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Exclusive Interview: Russell Scrimshaw of Fortescue Metals
Russell Scrimshaw of Fortescue Metals, ‘The New Force in Iron Ore’
They call this company ‘The New Force in Iron Ore,’ and it isn’t difficult to see why. Word has it that come 2017, the company could hit iron ore production rates of 360 million tonnes per annum. The company in question is, of course, Fortescue Metals [ASX Code: FMG]; currently Australia’s third-biggest iron ore producer, based in Perth, Western Australia and operating in the Pilbara. There were plenty of questions IRJ looked forward to asking Russell Scrimshaw, Fortescue’s Deputy CEO and Executive Director, including just how this company, founded in 2003, has managed to rise up into the highest echelons of the iron ore industry—where countless others have tried and missed. In this interview we talk about doing things the Fortescue way, and pioneering attitudes to major mining projects, possible outcomes for the MRRT (minerals resource rent tax, or, as Fortescue’s slogan campaign winner recently coined it, Monster Rort Rushed Through), and hear about those exciting plans for rapid successful expansion and increasing production rates.
Nuala Gallagher: I think a good place to start is to look at how Fortescue has grown so rapidly in these last few years. What is it about the company that has enabled you to rapidly achieve such an enviable position in the Australian iron ore industry where others have fallen short?
Russell Scrimshaw: I think it’s been a number of factors. We’ve had a very energised and focused entrepreneur leading the company and a very strong team of people around him. It’s the leadership team. Nothing happens without the right people to make it happen.
But there’s also been this circumstance with the rise in China over the last seven or eight years, the fact that the Chinese demand has really spurred on those who are willing to finance projects like ours. We just worked to find six billion tonnes of iron ore where the major suppliers of BHP and Rio said there wasn’t any. We used our intellect and brains, combined with some very good people and the good luck of China’s growth to make it happen.
NG : The company has added US$500 million to cash holdings in the June quarter. Your quarterly increase has hit a total of US$1.24 billion. How do you feel you were able to do this?
RS: I think it is two things. Firstly, we’ve managed to have a record quarter for volume—we moved just over 11 million tonnes of material to the markets of Asia in the last quarter. That, combined with the fact that we’re already at a relatively low production cost for the material, and the iron ore market had strengthened in price quite somewhat, especially in the second quarter of this year. So really a combination of strengthening prices, low production cost and the volume has led to us producing a very satisfying increase in our cash holdings.
NG: Fortescue aims to become the lowest cost iron ore producer in the Pilbara. Let’s look at how you are going to do this, approach operations accordingly and why this company can manage such a task.
RS: The Pilbara is the richest mineral province in the world. It’s the home that really made BHP Billiton and Rio the successful companies they are today. The way we’re really going to be able to compete successfully against them is to get to a significant scale and by that I mean to be a producer of well over 100 million tonnes a year of iron ore—we’re already producing in our second full year at a rate of just over 40 million tonnes per year. Scale is one of the aspects that will enable us to become that low cost producer.
The second is innovation. We’ve been very creative in using techniques in mining and equipment that haven’t been used before [in this region]. I speak particularly of a machine which comes out of Germany by a company called Wirtgen, called a “surface miner” which is a very efficient way of mining the iron ore. A second example of innovation is a machine we’re just beginning to deploy now, called an “overburden conveyor system” which moves massive amounts of waste material, or overburden, away from the iron ore without having to pick the earth up and put it down more than one time. When you’re moving massive amounts of earth you only want to pick them up and put them down once, and that’s what this machine allows us to do. The third thing is that we’ve had the benefit of today’s advanced technology that our competitors didn’t have when they built their rail and port and mine system. We’ve got the benefit of very sophisticated computer modelling, satellite positioning—to get the rail alignment exactly right, for example. There’s much more efficient ship loaders, stackers and reclaimers too, [all] putting us on a very advantageous cost curve.
NG: Let’s look at your projects and talk scale, as you previously mentioned. Perhaps we can talk about how you plan to expand and meet plus-100 tonnes annual production targets in the next couple of years?
RS: Our first mine was a mining area called Cloud Break and we recently opened a second mine in the last 12 months or so, in an area near there called Christmas Creek. Together those two projects are in an area called the Chichester Range. Our plan is to take the combined production from those two mines, from an annual rate of just over 40 million tonnes today, to around 95 million tonnes in the next couple of years. An expansion of that initial project to that massive scale, we’ve already begun production at a rate which took BHP and Rio Tinto decades to get to, and [then] we [will] deliver the expansion of [these projects] to an annual production capability of 95 million tonnes over the next couple of years. There’s been nothing of this scale of expansion ever experienced before in the iron ore industry worldwide.
