Forging ahead

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IRJ Editor Nuala Gallagher speaks exclusively with Andrew Forrest, founder of Fortescue Metals Group -- the new force in iron ore

In June, IRJ met with Andrew ‘Twiggy’ Forrest to mark his transition from chief executive of Fortescue Metals Group (ASX: FMG) (“FMG”) to non-executive chairman.

We knew that the Pilbara-focused iron ore producer/world major seaborne trader which Forrest founded and grew into a $20 billion company in just eight years was an astounding story, but despite that, he assured us that the best was yet to come. Some six months later it looks like his plans (or “remarks laced with optimism” as he calls them) have been spot on. FMG has embarked on the biggest single phase project expansion in Australian iron ore history. It has upped its flagship project by 200 per cent from 55 million tonnes to 155 million tonnes.

“Since that interview we’ve made massive discoveries which continue to show the benefit of our huge landholding in the Pilbara,” Forrest confirms.

“Holding that project on track leads me to believe that my comments made last time hold absolutely true.”

FMG’s September quarterly report offers more encouraging updates. The team shipped 12.36 million tonnes of iron ore for the quarter (a 21 per cent increase to last year’s corresponding timeframe) while production costs dropped by 6.5 per cent on the previous quarter. This has now lifted to over five million tonnes per month, well exceeding analyst expectations.  It’s no wonder that they now predict company plans to triple output within the next two-to-three years are a wholly attainable feat, and as the masses continue to second guess both Forrest and FMG’s next moves, IRJ caught up with the man himself to hear more about what we’re really in for.

(Nuala Gallagher “NG”) NG: Ramping up to your outlined production goals looks like a monumental task, even by FMG’s standards. Before we try to comprehend where you’re heading, let’s recap where 2011 has taken the company.

(Andrew Forrest “AF”) AF: We have completed the financing of the project and we’re now well advanced in the execution of the expansion where we expect to have it fully finished and ramped up well within the next two years—around 18 months. If not quicker, it’s a very exciting time. It’ll bring on one of the world’s largest iron ore producers and we’re in great shape.

The highlights for me are really three-fold: Firstly, achieving the 55 million tonnes per annum runrate which as you can see is now closing on or at 60 million tonnes per annum.  Secondly, our massive new discoveries are in the world’s best iron ore region, the Pilbara. We’re at around 12 billion tonnes of resources now, yet we aren’t heading off to far flung risky corners of the world. We’re finding billions of tonnes under the nose of the world’s most modern, stable and advanced iron ore logistics—rail, port and community infrastructure. The third thing I’m thrilled about as we close off the year is that the expansion from 55 million tonnes to 155 million tonnes is proceeding on schedule, on budget and going exactly according to plan. These huge projects never go absolutely smoothly, of course, however we are on track because we have excellent management that embraces challenges and looks for inherent opportunities.

NG: The rumour mill seems like it’s grinding into action for 2012. How about possible partnering between FMG and other groups to develop the Anketell Point port?

AF: We welcome any port logistics solution which can expedite that port. In any event once all planning and board reviews are completed, Fortescue will be in a position to proceed at full speed with its own development. I think that of all the entrepreneurial companies around the world, nobody can complete a new port in Australia faster and more efficiently than Fortescue. If people want to add to that value, we’ll be more than delighted to hear from them.

NG: Winning the right to High Court appeal against the Pilbara’s monopolistic logistical access gripes looks like another 2011 triumph set to get a lot of newsflow in the coming year.

AF: A case this big was always going to wind up in High Court. Everything up to this point has called for that and a disciplined way of gathering evidence. I think that having gone through various steps and gathered the necessary evidence, we’re now looking forward to being able to present this case and await a final un-appealable verdict in the High Court.

NG: Then there’s the mining tax, and the clock is ticking towards the implementation date (July 1 2012). I read that a bunch of executives, including yourself, have repeatedly asked that the Australian government make public the assumptions on which they founded the proposed legislation now handed over to government. Are we going to see that take place any time soon?

