China’s Citic fail to pay $400 million in Australian contract; can’t comprehend “rule of law” concept

Chang Zhenming, executive chairman of Citic Pacific

Up to $400 million in royalty and purchase payments due to Queensland mining magnate Clive Palmer are in dispute and have not been paid, as a rift widens between him and China’s Citic Pacific, the builder of the troubled $US8 billion ($7.8bn) Sino Iron project in Western Australia.

Hong Kong-listed Citic has said it is reassessing a $HK1.52bn ($190m) penalty payment that it is due to pay Mr Palmer next month.

It has also said another payment of between $US100m and $US200m announced last year has not been made because of a dispute over Sino Iron that is heading for a showdown in the West Australian Supreme Court.

The two issues, which are in addition to a previously reported court tussle between the two over when royalty payments would start, multiply by many times the $4m or so at stake in that dispute, which came to light in November.

The rocky relationship between the pair began in 2006, when Mr Palmer sold Citic the right to mine magnetite iron ore at ground he controlled near Karratha for $US415m and a healthy royalty stream.

That agreement stated that if Citic had not started exporting by this month, Mr Palmer’s company Mineralogy would be owed a royalty penalty, which was last year calculated to be worth $HK1.5bn.

The deal also gave Citic an option to buy the right to mine more iron ore.

Citic exercised that right last year, announcing that it would pay Mr Palmer another $US200m, less drilling costs.

Citic’s annual accounts, released in full last week, show neither payment has been made to Mr Palmer and indicate neither is about to be made soon.

“Due to changes in the iron ore market, the formula for determining the amount in the contract is not capable of calculation,” Citic said of the penalty payment, which is for the equivalent of 12 million tonnes of magnetite concentrate.

“The group has commenced a reassessment of its liability under these clauses.”

The changes in the iron ore market relate to the end of the annually negotiated iron ore price in favour of spot-market pricing in recent years.

If relations between Citic and Mr Palmer were good, it might be reasonable to assume that there could be an easy and rapid solution to how a price is calculated. But the escalating animosity between the pair makes this unlikely, and there is a strong possibility that this, too, will end up in court.

On the matter of the option payment, Mr Palmer is said to have told Citic it has repudiated the contract after it would not accept without due diligence a nominated Palmer company that was to be the vehicle for the deal.

“The company (Citic) is of the view that the (Palmer) company does not satisfy the requirements of the option agreement,” Citic said. It has sought declarations from the WA Supreme Court to uphold what it sees as its rights under the option agreement.

A hearing is due later this year.

“The company is firmly of the view that (Palmer’s company) Mineralogy’s claims are without foundation and we will continue to contest all claims vigorously,” Citic said.

There are suggestions that the option payment due is about $US100m, and Citic has already spent $US100m on drilling.

The original dispute, which is over which material dug up by Citic should be subject to royalty of US30c a tonne, is due for a court hearing on April 23.

Mr Palmer has a reputation for being both a keen litigant and tough to deal with. It appears that Citic is feeling the effects of both, despite in the past six years agreeing to hand over nearly $US800m to Mr Palmer for iron ore ground on which it is building its beleaguered Sino Iron project.

The project is costing nearly three times its original estimate and first exports are already running three years late.

In an interview with The Australian last month, Mr Palmer said the original dispute — in which he also claimed that Citic had repudiated its contract — was about a clash of cultures.

“In China, companies are used to doing whatever they like because they don’t have the rule of law,” he said.

“When they come to Australia, they are taking directions from Beijing but they find there’s an independent judiciary and they don’t understand that.”

Related articles

• China’s New Record: World’s Biggest Cost Blow-out and Longest Construction Delay (forbes.com)
• MCC Contributes $858 Million to Blow Out at Citic Iron Ore Mine – Bloomberg (bloomberg.com)
• China’s Citic to Buy 13% Stake in Alumina for A$452 Million (bloomberg.com)
• UPDATE 2-China’s CITIC buys $467 mln stake in Australia’s Alumina (uk.reuters.com)
• Australian mining giant Rio Tinto posts record $3bn annual loss (craighill.net)