Big spender: why BHP worried about selling Clive Palmer its refinery

BHP was so worried about the future of its nickel refinery when it sold it to Clive Palmer that the firm imposed extraordinary conditions.

Clive Palmer outside the Queensland Nickel Refinery in Townsville in 2010.

BHP Billiton was so worried about the future of its Queensland Nickel refinery when it sold it to Clive Palmer that the mining giant imposed extraordinary conditions that would prevent the businessman stripping it of assets or cash.

However, Mr Palmer overcame the contractual restrictions in the sale agreement to spend tens of millions of dollars of the Townsville refinery's working capital on golf courses on the Gold Coast, the Hyatt Regency resort at Coolum (now a five-star dinosaur park), a wedding venue, luxury cars and a coal tenement.

The sale agreement, which has been obtained by The Australian, states that Mr Palmer and his companies agreed that for three years after the 2009 sale the refinery would not pay "any dividend . . . permit or facilitate any return of capital, capital reduction, share buyback or any other form of distribution . . . provide any financial benefit to a buyer or (Mr Palmer) or to any person or entity associated with a buyer or (Mr Palmer)".

Mr Palmer, whose Palmer United Party is likely to hold the balance of power in the Senate after July 1, has argued that the investments made by Queensland Nickel are part of a strategy to diversify the business. But large cash sums have been channelled from the refinery's coffers to interests including the Club of Madrid, a think tank in Spain that rewarded Mr Palmer by giving him the new title "joint secretary-general, World Leadership Alliance".

The spending spree with Queensland Nickel funds has now ceased as Mr Palmer's refinery, which has exhausted most of its cash reserves, has been unprofitable with a low nickel price, while senior sources claim production capacity has been hit by the loss of key staff, operational decisions and cuts to maintenance.

The refinery, which has paid for most of the high-profile asset purchases by Mr Palmer, lost almost $60 million in 2011-12, when the nickel price was higher.

Mr Palmer had planned to cover the refinery's losses with large iron ore royalties he had expected to get from a Chinese company, CITIC Pacific, but no such payments have been made.

The sale agreement shows that BHP effectively gave Queensland Nickel to Mr Palmer for $US40m, in an indication of how keen the mining giant's executives were to be rid of the loss-making and environmentally costly refinery.

One of the unusual elements of the deal was that those funds of $US40m were immediately directed back into the refinery's coffers to be used as working capital, under the control of new owner Mr Palmer, according to the sale agreement and senior sources.

To further improve its viability, Mr Palmer, who has put the refinery's insured value at $6 billion, was required to contribute $60m to the business as working capital within 120 days of his purchase.

Another unusual element is that, just weeks before the sale to Mr Palmer, BHP rejected a conditional offer by another nickel company to purchase the refinery for $US150m, according to Supreme Court of NSW documents.

The sale agreement discloses the series of restrictions that were imposed in an attempt by BHP to ensure the refinery would not be stripped of its cash and any profits for a period of three years after the mid-2009 sale.

Insiders have told The Australian that BHP feared it would be publicly blamed and its reputation as a corporate citizen called into question if the refinery, the largest private employer in North Queensland, collapsed after being sold to Mr Palmer, who had no experience in the business.

BHP executives knew that the economic cost of a collapse would be immediate, as about 1000 staff and contractors would be out of work and a further 1400 indirect jobs would be lost in the region.

BHP executives also believed that, even after a sale, the mining giant would still be asked to wear responsibility and pick up at least a large part of the bill for the environmental clean-up cost of more than $100m for the designated "major hazard facility", with vast tailings dams storing toxic by-products near wetlands and the Great Barrier Reef.

To give the refinery the best possible chance of continuing as a going concern after the sale to Mr Palmer, BHP instructed lawyers at Mallesons Stephen Jaques in Brisbane to put the restrictions into the sale agreement so that neither Mr Palmer nor his companies could remove capital for three years.