NG: Fantastic, and what goals are in place to do this?
RS: We have several goals over the next 12 months. The first one is expanding our production capability today. We hope by around the end of the first quarter next year to have completed an expansion up to 55 million tonnes a year and we’re financing that from our own cash resources. In parallel, we’re looking to finance our expansion to 95 million tonnes in the Chichester. They’re the two major pieces of work along with a Feasibility Study in a new area called Solomon.
We hope that Solomon is going to get the green light once we’ve finished our Feasibility Study, and we know where the Australian Federal Government is going on the resources tax. Once we get that green light to go ahead with Solomon’s first stage of development, (we will) add another 60 million tonnes on top of 95 million from the Chichester. We’ve got a lot on our plate. We’ve got all of the preparatory work and financing to go to 95 million in the Chichester and we’ve got the Feasibility Study, which is advancing very fast, to put Solomon in play and add another 60 million tonnes per year. That’s only a Feasibility Study for this point. It will take about two years [to complete these projects] once we get financing for each of these projects—95 million tonnes and the project in Solomon —which will take us to 155 million tonnes.
NG: I’m glad you mentioned the pivotal issue of where the government will go on the MRRT because, of course, Fortescue has really stepped up and spoken out about this. What would your ideal outcome be and what looks most likely to happen at this stage?
RS: From our point of view, we think the ideal outcome is not to have a focused mining tax at all. We already pay the same corporate tax rate as everybody else and we also pay significant royalties to the various states who, under Constitutional Rights of Australia, own the mineral rights in Australia. We pay around five-and-a-quarter per cent royalty on our sales—that’s not after tax, that’s on our sales—as well as paying the corporate tax, so we don’t think it’s right that we should be paying any mining tax at all.
We will continue to ask the government to be as transparent as possible and to get them to justify what it is they’re trying to achieve, on the basis that the industry which is driving the economy to great success is the mining industry. It’s nonsensical to think that if you want to try and slow the most successful industry down that’s going to be good for the rest of Australia. So what predictions do we realistically have? Well, as you probably know we have a federal election happening in Australia in two weeks time and the opposition party, the Liberal Party of Australia, if they were to win they would not implement such a tax. If the existing ALP Government was to maintain Government, and they’ve struck a compromise deal with BHP, Rio and Xstrata, I daresay ourselves and the other junior and smaller miners will continue to fight it as strongly as we possibly can after the election to make sure that whatever legislation finally gets agreed, sometime in the middle of next year, is fair and equitable and keeps Australian mining competitive with the rest of world.
NG: In terms of a wider industry response, it seems like you’ve also worked to encourage understanding of quite how far reaching the effects of the MRRT would be, if instated.
RS: This is the way that democracies work, thank goodness, that people have a right to express their views publicly and as loudly as they reasonably can, with as much emphasis as they can, so we’re encouraging not only the other mining companies who are going to be affected by this tax —and there are hundreds of those—but also other businesses who rely on the mining industry for their success. There are thousands of contractors that we deal with on an everyday basis; from food and accommodation in the mining camps, to trucks, to cars, the list goes on and on. We’re trying to impress upon the multiplying effect of all of these other industries who are impacted by any slowdown or any negative impact on the mining industry to speak their minds. If the Labor government is re-elected [we will] let them know about that proposal. I’m certain that campaign going to continue over the next two weeks and if the Labor government returns, long after the next two weeks.
NG: Let’s wrap up by getting to the root of Fortescue’s success and looking at those key strengths our readers will really appreciate. What’s the ‘take-home message’ for the many looking closely at Fortescue today?
RS: Fortescue’s very interesting to many companies around the world; I know that several universities around the world at the moment are actually doing case studies on the company. How it could happen that so many companies are trying to get in this position for iron ore, but only one has managed in such a rapid period of time with such scale is a subject of great interest to them. The demand is there, the China story is here for the long-term, and we’re very lucky here in Australia —especially in the Pilbara— we have three billion people on our doorstep in Asia who are urbanising and industrialising their economies at tremendous rates. That’s the key driver for us at Fortescue, to expand our business as quickly as we can, in partnership with Asia and major steel and other companies who are participating in the development of their own economies. Fortescue is in an extremely lucky position with what’s happening in Asia here on our doorstep and what we have to do is be excellent at delivering the opportunity that we can see in front of us, with the demand that’s coming forward for the iron ore that we have.
