Australia's new gold rush

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By Brian O'Keefe, Fortune senior editor

Like Forrest, Palmer has signed multibillion-dollar deals with Chinese steelmakers in the past year -- but he is operating with a different business model altogether. For starters, he has no intention of building or managing a public company with thousands of employees. His private company, Mineralogy, employs just over a dozen, and he's not spending a penny to build a mine or a port.

Instead he negotiated a deal with his Chinese investors to build the infrastructure: Hong Kong-based Citic Pacific and Beijing's Shougang Steel are investing more than $4 billion. Mineralogy's haul: more than $400 million upfront in the past year, plus annual royalty payments that should be worth hundreds of millions more down the road.

Despite his passive role, Palmer, 52, is hardly a modest, retiring type. He dropped out of college at age 20 to sell land and "retired" eight years later after building a $40 million fortune. A few years ago he taught some business classes at Deakin University near Melbourne, and ever since he's been calling himself "professor." After collecting his payments from the Chinese, he bought himself two Boeing MD-80 jets and a DC-9, which come in handy for shuttling workers and visitors to the Pilbara.

Following his deals last winter, Palmer made his debut on an Australian magazine's list of the continent's richest people, with an estimated worth of around $1 billion. But he claims that is greatly understating his wealth, sort of like "undercooking a steak."

If you factor in the royalty payments, he thinks he should probably be worth about $5 billion. But of course the deals he has completed so far give his Chinese partners the rights to only three billion tons of ore. All told, Palmer claims his land has about 160 billion tons of ore -- or more than Rio Tinto and BHP combined. "It's a funny story, isn't it?" he says. "Because you could multiple that out, and we'd be the richest people in the world."

Palmer stumbled into the world of Pilbara iron ore in 1985, when he decided to un-retire and get back into the business world. After reading that the Soviet Union was interested in joint venture deals to develop mineral projects in Australia, he heard from a friend that an American company, Hannah Mining, was looking to unload a significant plot of unmined land near Karratha (see "Region of Riches" map). He snatched up the mining claims. Then he flew to Moscow where, he says, he received an unorthodox barter offer. In exchange for the claims, the Russians offered to give him $3 billion worth of cinnamon.

"Apparently Chairman Stalin had ordered them to stockpile cinnamon after a shortage in the '50s, and nobody ever countermanded the order, so they had quite a lot," he says. Palmer turned down the Soviets, thinking that he'd develop the land himself and not realizing that it would take him more than 20 years to finally get a deal done.

Early on, a lack of power plants in the Pilbara was a problem, but recent discoveries of natural-gas reserves have solved that. There's also the fact that Palmer's ore is magnetite, which means that it comes out of the ground only about 30% iron and must go through a costly concentration process before it can become steel. All of a sudden, however, a lot of things that didn't appear economically viable a few years ago make a lot of sense at today's ore prices.

To see Palmer's Pilbara property up close, I board a jet from Perth with Andrew Caruso, managing director of Australasian Resources, a public company to which Palmer recently sold a stake in his mine project in exchange for 70% of the company's equity, and Palmer's longtime right-hand man, Vimal Sharma, whom Palmer met in Fiji while trying to develop a casino project back in the mid-1980s.

After a two-hour flight to Karratha on the northwestern coast, we jump into a four-seat helicopter that takes us to Preston Island, a speck of rocky land about a half-mile offshore. Soon it will be connected to the mainland by a jetty that will define the man-made harbor. Just above us a single osprey sets its wings to hover in the wind, sliding ever so slightly to its left.

"This is where professor Palmer's port will be," says Sharma, and with a sweeping motion of his right arm he summons a vision of conveyor belts loading the ore onto ships for a quick departure out to sea. Citic Pacific is shouldering the cost of construction, and it has hired one of the largest contractors in China, MCC, to build it. When the port is completed in 2009, the stockpile area will hold up to five million tons and the facility will be able to load 150,000 tons a day onto ships, for a total capacity of 24 million tons a year.

With the sun shimmering across the Indian Ocean to the west, I mention to Sharma that it's amazing to contemplate such a massive operation rising up here. He laughs and says he's amazed at how the Chinese partners seem to take it all in stride. "We've had lots of Chinese officials out on this island, and they always say, 'Okay, great. Let's pick up some seashells!'"

After lunch we jump in a four-wheel-drive and motor up into the more mountainous, inland area of Palmer's property. Over half of Palmer's Pilbara land is made up of jagged, hilly terrain filled with gorges. The rocks here are roughly 2.5 billion years old. As far as the eye can see, the ground is burnt orange from the slabs of oxidized iron that have pushed up to the surface over the eons and broken into rocks and dust.

As we bump down the path, a pair of kangaroos hop along at high speed to our left, and a third flees to our right in front of exposed red outcroppings of ore. Says Sharma: "Usually we get to right about here, and the Chinese say, 'Okay, we get it. You've got tons of iron. Why does God discriminate and give all the iron to Australia and not enough to China?"

Actually, China is the world's largest producer of iron ore. Last year it mined 520 million tons. But much of it is low quality, and the country can't keep up with its own demand. Because of that insatiable appetite, Merrill Lynch analysts in Sydney estimate that China is responsible for 80% of the growth in the iron ore market this year. "Price is important to them," says Palmer. "But it's also about locking up the resources they need down the road."

The Australians have a catchphrase for the gravity-defying supercycle of commodities demand that they believe lies ahead: "stronger for longer." Folks Down Under are taking the concept -- that they are living through a historic economic event, driven by China's and India's growth -- extremely seriously. One of Australia's most respected economists, Ross Garnaut, predicts that the boom is only getting started. He estimates that in 20 years China might well use more resources than all the countries in the developed world do today.

On a sunny afternoon I visited Xiaofei Cui, the 35-year-old managing director of Sinosteel Australia, in his office on the 42nd floor of the Bankwest Tower in downtown Perth.

Sinosteel is one of China's largest importers of ore. Its investment in the Channar mine with Rio Tinto in 1987 was the first joint venture mining deal by a Chinese company in Western Australia. Recently it has formed a joint venture with a junior iron ore miner and is exploring deals with a pair of others.

Cui is wearing metal-rimmed glasses, a gray pinstriped suit, and a brown sweater. As we sit across from each other at the conference table in the boardroom, a sweeping view of the Swan River below us, he seems extremely wary of my questions. But he perks up when I ask him how he identifies profitable deals for his company.

"Profitability is only one of the criteria," he says. "Our investment is based on a long-term strategy. We want to bring harmony to the relationship between China and Australia." As long as he brings his checkbook, it should be a strong and long mateship.

Reporter associate Doris Burke contributed to this article. To top of page

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Market indexes are shown in real time, except for the DJIA, which is delayed by two minutes. All times are ET. Disclaimer LIBOR Warning: Neither BBA Enterprises Limited, nor the BBA LIBOR Contributor Banks, nor Reuters, can be held liable for any irregularity or inaccuracy of BBA LIBOR. Disclaimer. Morningstar: © 2014 Morningstar, Inc. All Rights Reserved. Disclaimer The Dow Jones IndexesSM are proprietary to and distributed by Dow Jones & Company, Inc. and have been licensed for use. All content of the Dow Jones IndexesSM © 2014 is proprietary to Dow Jones & Company, Inc. Chicago Mercantile Association. The market data is the property of Chicago Mercantile Exchange Inc. and its licensors. All rights reserved. FactSet Research Systems Inc. 2014. All rights reserved. Most stock quote data provided by BATS.