid $136,799 in tax the year before. It is difficult to criticise a company that pays no tax when it earns no real income and most of its costs are incurred by trying to 'prove-up' a large resource in a remote area.

These accounts highlight the difficulty of valuing Palmer’s mineral deposits and therefore his personal wealth. Business Review Weekly listed Palmer’s wealth at $5.05 billion, but America’s Forbes magazine rates it at a more modest $US795 million. His true wealth probably lies somewhere between these extremes.

Palmer is a classic asset investor rather than a mining entrepreneur. While he has an uncanny ability to identify value, he appears to be frustrated that his assets would be worth a great deal more if they could be extracted. What adds to this frustration is the fact that Gina Rinehart’s coal assets nearby have gained traction with the state government and international buyers through some clever business structures and the appointment of a talented (albeit risky) management team.

So is Palmer a mining magnate or an asset investor? Either way, his wealth is trapped in stranded assets with little prospect of being rescued by sympathetic investors.

Jason West is a senior lecturer at Griffith University's school of business. This story first appeared on The Conversation. Reproduced with permission.

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