fmgl.com.au
They call this company ‘The New Force in Iron Ore,’ and it isn’t difficult to see why. Word has it that come 2017, the company could hit iron ore production rates of 360 million tonnes per annum. The company in question is, of course, Fortescue Metals [ASX Code: FMG]; currently Australia’s third-biggest iron ore producer, based in Perth, Western Australia and operating in the Pilbara. There were plenty of questions IRJ looked forward to asking Russell Scrimshaw, Fortescue’s Deputy CEO and Executive Director, including just how this company, founded in 2003, has managed to rise up into the highest echelons of the iron ore industry—where countless others have tried and missed. In this interview we talk about doing things the Fortescue way, and pioneering attitudes to major mining projects, possible outcomes for the MRRT (minerals resource rent tax, or, as Fortescue’s slogan campaign winner recently coined it, Monster Rort Rushed Through), and hear about those exciting plans for rapid successful expansion and increasing production rates.
Nuala Gallagher: I think a good place to start is to look at how Fortescue has grown so rapidly in these last few years. What is it about the company that has enabled you to rapidly achieve such an enviable position in the Australian iron ore industry where others have fallen short?
Russell Scrimshaw: I think it’s been a number of factors. We’ve had a very energised and focused entrepreneur leading the company and a very strong team of people around him. It’s the leadership team. Nothing happens without the right people to make it happen.
But there’s also been this circumstance with the rise in China over the last seven or eight years, the fact that the Chinese demand has really spurred on those who are willing to finance projects like ours. We just worked to find six billion tonnes of iron ore where the major suppliers of BHP and Rio said there wasn’t any. We used our intellect and brains, combined with some very good people and the good luck of China’s growth to make it happen.
NG : The company has added US$500 million to cash holdings in the June quarter. Your quarterly increase has hit a total of US$1.24 billion. How do you feel you were able to do this?
RS: I think it is two things. Firstly, we’ve managed to have a record quarter for volume—we moved just over 11 million tonnes of material to the markets of Asia in the last quarter. That, combined with the fact that we’re already at a relatively low production cost for the material, and the iron ore market had strengthened in price quite somewhat, especially in the second quarter of this year. So really a combination of strengthening prices, low production cost and the volume has led to us producing a very satisfying increase in our cash holdings.
NG: Fortescue aims to become the lowest cost iron ore producer in the Pilbara. Let’s look at how you are going to do this, approach operations accordingly and why this company can manage such a task.
RS: The Pilbara is the richest mineral province in the world. It’s the home that really made BHP Billiton and Rio the successful companies they are today. The way we’re really going to be able to compete successfully against them is to get to a significant scale and by that I mean to be a producer of well over 100 million tonnes a year of iron ore—we’re already producing in our second full year at a rate of just over 40 million tonnes per year. Scale is one of the aspects that will enable us to become that low cost producer.
The second is innovation. We’ve been very creative in using techniques in mining and equipment that haven’t been used before [in this region]. I speak particularly of a machine which comes out of Germany by a company called Wirtgen, called a “surface miner” which is a very efficient way of mining the iron ore. A second example of innovation is a machine we’re just beginning to deploy now, called an “overburden conveyor system” which moves massive amounts of waste material, or overburden, away from the iron ore without having to pick the earth up and put it down more than one time. When you’re moving massive amounts of earth you only want to pick them up and put them down once, and that’s what this machine allows us to do. The third thing is that we’ve had the benefit of today’s advanced technology that our competitors didn’t have when they built their rail and port and mine system. We’ve got the benefit of very sophisticated computer modelling, satellite positioning—to get the rail alignment exactly right, for example. There’s much more efficient ship loaders, stackers and reclaimers too, [all] putting us on a very advantageous cost curve.
NG: Let’s look at your projects and talk scale, as you previously mentioned. Perhaps we can talk about how you plan to expand and meet plus-100 tonnes annual production targets in the next couple of years?
RS: Our first mine was a mining area called Cloud Break and we recently opened a second mine in the last 12 months or so, in an area near there called Christmas Creek. Together those two projects are in an area called the Chichester Range. Our plan is to take the combined production from those two mines, from an annual rate of just over 40 million tonnes today, to around 95 million tonnes in the next couple of years. An expansion of that initial project to that massive scale, we’ve already begun production at a rate which took BHP and Rio Tinto decades to get to, and [then] we [will] deliver the expansion of [these projects] to an annual production capability of 95 million tonnes over the next couple of years. There’s been nothing of this scale of expansion ever experienced before in the iron ore industry worldwide.
