FMG 0.21% $16.89 fortescue metals group ltd

an interview with andrew forrest

  1. 3,267 Posts.
    A good article..........

    "Iron ore kid needs a man of steel to get up and away Matthew Stevens | November 14, 2008
    Article from: The Australian
    ANDREW FORREST often describes his fledgling iron ore producer as "the Fortescue Family".

    Forrest has, very famously, spent $3 billion of other people's money to quite spectacular effect in building a new iron ore business in the Pilbara.

    Iron ore's third man has, in just four years, established Fortescue as a new iron ore producer, an operator that has so far shipped maybe 11 million tonnes to 27 Chinese customers.

    But now China's iron ore demand is in free-fall and so is Fortescue's share price. Its port is three days away from a largely unanticipated, 10-day shut-in and already actual shipments in November are running at no better than half the run rate of just two months ago.

    And, of course, the overall mood has not been helped by the sudden and still unexplained resignation of Fortescue's Mr Railway, chief operating officer Alan Watling.

    So, with its capital spending programs being reined in, cash flow seemingly shrinking and iron ore giants such as Rio Tinto suggesting Chinese demand will be weak for another two quarters, there is a growing belief that Fortescue to will need new capital to stabilise a debt-heavy balance sheet.

    Not so, according to a breathless and jet-lagged Andrew Forrest. Forrest last night interrupted his latest marketing tour of China to debunk the idea that his company is in trouble.

    While he seemed genuinely unsure about exactly where he was in China, Forrest was extremely certain of Fortescue's most-favoured status with his Chinese customers and that Fortescue needed no new equity or refinancing to sustain its long march to 80 million tonnes a year and beyond.

    Forrest said he was not seeking new capital, that Fortescue was making interest payments and not capitalising them, that the company had $600 million in cash, that it could sell "every teaspoon" of iron ore it could produce, and that it had a major Chinese customer wanting to lift its contract tonnage from 5 per cent of Fortescue production to 10 per cent.

    Forrest's typically entertaining, scatter-gun briefing started thus: "I would like to go straight to the heart of a number of issues if I could. With any luck I will prompt your questions and maybe answer them before they are asked.

    "Issues like recent sales activity, customers cancelling orders, the shipping market and our activity in it, the short-term production outlook and expansion outlook in the longer term, the Cloud Break optimisation program, our costs, mining rates and de-watering issues. I want to be extremely transparent. There has been a lot of speculation emerge while I have been travelling overseas. I would say that like Mark Twain, news of my death has been greatly exaggerated. We are in good form.

    "If people were to say the activity in the Chinese market has dropped considerably, they would, of course, be correct. Now is a wonderful time to be in China, to see how quiet the market has become. And I can confirm though that the diligence and the honesty and energy with which Fortescue has pursued its customers' best interests is well recognised here.

    "We have avoided the considerable temptation following our colleagues (Rio Tinto) to utilise the fine print of contracts to sell ore on the spot market. We have a major shut-in coming up which will give our customers some breathing space. When we seek assurance, we are told it is not Fortescue ships that will be deferred or turned around.

    "We have a major mill negotiating energetically to increase their position with us. We have one mill which wants to move from 5 per cent of our production to a flat 10 per cent."

    And so it went. On. And on. After an hour Forrest had raised as many questions as his inquisitors and answered not a lot of them.

    The most immediate problem for Fortescue is that it is simply not moving enough iron ore, both because the market has softened and because it has some technical issues with the quality of its resource.

    Fortescue has averaged 13 shipments a month to Chinese customers since June. In September, the company made 15 shipments to hit an annual run rate of 30 million tonnes.

    So far this month, only four shipments have left Fortescue's Herb Elliott port. It has another ship, the Alpha Friendship, at port currently. It has been docked for four days now. And there are another six Fortescue-nominated vessels bobbing away at anchor offshore Port Hedland. Some of them have been there for 15 days.

    In October, the company shipped a disappointing 1.6 million tonnes, which is an annual rate of under 20 million tonnes.

    From Monday, Fortescue's only wharf will close for 10 days. At current loading rates, it is very hard to see how Fortescue would make even eight shipments this month.

    Meanwhile, there are problems further up the line. Fortescue's major bottleneck is its mining operation.

    There are five pits being mined at the Cloud Break operation. Some of the ore they produce contains too much alumina. Fortescue is commissioning a de-sand plant that will extract "higher than normal impurities such as alumina".

    It is clear Fortescue is delivering more ore with these undesirable impurities than it had planned to. That is why it is not going to hit its target to mine 22 million tonnes of product by the end of the year. And why there is very little chance of hitting its long-trumpeted target rate of 45 million tonnes by year end.

    In the end, Fortescue's experience is not too dissimilar to that of Mark Rowsthorn's Asciano. Forrest's domain is being marked down by investors because of its weight of debt and the risk that recession in its key markets will undermine its ability to meet its bills.

    As a final aside, one of the truly endearing things about Andrew Forrest is that he does seem genuinely indifferent about his own wealth. Asked about the $11billion erosion of his family wealth since June, Forrest said:

    "It was a book entry before and it is a book entry now. I have said often enough my car is old enough to vote. My priorities are my God, my family and friends.

    "I am fortunate to have a great deal of very good friends It is sad to be losing one from that family, Mr Watling. Things like that affect me more than the share price drop.""
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