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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 ...

The company’s stock peaked at almost HK$50 in October 2007, valuing his 19 per cent stake at HK$20.9-billion ($2.65-billion Cdn) (The stock now trades at about HK$11.)

That year, Mr. Yung took home almost HK$67-million in pay, including a HK$48-million bonus, according to company filings.

The silver-haired Mr. Yung fit seamlessly into the close-knit ranks of Hong Kong’s super rich. He bought Birch Grove in Sussex, the former home of late British Prime Minister Harold Macmillan, for a reported £5.5-million in 1989 and spent heavily adding a golf course. The house has since been sold.

Like other tycoons in gambling-mad Hong Kong, Mr. Yung invested in champion thoroughbreds and was elected a steward of the prestigious Hong Kong Jockey Club. Club records show 13 Hong Kong horses listed under his ownership won combined prize money of almost HK$100-million. By the time he began scouting for iron ore, China’s official media was describing him as the country’s richest tycoon.

His connections did him little good in the arid outback. Established players had already scooped up most of the best deposits of hematite, a rich form of iron ore, local miners say.

CITIC had little choice but to invest in plentiful deposits of lower-grade magnetite ore, which then accounted for less than 1 per cent of Australia’s iron ore output.

In 2006, after Mr. Yung had visited Australia to explore potential investments, CITIC Pacific signed a deal for the right to mine up to six billion tonnes from the Pilbara deposit owned by Australian mining entrepreneur Clive Palmer.

Australian officials involved in the discussions say Mr. Yung was a confident and polished host. At a meeting in Hong Kong after the signing, Mr. Yung told his Australian guests he was flying to South America the following day on his private jet to hunt wild boar.

The Australian government approved the deal in June 2006. Within months, it became clear CITIC Pacific had underestimated the costs of establishing Australia’s biggest magnetite mine. There were also unexpected management challenges.

By Chinese standards, Australian labour is expensive, unruly and in short supply. Government and unions quickly dashed expectations that an army of low-paid Chinese workers could be imported to build the facility.

That irritated CITIC Pacific managers, who went public with critical views on local working conditions and habits. Then, in the midst of an Australia-wide mining boom, the price of energy, materials and engineering services soared. Complex projects in China had been completed much faster and at lower cost than similar projects in Australia.

“For a Chinese company coming to operate in Australia, this is a big issue,” says metallurgical engineer Darryl Harris, a director of Perth-based Indo Mines who has also worked extensively in China. “The trouble is they can’t transfer that know-how here.”

With costs ballooning at Sino Iron, the Australian dollar began to rise on the back of soaring commodity exports. By July 2008, it had risen 25 per cent since work started at the mine, effectively boosting labour and other costs by one-fourth for the company, which had borrowed from Chinese banks.

Facing the prospect of further currency losses, CITIC Pacific entered into a series of leveraged derivative contracts in June and July 2008 to hedge against the rising currency.

They struck deals with a range of banks, including Citibank, Rabobank, Standard Chartered, Natixis, Credit Suisse, Bank of America, Barclays Capital, BNP Paribas, Morgan Stanley, HSBC, China Development Bank, Calyon and Deutsche Bank, according to copies of contracts the company later disclosed.

Just as the contracts were signed, the global financial crisis hammered the Australian dollar in August of 2008, leaving the company holding wrong-way bets.

It wasn’t until Sunday, Sept. 7, 2008, five days before Lehman Brothers filed for bankruptcy, that Mr. Yung and his senior managers learned about the exposure, according to disclosures made later to the Hong Kong Stock Exchange. At the time, the Australian dollar was trading at about 81 cents to the U.S. dollar.

CITIC Pacific finally announced six weeks later, on Oct. 20, that it faced losses of up to $2-billion on its hedging. By then, the Australian currency had sunk to 69 cents.

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