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Assif Shameen: Lessons from faltering mega IPOs

Tags: BHP Billiton | Rio Tinto Group | Vale
Written by Assif Shameen
Tuesday, 14 June 2011 16:14

So go the lyrics of an old song that has been recorded by a host of bands and singers over the years. Australian businessman Clive Palmer has probably heard the song many times over.

A week ago, Palmer?s Brisbane, Australia-based ?mining concession holder? Resourcehouse pulled its US$2.5 billion ($3.1 billion) Hong Kong IPO for the record fourth time after twice scaling down the IPO?s size and cutting its offering price over a span of five days in a desperate bid to drum up additional interest and just get the listing out of the way. While the firm had tried to list three times before, its latest attempt was the first time that Resourcehouse had actually set a price range for its offering.

Resourcehouse?s pullout marks the largest shelved IPO since last year?s cancelled US$2.6 billion offering by Hong Kong?s Swire Properties. Reuters reports the level of withdrawn IPO proceeds by non- Japanese Asian companies globally are at an all-time high of US$57.8 billion, with 32 withdrawn IPOs so far, an increase of 19% from the 2010 total.

Choppy markets are wreaking havoc on a season of large IPOs in Hong Kong. Luggage maker Samsonite International last week cut its maximum IPO size from US$ 1.5 billion to US$ 1.3 billion and priced the offering at the lower end of the originally indicated price range. With global markets still choppy, it?s still moot whether Samsonite?s IPO or the more glamorous and widely anticipated one for Milan fashion house Prada SpA will go ahead as planned.

Palmer, 57, has been listed as Australia?s sixth-richest man, with a net worth of over US$3.3 billion. But since almost all of his net worth is tied to Resourcehouse?s valuation and his firm?s investment bankers have been eager to repeatedly slash offer prices, even an informed guesstimate should be taken with a large portion of salt. A law school dropout, Palmer is a huge bulk of a man who made his money flipping real estate.

Palmer owns Mineralogy Pty Ltd and Waratah Coal Inc, which claim to have secured access to 10 billion tonnes of iron ore reserves in the Pilbara region, in remote Western Australia, as well as the rights to mine 1.4 billion tonnes of soft thermal coal at its China First coal project in the Galilee Basin in Queensland.

Once in production, the Mineralogy mine will have the potential of becoming the world?s fourth-largest iron ore producer after Brazil?s Vale and Australia mining giants BHP Billiton and Rio Tinto Group. Ramped up to its optimum, the Galilee project could become one of the world?s largest producers of power station coal.

But, here?s the rub. Resourcehouse?s ?concessions? actually do not produce any coal or iron ore just yet and the company only has an agreement to extract specific quantities of ore. In return for ?access? to its mines and production, Resourcehouse is committed to giving Palmer?s private companies up to A$1.1 billion ($1.4 billion) over the next three years.

Because it was Resourcehouse?s fourth try at listing and more than a dozen investment banks have been involved in the four IPOs, Palmer is fairly upfront about what he is doing. Every investment banker worth his salt has gone through the contracts between Resourcehouse and Palmer?s private companies with a fine-tooth comb.

To be sure, all IPO prospectuses have several pages devoted to ?risk factors? ? which helps investment bankers, underwriters, law firms associated with the listing to cover their backs just in case. Resourcehouse?s draft prospectus details risk factors associated with the IPO. ?We are an early-stage development company, have no operations and may not develop our business as planned at all? is an example of what you might find among the key risks. Indeed, the company goes on to list in excruciating detail that it actually lacks a number of the licences and approvals that are necessary to develop the coal and iron ore projects that the firm promises to help bring to fruition.

Resourcehouse makes it abundantly clear in reasonably plain English, avoiding the legal jargon that often fills such documents, that it is not the lawful titleholder of the exploration tenements. Moreover, the company states clearly that while it had ?letters of support from prospective Chinese customers and financiers?, it had no legally binding agreements for the coal and iron ore projects. It also clarifies at least twice in the prospectus that it expects to ?remain unprofitable for the foreseeable future?.

And what of those ?concessions?? Well, they are seemingly tainted by parallel exploration rights that have been granted to unrelated third parties, which can of course have an adverse impact on Resourcehouse?s own ability to extract iron ore or coal.

If the scaled-down Samsonite and Prada IPOs do get out of the gates, albeit at lower valuations, Palmer and Resourcehouse might have a problem blaming ?market conditions? for being fourth-time unlucky.

Unlike Samsonite and Prada, which own intellectual property such as luggage and handbag designs and are operational companies selling actual goods and have a track record of profits, Resourcehouse has no mines, no ore or coal, no sales or profits to speak of ? just tens of millions of dollars in accumulated losses and fees owed to investment bankers for abandoned IPOs.

It will be three to four years before the coal and iron ore mines at the centre of Resourcehouse?s IPO are ramped up and actually start producing something. There is also the small matter of up to US$10 billion in capital expenditure needed to make Resourcehouse and the two Palmer firms key suppliers of raw materials to China.

In lieu of the US$3 billion it was hoping to raise in Hong Kong, Resourcehouse last week claimed it had ?secured? a further US$1.28 billion in funding from Export-Import Bank of China that will be used to develop its coal project. Palmer claims that funding for the iron ore project is now being lined up from other Chinese institutions.

Given the publicity surrounding the failed fourth attempt, analysts say it is unlikely that there will be a fifth attempt anytime soon unless Palmer restructures his companies. Clearly, an easy way to do it would be to merge his private companies with Resourcehouse and seek a listing for the newly merged entity. If he insists on listing the same Resourcehouse, the caveats or ?risk factors? could run twice as long as the 30 pages they got in the last hefty draft prospectus.

Resourcehouse just needs to get its house in order before it makes yet another attempt.