NG: Fantastic, and what goals are in place to do this?
RS: We have several goals over the next 12 months. The first one is expanding our production capability today. We hope by around the end of the first quarter next year to have completed an expansion up to 55 million tonnes a year and we’re financing that from our own cash resources. In parallel, we’re looking to finance our expansion to 95 million tonnes in the Chichester. They’re the two major pieces of work along with a Feasibility Study in a new area called Solomon.
We hope that Solomon is going to get the green light once we’ve finished our Feasibility Study, and we know where the Australian Federal Government is going on the resources tax. Once we get that green light to go ahead with Solomon’s first stage of development, (we will) add another 60 million tonnes on top of 95 million from the Chichester. We’ve got a lot on our plate. We’ve got all of the preparatory work and financing to go to 95 million in the Chichester and we’ve got the Feasibility Study, which is advancing very fast, to put Solomon in play and add another 60 million tonnes per year. That’s only a Feasibility Study for this point. It will take about two years [to complete these projects] once we get financing for each of these projects—95 million tonnes and the project in Solomon —which will take us to 155 million tonnes.
NG: I’m glad you mentioned the pivotal issue of where the government will go on the MRRT because, of course, Fortescue has really stepped up and spoken out about this. What would your ideal outcome be and what looks most likely to happen at this stage?
RS: From our point of view, we think the ideal outcome is not to have a focused mining tax at all. We already pay the same corporate tax rate as everybody else and we also pay significant royalties to the various states who, under Constitutional Rights of Australia, own the mineral rights in Australia. We pay around five-and-a-quarter per cent royalty on our sales—that’s not after tax, that’s on our sales—as well as paying the corporate tax, so we don’t think it’s right that we should be paying any mining tax at all.
We will continue to ask the government to be as transparent as possible and to get them to justify what it is they’re trying to achieve, on the basis that the industry which is driving the economy to great success is the mining industry. It’s nonsensical to think that if you want to try and slow the most successful industry down that’s going to be good for the rest of Australia. So what predictions do we realistically have? Well, as you probably know we have a federal election happening in Australia in two weeks time and the opposition party, the Liberal Party of Australia, if they were to win they would not implement such a tax. If the existing ALP Government was to maintain Government, and they’ve struck a compromise deal with BHP, Rio and Xstrata, I daresay ourselves and the other junior and smaller miners will continue to fight it as strongly as we possibly can after the election to make sure that whatever legislation finally gets agreed, sometime in the middle of next year, is fair and equitable and keeps Australian mining competitive with the rest of world.
NG: In terms of a wider industry response, it seems like you’ve also worked to encourage understanding of quite how far reaching the effects of the MRRT would be, if instated.
RS: This is the way that democracies work, thank goodness, that people have a right to express their views publicly and as loudly as they reasonably can, with as much emphasis as they can, so we’re encouraging not only the other mining companies who are going to be affected by this tax —and there are hundreds of those—but also other businesses who rely on the mining industry for their success. There are thousands of contractors that we deal with on an everyday basis; from food and accommodation in the mining camps, to trucks, to cars, the list goes on and on. We’re trying to impress upon the multiplying effect of all of these other industries who are impacted by any slowdown or any negative impact on the mining industry to speak their minds. If the Labor government is re-elected [we will] let them know about that proposal. I’m certain that campaign going to continue over the next two weeks and if the Labor government returns, long after the next two weeks.
NG: Let’s wrap up by getting to the root of Fortescue’s success and looking at those key strengths our readers will really appreciate. What’s the ‘take-home message’ for the many looking closely at Fortescue today?
RS: Fortescue’s very interesting to many companies around the world; I know that several universities around the world at the moment are actually doing case studies on the company. How it could happen that so many companies are trying to get in this position for iron ore, but only one has managed in such a rapid period of time with such scale is a subject of great interest to them. The demand is there, the China story is here for the long-term, and we’re very lucky here in Australia —especially in the Pilbara— we have three billion people on our doorstep in Asia who are urbanising and industrialising their economies at tremendous rates. That’s the key driver for us at Fortescue, to expand our business as quickly as we can, in partnership with Asia and major steel and other companies who are participating in the development of their own economies. Fortescue is in an extremely lucky position with what’s happening in Asia here on our doorstep and what we have to do is be excellent at delivering the opportunity that we can see in front of us, with the demand that’s coming forward for the iron ore that we have.
fmgl.com.au
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