Eccentric Aussie Digs China an $8 Billion Investment Sinkhole

<b class="credit">Citic</b>The Sino Iron Mine's concentrator area.
CiticThe Sino Iron Mine's concentrator area.

"It seemed like a good idea at the time" is a phrase often used to cover a multitude of sins, bad ideas, and botched plans. But even back when the plans for this massive iron-ore-mine-gone-wrong were first proposed, many people in the know didn't think the idea was very good.

Seven years ago, eccentric Australian billionaire Clive Palmer pitched Citic Pacific Investment Ltd. on the idea of mining low-grade iron ore from the Australian Outback. Citic is a part of China's biggest state-owned investment vehicle.

Clive Palmer, Australian billionaire and mining magnate, speaks during a news conference on the plans for the replica Titanic at the Ritz hotel in London, U.K., on Saturday, March 2, 2013. Palmer plans to build a 21st Century replica of the Titanic and sail it from England to New York by the end of 2016. Photographer: Matthew Lloyd/Bloomberg via Getty Images
Matthew Lloyd/Bloomberg via Getty Images Clive Palmer, Australian billionaire and mining magnate

The total cost to get the Sino Iron mine producing ore on a steady basis was originally estimated to be $2.5 billion. With the first two lines built but still not fully operational, the mine has yet to actually ship any ore; estimates for how much it will cost in total to get it completely up and running range as high as $8 billion, according to a Bloomberg report.

At least one analyst quoted in that article thinks even that figure is far from certain. "The uncertainty is," Moody's Investors Service senior analyst Kai Hu said, "the company still hasn't provided the market with clear estimation of the remaining capital expenditures."

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And this week, the news out of Sino Iron continued to be bad: According to Reuters, CITIC Pacific said Wednesday during its half-year earnings report that repairs to a key processing plant on the second production line were taking longer than anticipated, which means more delays for the project. On the positive side, progress was being made in getting the first production line started up.

According to The Australian news website, the issues at the grinding mill, which halted work in April, are a "major technical problem." And beyond that, the site notes, a major money wrangle between Citic and Palmer -- to the tune of around $183 million in contested royalties -- will have to be settled by the courts before the ore can begin flowing. As The Australian writes:

In a report to shareholders, Citic did not provide a fresh estimate for when magnetite exports would begin from the project, but did concede that shipments could not start until the resolution of a messy legal dispute with Mr Palmer over security plans at the Cape Preston port.

China is the world's largest consumer of iron ore, and helped fund the investment through Citic as a way to have a stake -- and therefore more of a say -- in the procurement of a commodity its economy relies on. Now, Citic may have to sell a considerable amount of debt to finance the completion of the mine, causing its stock price to drop for the fourth year in a row. Currently, Citic shares are down by about a third from their 2013 high point.

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Palmer earned the tag "eccentric" in part because of his plans to build a full-scale replica of the Titanic and and sail it from the U.K. to New York City. Perhaps adding fuel to the fire, according to Palmer himself, at the time he proposed the idea of a low-grade iron-ore mine in the far reaches of Australia, peers called the idea "mad."

Palmer stands to make money on the deal from royalties once the mine is actually producing and selling ore, but it's unclear how much money Palmer himself put up to fund the project, if any. If his statement in the Bloomberg article is any indication, he seems unconcerned at the state of things: "[The mine has] cost ... more money and it's taken ... longer, but that's the learning curve."

Palmer may be unconcerned at how long it's taking to turn a profit from the world's largest iron-ore mine, but it's unlikely that Citic and its long-suffering shareholders feel quite so unconcerned about the investment sinkhole they now find themselves in.


John Grgurich is a contributing writer to The Motley Fool.