28/06/2013 - 15:25

Business and politics don’t mix

28/06/2013 - 15:25

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Clive Palmer got more than he bargained for when he decided to enter the political arena.

Business and politics don’t mix

Clive Palmer got more than he bargained for when he decided to enter the political arena.

Politics and business never mix, as we all saw when Brian Burke mistook one for the other in the 1980s – an experience that will ensure that current Premier, Colin Barnett, does not get sucked into the latest attempt to mix the two.

The man at the heart of what’s happening is Clive Palmer, perhaps better known in Queensland than Western Australia, but with his potentially most valuable asset located in the Pilbara.

That asset is a royalty stream from iron ore mined by the Chinese company, Citic Pacific, at the Sino Iron mine near Karratha.

The problem is that Citic Pacific is not happy with the arrangement, despite having willingly entered a deal with Mr Palmer the best part of 10 years ago.

Mr Palmer is even less happy that the royalty argument is jammed up in a legal dispute, which has prevented them from flowing.

Complicating the issue is his decision to enter politics by launching his own party, fielding a candidate in every seat across the country, and declaring his intention to run for prime minister.

That political step changed the nature of what to this point has been a strictly commercial argument over a disputed contract; and while Mr Palmer probably thought it a smart move to ratchet up the pressure on Citic Pacific, it has also changed his status as a private man into a public figure.

It is that change which explains the full-frontal assault launched against Mr Palmer by The Australian newspaper, which has run a series of stories questioning the financial strength of the Palmer business empire.

If Mr Palmer had remained a private person there is no way the newspaper would have attacked him so vigorously, and every chance that a legal action against the paper would succeed.

But Mr Palmer is no longer a private man. He is a self-declared candidate to be Australia’s next prime minister, and that’s why some sections of the media regard him as fair game, subjecting him to a higher level of scrutiny, confident that there is a higher level of legal protection.

The problem for everyone involved, including Mr Barnett, is the difficulty in separating Clive Palmer the businessman from Clive Palmer the politician; a morphing of status that Mr Palmer himself started when he said he would run for prime minister.

One effect of his decision to seek the top job in the Australian government would have been the collective shudder it sent through the senior ranks of management at Citic Pacific, where a question would have been asked about whether it should be in dispute with a man who might attain some level of political power in Australia (given the job of actually leading the country is probably unrealistic).

Such considerations are given great weight in China question because of the way politics and business are routinely mixed.

What happens next is the big issue. Currently locked in a legal argument over royalty payments, Mr Palmer last week claimed he is paid $500 million in royalties each year. Citic Pacific disagrees.

Mr Palmer would undoubtedly like the funds to invest in other parts of his business, such as the Yabulu nickel refinery, which is battling a low world nickel price. Citic Pacific knows that.

Pressure is growing at both business and political levels.

Mr Palmer has shown a willingness to play both cards and may consider asking Mr Barnett for some advice on the grounds of mutual interest – after all, if Mr Palmer doesn’t get his royalties, neither does WA.

For his part Mr Barnett would reply resoundingly in the negative to any request, if in fact it were ever made; as the Burke years showed, politics and business are best kept at arm’s length.

Citic Pacific could either roll over and start paying, or may decide to play a long legal game; the latter could include taking the dispute all the way to the Australian High Court, a process that can take years and would have the effect of applying more pressure on Mr Palmer in what is starting to looking like a ‘squeeze’ play.

The Chinese company could even opt to drag the process out longer by further delaying commissioning of its iron ore plant until legal actions are resolved.

And while that is not something a Western company would do, there is an issue of ‘face’ involved in the dispute with Mr Palmer, especially now that it has gone political.

Mr Palmer’s first step is to actually get elected – at least to parliament if the top job is beyond reach; otherwise he could cave in and strike a lower royalty rate with Citic Pacific, accepting the result of getting something as being better than the risk of nothing (at worst) or years of expensive legal arguing (at best).

For Mr Barnett, the only sensible thing to do is to urge a settlement so the Sino Iron project can start producing, and start paying royalties to WA and Mr Palmer – but to be seen doing nothing other than urging resolution of a commercial dispute.

Nearly there

Everyone is looking for signs of the market ‘bottoming’; and while they might be hard to see, there are two encouraging developments.

First, is the unwinding of so-called ‘carry trades’, a term that relates to speculators borrowing cheap money to invest in high-yield situations, such as Australian banks and Commonwealth government debt.

The mass rush for the exits last week was tough on investors but actually signals a return to some form of normality and was a similar event to short-sellers being squeezed on a stock that starts to rise when they had placed bets on it continuing to fall.

The second sign of a bottom being reached is the number of small miners now trading at less than cash backing – significantly less in some cases.

Chalice Gold, an explorer that made a handsome profit selling a gold project in the North African country of Eritrea last year, is valued on the market at around $41 million – but has $55 million in the bank.

Ongoing costs are one explanation for the value gap, but it’s not often that you can buy $1 for 75 cents, unless you believe that Chalice will struggle to invest its spare cash profitably; and such a gloomy thought is another sign of the market bottom being close.

STANDING BY BUSINESS. TRUSTED BY BUSINESS.

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