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In 2006, CITIC Pacific bought the right to mine up to six billion tonnes from the Pilbara deposit in Australia. Once considered a coup for the Chinese firm, the iron ore mine has since been called a potential ‘company killer.’ (STAFF/REUTERS)
In 2006, CITIC Pacific bought the right to mine up to six billion tonnes from the Pilbara deposit in Australia. Once considered a coup for the Chinese firm, the iron ore mine has since been called a potential ‘company killer.’ (STAFF/REUTERS)

China Inc.’s debacle in the outback Add to ...

Larry Yung Chi-kin is a loyal scion of the Chinese Communist upper crust. His late father, Rong Yiren, was the legendary “Red Capitalist,” one of the few industrialists to stay behind in the mainland after the revolution of 1949. Mr. Yung himself went on to found the conglomerate CITIC Pacific and become one of China’s richest men. So, when duty called, Larry Yung answered.

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In 2006, foreign mining giants were jacking up prices of the iron ore needed by China’s voracious steel industry. At the urging of Beijing, Mr. Yung and CITIC Pacific negotiated the rights to exploit a vast deposit of low-grade ore in the red-rock landscape of Australia’s remote northwest Pilbara region.

The multibillion-dollar deal seemed to be a coup for China’s resource-hungry economy. But Mr. Yung and Beijing are now paying a heavy price.

A few kilometres down a dirt track off the North West Coastal Highway, beside a towering pile of red tailings, the company has dug itself into what increasingly looks like a bottomless pit.

The original $2.47-billion (U.S.) budget for the massive open-cut mine and processing complex has blown out to $8-billion and it is more than two years behind schedule. Senior company managers won’t rule out a $10-billion price tag for one of China’s flagship offshore resource investments. “It has the potential to be a company killer, that’s for sure,” says Clinton Dines, a former president of mining giant BHP Billiton in China.

It is a dramatic reversal for Mr. Yung, 70, who emerged from obscurity after the Cultural Revolution to become the first tycoon among China’s “princelings,” the children and grandchildren of the party elite.

To compound its pain, CITIC Pacific in 2008 bungled an attempt to hedge against the overruns – exposing the company to a further $2-billion in losses. Mr. Yung and his long-time deputy, Henry Fan Hung-ling, were forced to resign that year when Hong Kong police and regulators launched investigations into the hedging transactions.

According to people familiar with the investigations, police and regulators in Hong Kong have concluded their probes into suspected fraud, theft and disclosure failings. They have handed their findings to prosecutors in the semi-autonomous city, who are weighing whether to lay charges against some of China’s highest-profile business figures in the politically charged matter.

Mr. Yung’s office did not return calls requesting comment. A spokeswoman for Hong Kong’s Department of Justice did not respond to questions about the investigations. Officials in Beijing have been publicly silent about the probes.

But senior Chinese leaders have privately said they are worried the mine could turn into an embarrassing failure, according to Australian government officials and foreign mining executives. Soaring costs and missed deadlines in the Pilbara mine have delivered a major setback to China’s global drive to secure reliable supplies of key raw materials.

CITIC Pacific’s Australian subsidiary, Sino Iron, is scrambling to begin operations at the mine and release a flow of revenue that is projected to last for 25 years. Shipments were supposed to begin this year, reaching a pace of 27.6 million tonnes a year.

CITIC Pacific chairman Chang Zhenming said at the company’s Aug.16 results briefing in Hong Kong it now expects trial production to begin only in November, the latest in a series of missed deadlines.

“Before the end of the year we should have production ready for export,” said Mr. Chang, a veteran of China’s state-owned finance sector who was drafted in to replace Mr. Yung.

The saga speaks to the broader problems that China’s state-owned giants are having as they venture into the wider world. Resource projects account for most of the $380-billion of total Chinese outbound investment as of the end of 2011, according to China’s Ministry of Commerce. Losses on these investments have reached almost $27-billion, official media reports say.

Most of it has been blamed on failures to undertake proper research before deals are signed. “In many of these cases, my view is that due diligence was either poor, non-existent or there was an element of hubris involved,” says Mike Komesaroff, managing director of Queensland-based Urandaline Investments, a consultancy specializing in China’s minerals and metals industries.

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