AF: The tax was negotiated by three of the world’s largest players in order to drive the best outcome for their shareholders. Is it then a tax that applies fairly across the industry? Until Government publish their assumptions, we aren’t going to know if what the three multinationals signed was fair. Our public, transparent and open assumptions, show quite clearly that companies like Fortescue and bigger will pay very little tax in the short-to-medium term, and smaller companies will pay a great deal of this new mining tax. I believe that it’s the first time—certainly in the history of the Western world—that we’ve seen taxation policy that rewards the rich on the basis of their size, and penalises smaller companies on the basis of theirs. It runs counter to the Labour philosophy.  It’s a type of Hood Robin tax.  Tax the poor to help the rich.

NG: When we last spoke, you said you believe that the most reliable commentator on Chinese demand is China. Since July we’ve seen some more volatile times for the iron ore markets and plenty of speculation about Asian demand as nations work through their stockpiles. Perhaps you can comment on recent market fragility and what is up ahead?

AF: Since we last spoke we’ve had a quarter where China’s growth “collapsed” to 9.1 per cent. I say collapsed because commentators point to it with ridiculous concern, but anywhere else in the world if you had 9.1 per cent annualised growth you’d be toasting your economy with champagne. I think it’s a spectacular growth rate at a time when European economies are at best uncertain.  The U.S. is beginning to grow again and China is growing in excess of nine per cent, and that means their underlying economic strength is unquestionable. While there’s always going to be supply-demand imbalances and therefore volatility, the trend is all we should be looking for and with China that means an increasing reliance on seaborne iron ore.

NG: Your comments at the Commonwealth Business Forum about the global psychological approach to Chinese demand and turbulence in the U.S. and Eurozone were interesting. I understand you feel that we ought to be more focused on Asian demand and demand drivers, and less on the current tales of woe we see so much of.

AF: Quite right. There’s much ado about nothing with Greece. If they default or leave the European Union, just get on with it.  To have the world’s financial sectors so incredibly focused on what is happening in Greece—such a small global player—is nothing short of extraordinary. The world seems to be seeking out bad news, in terms of its psychology as opposed to looking at the phenomenon taking place across Asia where this part of the world is re-establishing itself as the economic powerhouse it once was.   India cops much criticism in the press as well, yet it has domestic consumption potential [that is] the envy of the western world. That’s the macro bottom line. We read these bad news items in the press all of the time, but we forget that these other massive economies are growing.   That’s where most of the world’s people are. The world ticked over seven billion people in the past few days, and most of those people are in Asia.

That’s where the global growth is occurring, not where the headlines are.

In Copenhagen recently, we’ve witnessed the new elective on a platform of higher welfare and higher taxes. To me, that’s the beginning of the end; where you cease to encourage investment in your economy by signalling broader taxes and also seek to discourage productivity by signalling higher welfare.  A new Government that appears bent on providing a greater reward for not being part of a productive workforce, are seriously discouraging the economy in order to win short-term thinking and short-term votes. That’s something which I would say suggests that Europe will unfortunately have to get worse before it gets better, until it starts to reward productivity and hard work. It’s interesting to consider that Europe formerly led the world. Let’s hope the rest of the world doesn’t follow Europe, or the Romans, but take an example of the reward for effort of the developing economies.

NG: How about your new role and your plans to focus more on your philanthropic involvements? Last time you spoke about balancing your dual roles in good causes and FMG.

AF: Proportionately, I’d say around 75 per cent is philanthropic and around 25 per cent is Fortescue, and I think that’s about right. The reason why I became a non-exec chairman is to pursue these other major objectives.  I remain the number one ticket holder of the Fortescue fan club.

NG: In July 2011, you said that the future was bright for FMG. The interim months have certainly been successful. Are you prepared to reiterate that outlook for 2012?

AF: We did remark, remarks laced with proper optimism of course, that the future has never looked brighter. Since that time we’ve made huge discoveries.

We’ve completed the financing of the project and we are advancing towards the biggest single expansion in Australia’s iron ore history, while our operations continue to regularly beat their own records.  Yet taking an operation up not by 100 per cent, but by 200 per cent in one hit is no small feat yet the team is achieving that smoothly. On completion we will have gone from 55 million tonnes, which is already enormous, to 155 million tonnes. Having that project on track as we come onto the home straight still leads me to believe that my comments made last time hold absolutely true.

IRJ thanks Forrest and Fortescue Metals Group for their time and assistance in this article and wishes them the best for 2012.

For more information please visit www.fmgl.com.au

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