The ranks of those who doubted Andrew Forrest’s vision of Fortescue Metals Group Ltd becoming the third force in Australian iron ore are growing noticeably thinner.
The recent symbolic turning of the first sod at Anderson Point, Port Hedland, where ore from 250 kilometres away will be stockpiled then shipped from late 2007, was a watershed many said would never be reached in the development of Fortescue Metals Group’s $2.5 billion iron ore project.
“This is a historic moment in the implementation of our Pilbara iron ore project and the state’s first open access rail and port infrastructure facility. This is an exciting moment. I’m stoked and it’s all down to them,” Fortescue Metals Group chairman and managing director Andrew Forrest told WA Business News in acknowledgment of his team.
“Blind Freddie could have led this project with people like we’ve got.”
It’s a fitting theme from the enthusiastic Mr Forrest, who quickly deflects much of the attention and kudos that comes his way to those below him. Perhaps it’s a style borne of someone who has also felt what it’s like to carry the burden of failure single handedly, in less euphoric days.
A couple of kilometres away from Anderson Point, against a clear blue Hedland sky, stands an ominous warning to thwarted ambition – the ghostly black remains of BHP Billiton’s failed multi-billion dollar Boodarie hot briquette iron project, which was scrapped last year.
The BHPB infrastructure went unnoticed by Mr Forrest, who regaled the gathering of 150 invited guests with his iron clad belief in the success of FMG’s grab for a big chunk of the Pilbara’s boundless riches.
While a supporter of the FMG project, Planning and Infrastructure Minister Alannah MacTiernan sounded a cautionary warning last week when she said there were: “Still quite a number of hurdles for this project to cross before it starts in full. However, we are very confident it will take off.”
In this assessment, Ms MacTiernan is correct. As FMG’s development becomes more of a triumph of project over spin, the real crunch time is just around the corner.
A few weeks ago, Mr Forrest called his team leaders together at the company’s big, open-plan Kings Park Rd headquarters and announced the instigation of a 40-day strategy to clear the project’s last major hurdle – securing the crucial $2.5 billion funding package.
The clock is ticking on the project, which, when in production at 45 million tonnes a year, will have gone from conception to production in a little over three years, a feat never before achieved in the Australian iron ore industry.
By the middle of next month, all the boxes on an approximate 60-item check list must be ticked before US bank Citigroup undertakes the financing.
“We are through practically all of those. When this plan is complete, we’ll be in Citigroup’s hands as to exactly when the funding takes place,” Mr Forrest said.
Mr Forrest has indicated a preference for a standard 70 per cent debt to 30 per cent equity and shareholders have already agreed to an equity placement of up to 55 million new shares by March 8 this year.
However, stockbroker BBY Ltd, which has a buy recommendation on the company, suggests FMG sells a 20 to 25 per cent stake in the Chichester iron ore project to raise up to $500 million, and/or issues new FMG shares to a cornerstone investor at between $7 and $9 share.
Mr Forrest said both options were being considered, along with a partner for the rail/port infrastructure component of the project.
The balance of the funding would come from the US debt capital markets, a market Mr Forrest has already had some success in, attracting the likes of such major institutions as JP Morgan Fleming Asset Management, the Capital Group and Harbert.
It is a return to the well that many Anaconda Nickel Ltd shareholders and those involved with the ill-fated $1 billion Murrin Murrin laterite nickel project in WA remember vividly.
Between early 1997 and late 2000, the share price of the Forrest-led Anaconda rose from $1 to a staggering $13. It then crashed to 48 cents at the end of 2002 when Murrin Murrin ran into technical problems, costing shareholders billions of dollars.
South African mining giant Anglo American, with the support of other major shareholder, Swiss commodity trade Glencore, showed Mr Forrest the door, claiming mismanagement and crippling debt.
Murrin Murrin, now owned by Minara Resources Ltd, is currently producing at an annualised 36,000 tonnes a year (tpa), still well short of its nameplate 45,000tpa.
Mr Forrest remains proud of the Murrin Murrin project, which he points out exports $1 billion worth of nickel and cobalt a year.
Since listing in 2003, FMG’s market capitalisation has risen, albeit with some big fluctuations, to around $1.4 billion, of which Mr Forrest owns just under half.
In the past six months the share price has jumped from $3 to $5.30, despite the fact that the Pilbara project is unlikely to produce a profit for several years.
The prize, as Mr Forrest reminded his spellbound listeners at Anderson Point last week, is massive.
He estimates that Pilbara duopoly BHP Billiton and Rio Tinto, the world’s biggest and second largest resources companies, will jointly make almost $15 billion profit over the next two years from their iron ore operations in the region, with Rio taking the edge at $8.25 billion.
In that time, Pilbara iron ore would contribute 50 per cent of Rio’s total earnings and 25 per cent of BHPB’s.
“No wonder competition in the Pilbara is not exactly welcome,” Mr Forrest said, suggesting that isolation is not the only reason the region remains WA’s best kept secret.
Against this, stockbroker BBY Ltd expects FMG’s 2004-05 loss of $800,000 to improve slightly to a $700,000 loss this year, with after-tax profits of $24.7 million coming in 2007, rising to $77.4 million the next year, $292.2 million in 2009 and $404.8 million in 2010.
Annual royalties to the state government are estimated at $100 million a year.
FMG is planning an initial 45mt/year from its Cloud Break and Christmas Creek deposits, about 250km south of Port Hedland, from late 2007, rising to 60mt/year around 2010-11.
While the rail link and port infrastructure is being planned to handle 45mt/year, construction is being aimed at the higher level to allow it to be expanded quickly following all the relative approvals.
Ore reserves stand at 1.1 billion tonnes for both Cloud Break, for which final environmental approvals have not been received but are expected by the end of the month, and Christmas Creek.
Within this sits a high grade 360mt that will require minimum, low-cost refining for direct shipping to clients.
This sits within a greater project resource of 2.4 billion tonnes in a 16,800 square kilometre tenement portfolio that spans the Pilbara.
Mr Forrest is coy about who has committed to taking long-term sales contracts totalling 30mt/year, 66 per cent of planned production, except to say most are Asian steel mills in the upper tier of iron ore consumers. The agreements signed to date range from a minimum 10 to 20 years, and one with a 22-year term.
As opposed to the highly technical hot-acid-under-pressure processing of laterite nickel at Murrin Murrin, the orebodies at Cloud Break and Christmas Creek will be mined by proven, low cost, open cut, rip and tear methods.
The Murrin Murrin memory is one Mr Forrest does not want to relive.
“You don’t do what I did at Murrin Murrin,” he said in reference to the radical nickel technology and the way the consulting engineers were motivated. “Lump sum contracts don’t get fulfilled because of short cuts the engineers take. That’s not going to happen at FMG.”
The use of surface miners is, however, an innovation. It was developed by BHP Billiton, which he believes allows FMG to mine its flat and shallow orebodies in layers.
It also provides excellent grade control.
Big bucket wheel excavators will also be used once a mine face has been established. In its construction phase, the project will employ 1,700 full-time staff, reducing to 600 in the operational phase.
Never missing an opportunity for a shot at one of his major competitors, Mr Forrest remembers how BHP Billiton CEO Chuck Goodyear once wrote off FMG’s iron ore prospects as ‘a bucket of rusty nails’.
“Bless his cotton socks,” Mr Forrest said. “There are plenty more buckets like ours in the Pilbara and it’s going to be FMG’s job to find them.”
Its big, confident talk and leaves the listener thinking it would take a major problem out of left field to stop An-drew Forrest, FMG and this project now.
