Before You Invest Your Money

(Bloomberg) — Billionaire Clive Palmer, a law school dropout who made his first fortune from real estate on Australia’s Gold Coast, is driving what may be the biggest initial share sale of a mining company since 2007.

Palmer, 55, aims to raise as much as $3 billion in the Hong Kong IPO of Resourcehouse Ltd., which plans to spend A$10.2 billion ($9.1 billion) to develop iron ore and coal mines in Australia to supply steel mills and power companies in China.

“Most of our funding comes from the People’s Republic of China,” said Palmer, referring to Resourcehouse, which this week sealed an investment and sales accord with Metallurgical Corp. of China Ltd. “It’s the place where we should be.”

Palmer is betting demand for Resourcehouse stock will be underpinned by economic growth in China, which may overtake Japan as the world’s second-largest economy this year. The nation is expected to consume more iron ore over the next five years than Australia, the biggest exporter, has shipped throughout its history, according to Rio Tinto Group.

“He’s playing in the game he knows well and that’s the steel industry,” said Mark Pervan, a commodity strategist at Australia & New Zealand Banking Group Ltd. in Melbourne. “They’ve obviously taken a calculated decision on iron ore demand.”

Palmer, who owns closely held Mineralogy Pty, is Australia’s fifth-richest man, according to Business Review Weekly’s annual rich 200 list published in May, which valued his fortune at A$3.4 billion. Last year he paid A$5.3 million for a Horizon 98 motor yacht, adding to his 14.6 meter Sunseeker luxury boat, two McDonnell Douglas MD-82 private jets, and an Agusta helicopter.

‘One Bed’

“I’m pretty comfortable and quite happy in my lifestyle,” Palmer said in an interview in Brisbane, Australia. “You can only live with one woman, sleep in one bed, have one meal at one time.”

A licensed real estate agent and owner of the Gold Coast United soccer team, Palmer retired at 29 after he’d amassed a fortune of about A$40 million through real estate investment on the Gold Coast, a tourist strip with 70 kilometers (44 miles) of beaches and home to Q1, the world’s tallest residential tower. He came out of retirement two years later to buy the Australian assets of U.S.-based Hanna Mining Co.

Palmer, who’s a director of the Greg Norman Golf Foundation, negotiated his first major iron ore deal with China’s Citic Pacific Ltd. in 2006. Citic signed sales agreements in November for the $4 billion mine its building that will draw on the same lode in northwestern Australia as the Resourcehouse project.

Break Dominance

“He seems to have a pretty solid theme to what he’s doing to supply raw materials to China, which I think is probably going to be a winner,” said Peter Arden, a Melbourne-based senior mining analyst at Ord Minnett Ltd., an affiliate of JPMorgan Chase & Co.

Resourcehouse has the potential to become the world’s fourth-largest iron ore producer, according to Macquarie Group Ltd., one of the IPO managers. Vale SA, Rio Tinto Group and BHP Billiton Ltd. control about two-thirds of the world’s seaborne trade, prompting China to invest in smaller rivals in Australia in a bid to break their dominance.

Palmer, who says he’s been to China more than 50 times, has long-term personal contact with the nation stretching back to 1962 when as a boy he met Pu Yi, the last Emperor of China, in Beijing while on a visit with his businessman father.

His IPO, sold at the top of its $2 billion to $3 billion range, may be the biggest in the industry since Eurasian Natural Resources Corp.’s $3 billion share sale in 2007, according to Bloomberg data. The sale has been delayed for a second time to March, the Australian newspaper reported Jan 25.

‘Bigger Role’

Shares of United Co. Rusal, the world’s largest aluminum producer, last traded 12 percent lower than their HK$10.80 sale price in last month’s HK$16.7 billion ($2.2 billion) IPO in Hong Kong.

“The broader sentiment has weakened in the last two or three weeks,” Binay Chandgothia, who manages about $2 billion as chief investment officer at Principal Global Investors (Hong Kong), said by phone. “We are in a more discerning environment so valuations and prospects will play a bigger role. It’s more about issuers settling for a reasonable price range.”

Resourcehouse has the rights to 10 billion metric tons of iron ore, according to Macquarie. It’s the same orebody that was the subject of negotiations with former Soviet President Mikhail Gorbachev’s regime. The Kremlin offered $3 billion of cinnamon, used in cooking to flavor pies, beverages and breads, in exchange for the ore, Palmer said.

Josef Stalin

“I thought ‘well it’s my opportunity to corner the toast market,’ but I didn’t do it,” said Palmer, adding the Soviet’s had been stockpiling the spice since the 1950s on orders of former leader Josef Stalin and had more than they needed. “I kept the iron ore for 20 years and held on.”

First output from the proposed Resourcehouse iron ore mine in the Pilbara region of Western Australia and the coal mine in Queensland isn’t due until 2013.

“It’s not an earnings story near term,” said Tim Schroeders, who helps manage $1.1 billion at Pengana Capital Ltd. in Melbourne and said he will study the prospectus once it’s issued. “It really is a pure asset in the ground play, which becomes unlocked with lots more money spent.”

China Metallurgical, which helped build the “Bird’s Nest” Olympic stadium in Beijing, signed an agreement to buy $200 million of shares in Resourcehouse, take a 10 percent stake in the Australian company’s coal project as well as buy coal, according to a filing to Shanghai’s stock exchange. The project is estimated to produce 40 million tons of a coal a year from six mining pits for more than 20 years.

“That really means that whether the market is up or the market is down you are still in business,” Palmer said in the interview. “It’s not like you are manufacturing lipsticks in Kowloon and you’ve got the wrong color for the wrong year.”