The sale agreement states that Mr Palmer and his companies "agree that during the restriction period neither of the companies or the subsidiaries will pay any dividend . . . permit or facilitate any return of capital, capital reduction, share buyback or any other form of distribution . . . provide any financial benefit to a buyer or (Mr Palmer) or to any person or entity associated with a buyer or (Mr Palmer)".

The sale agreement also states that, for the first three years, Mr Palmer and the companies agree that they would not "transfer any of the assets to a buyer or (Mr Palmer), or to any person or entity associated with a buyer or (Mr Palmer), or to any third party other than on arm's length terms".

The restrictions did not prevent the refinery companies making asset purchases. Insiders said BHP did not contemplate that such asset purchases would include properties such as golf courses with no direct connection to nickel production.

Mr Palmer declined to respond to The Australian's questions for this article, but in an earlier interview he has confirmed the unusual restrictions, saying: "I think BHP Billiton had a strong commitment to the community, and they wanted to make sure the business continued." BHP declined to comment yesterday.

After the sale, Mr Palmer and the refinery's staff rode a public wave of success and booked large profits as the nickel price steadily improved. But senior staff and BHP executives who had experienced the "swings and roundabouts of the price of nickel" became concerned that large sums of cash, which could have helped the refinery ride out the next price slump and pay for costly maintenance, were leaving the business to buy the unrelated assets such as golf courses and resorts.

To keep faith with the restrictions in the sale agreement, these leisure assets, which were also losing money, were bought by Queensland Nickel companies - and Mr Palmer told the staff that the business was "diversifying" by picking up distressed properties at bargain-basement, post-financial crisis prices.

The refinery's biggest single purchase was of a coal tenement for $50m from Mr Palmer's Waratah Coal, resulting in his main resources investment vehicle, Mineralogy, booking a large windfall gain.

An examination of Mr Palmer's companies' accounts and other documents shows that prior to his mid-2009 purchase of the nickel refinery, he had few revenue-generating assets. This is still the case.

However, in public statements in the past six months, Mr Palmer has estimated his wealth at $6bn and has expanded on plans for costly projects including building and launching the Titanic II.

Court documents sworn by Mr Palmer earlier this year show that, at the time he bought the Townsville plant, the internal management accounts indicated it was running at a net loss (before tax) of $1.3bn a year. But the documents also show that Mr Palmer was banking on receiving huge royalty payments from the Chinese company, CITIC Pacific, for the mining and export of millions of tonnes of iron ore in tenements controlled by his company, Mineralogy, in the Pilbara region of Western Australia.

An upswing in the nickel price and cuts to the operating costs of the refinery soon after Mr Palmer had bought it meant the losses quickly ended and profitability was restored. Staff were rewarded with million-dollar parties, 700 overseas holidays and 55 Mercedes-Benz cars.

But the window of profitability soon closed as the nickel price began falling again. The refinery has now lost many of its key senior staff, its maintenance budget has been cut, its production levels have slumped, and Mr Palmer's pledge of a $1bn upgrade has not come to fruition.

"I purchased the QNI refinery in the expectation that if it continued to run at a loss then it could be funded as necessary from royalties received from (CITIC Pacific)," Mr Palmer stated in an affidavit sworn on April 28 this year. The affidavit is part of ongoing litigation with CITIC, which has disputed his claims to iron ore royalties.

"The continued operation of the QNI refinery, including the livelihood and employment of approximately 1000 employees and contractors, is dependent upon Mineralogy receiving royalties from (CITIC Pacific), or in lieu of royalties by 2013, the minimum royalty," the affidavit says.

The royalties have still not been paid by CITIC Pacific. A court battle between Mr Palmer's company and CITIC Pacific to resolve the royalties dispute could drag on for two years, according to legal argument in the Supreme Court in Perth earlier this month.

Mr Palmer, who has launched legal action against The Australian, will be required to list his assets and pecuniary interests if he wins the federal seat of Fairfax. The result remains undecided, with recounting by the Australian Electoral Commission expected to continue for days.