a bar too high

Clive Palmer raised the bar too high

Sarah-Jane Tasker, Matt Chambers, Resources
From: The Australian
June 11, 2011 12:00AM


CLIVE Palmer's unwavering confidence in his projects and his own ability to deliver on his ambitious promises was the undoing of his $3.6 billion Hong Kong float, with his view on the price the major hurdle over which investors were not willing to jump.

While the Queensland billionaire's Resourcehouse outfit blamed market conditions for last week's failure of the much-anticipated initial public offering, market talk around the deal channels the blame to the issue of price, upon which Palmer was said to not be willing to budge.

The company was originally offering 5.72 billion new shares at $HK4.48 to $HK4.93 a share for a slice of Resourcehouse - Palmer's investment vehicle overseeing the development of a West Australian iron ore project and Queensland coal operation.

But newswires out of Hong Kong later said the price had been cut to $HK3.45 in an attempt to get investors over the line when it became clear the interest was not there.

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Palmer and his team have strongly denied he ever personally agreed to a price reduction, which is probably true, as bankers, who were aware of the detail around the float, but not on the final ticket managing the sale, say there was always a major question around Palmer's unrealistic view of the price.

"Part of the decision-making of (bankers) wanting to be in it, or not, included a lot of questions around the story," one banker says. "There was a sense that his (Palmer's) value expectations were well in advance of what anyone thought the market would pay. The market was never going to get near his price and it was going to be a failed deal."

Despite telling Bloomberg he didn't hold the banks responsible for the IPO's failure, Palmer is said to be disappointed in the lead float managers and feels they let him down. BOC International Holdings, HSBC, Royal Bank of Scotland and UBS ended up managing the sale, after a long list of top investment banks were linked to the potential float over the past two years.

"It is really rare with a deal of that size that you would take it to market expecting it to fail," says another banker. "They (the lead banks) were prepared to take the risk to get the fees, which is not the best business model."

If the float had got off the ground, Palmer would have had to pay the banks involved about $150 million in fees, which is reportedly two-thirds higher than the going rate.

Bankers that were engaged on the float, but weren't there at the end, say Palmer is very difficult to work with. One describes the hefty fees as part "pain money" and partly compensation for the high risk the project wouldn't get off the ground at the price Palmer was asking.

"It wasn't a deal the banks were falling over each other to do. It was more that if you're paid enough money, you'll take a punt," says one.

The banks that participated in the deal did not get their fees and were probably out of pocket from the marketing.

Many banks walked from the deal because they weren't prepared to take it to the market at the price Palmer wanted them to.

According to one person who stopped working on the float, this, and the failure of the float, are indicative of the way Palmer works. "He has a view that if you haven't pushed the other side to the point where they walk away, you're probably not pushing hard enough - he likes to create that kind of tension," he says.

While the resources behind Palmer's coal project in Queensland's Galilee Basin was not in question, his ability to deliver the project when he said he could definitely was. The project still needs an infrastructure solution and to gain certain government licences, but Palmer is still planning to start construction on the $8bn project later this year and start shipping coal by 2014.

Investors were said to be concerned around the project development risk and wanted a discount on the price because of that, but Palmer was understood to be firm on the value.

"The issue was that with the price that Clive was after, those fundamental concerns meant investors struggled to get there," a banker says.

It is not just bankers who find Palmer hard to work with. It is widely known that Citic Pacific, the Chinese-controlled miner building the $US5bn ($4.7bn) Sino Iron magnetite project on Palmer's tenements, doesn't find Palmer an easy landlord.

This also could have been a problem with Resourcehouse's China First Iron Ore designs in WA. According to the prospectus, Resourcehouse intended to use or expand on port, transport and power infrastructure being built by Citic.

"This plan is subject to (Palmer's wholly owned subsidiary) Mineralogy's approval and reaching agreement with Citic Pacific, neither of which we have obtained," the prospectus says.

"Failure to develop or obtain adequate and suitable infrastructure would impact the success of our projects."

There also was the potential that Resourcehouse, despite being 54 per cent owned by Palmer, would find itself in difficult negotiations with Mineralogy, or Waratah Coal, which are both 100 per cent owned by Palmer.

In the risk section of the prospectus was a warning that because Palmer was floating a contingent right to mine on his ground, not the actual ground, Resourcehouse's success depended on Palmer.

"Mineralogy may require that third parties use infrastructure and facilities developed by China First Iron Ore in Mineralogy's absolute discretion, which could have a material adverse effect on our ability to achieve project completion," was one warning along those lines to prospective investors.

There were also market concerns around Palmer's capability to undertake the significant projects and questions around his board and management team.

Despite being in the resource state of Queensland, he has not extensively tapped into the broader business expertise in the state and according to some industry insiders, simply surrounds himself with "yes" men.

His wife, Anna, was listed in the Resourcehouse prospectus as one of the company secretaries and the board features Clive Mensink, Palmer's nephew and the boss of Palmer's soccer team, Gold Coast United.

Derek Payne, a long-time employee of Palmer's at Mineralogy, his Brisbane-based company, was also listed as a company secretary. Former foreign minister Alexander Downer is also on the board, as is former Deloitte boss Domenic Martino, who has long been associated with Palmer.

Shen Heting, head of the state-owned China Metallurgical Group, is the Chinese government connection on the board. Palmer, who has closely tied himself to the Chinese, is banking on the support of the economic powerhouse to now fund his projects.