Punting on Palmer

It’s probably a bit unfair to focus on the “risks” section of the prospectus for the float of Clive Palmer’s Resourcehouse, but that’s exactly what commentators have done today.

Here are a few choice cuts:

“We are an early-stage development company, have no operations and may not develop our business as planned or at all.”

“We will require additional financing to implement our projects which we may not be able to obtain on commercially viable terms, or at all.”

“We may not be able to sell all or any of our coal or iron ore products at the price or quantity that we expect.”

“We will be dependent on external contractors over whom we have no control.”

To be fair, these are the sort of catch-all risk statements that all companies are forced to include in their prospectuses, but the document has laid out very clearly the speculative nature of this investment.

Palmer’s China First coal project in Queensland and iron ore projects in Western Australia are very much a work in progress and are not scheduled to start producing – both revenue and minerals – until the end of 2014.

And that assumes that everything – specifically mine construction and rail access – goes according to plan. Oh, and there’s that little matter of getting a mining lease.

As the prospectus says, these factors “will make it difficult for prospective investors to assess our likely future performance”.

Essentially, Palmer wants investors to trust him for the next five years.

Trust that he can get financing sorted and mining lease put in place. Trust that he has the connections in China to access contractors and new customers. Trust that he can make the operations of a mine work successfully, or at least find contactors who can. And trust that he can do all this in a timely and cost-effective manner.

But investors won’t just be giving Palmer trust – he’ll also take a lot of cash off the table in this deal.

Palmer will retain 53.59% of the business, worth about $3.8 billion based on a total company value of $7.1 billion.

He will also receive up to $55 million a year in royalties, paid to his wholly-owned companies Waratah Coal and Mineralogy.

Palmer is clearly taking a big punt here, but his payoff will impressive.

Now he faces the job of convincing investors that they will – eventually – enjoy an impressive payoff too.

It may well prove to be a tough sell in the current environment.