Fortescue founder shrugs off concerns

Fortescue founder shrugs off concerns

Australian Broadcasting Corporation
Broadcast: 04/07/2007
Reporter: Emma Alberici

The share price of Fortescue Metals continues to rocket, even though the company has not yet exported its main product, iron ore, and a cost blow-out is delaying the project. Company founder Andrew Forrest discusses Fortescue's prospects with Lateline Business host Emma Alberici.

Transcript
EMMA ALBERICI: The miners were really the star performers today. Two years almost to the day, Fortescue Metals was trading on the stock market at $2.87. The share price closed today at about 13 times that, at $36.25 - this despite the fact that the company is still yet to produce or ship one tonne of iron ore. The company has spent the past three years building a mine in the Pilbara in Western Australia. Just last week, it was revealed that a cost blow-out would delay the project and then there's Fortescue founder Andrew Forrest, whose failed Anaconda Nickel project has many analysts nervous about the viability of his ambitions in the Pilbara. His credibility will be tested further at the end of this month ,when court proceedings start in the case the corporate regulator is running against him on claims he misled the market about the state of his contracts to sell iron ore to the Chinese. I caught up with Andrew Forrest earlier today.
Andrew Forrest, welcome to Lateline Business. What can you tell us about the latest delays to your project?
ANDREW FORREST: Well, you're looking at about a four-year implementation program of this project, which in the Pilbara has normally taken between 12 and 15 years. So while the pressure is intense here in Fortescue to get the project up as quickly as possible, from where the most effect is felt, which is our customers, they're just saying, 'We're so grateful for your effort thus far, bring it on as quick as you can but don't break your back in the process'.
EMMA ALBERICI: So what is the production schedule now?
ANDREW FORREST: We hope to be ramping up to 3 to 4 million tonnes a month within 12 months of commencing production. We'll be commencing production in the first half of next year and that will be then steadily moved up to around 10 million tonnes per month to an ultimate goal of 200 million tonnes out of the Port Hedland port area and out of the massive iron ore hinterland of the Pilbara.
EMMA ALBERICI: How confident are you that you won't run into further delays?
ANDREW FORREST: You can never say never when you're doing large scale construction. I've had a lot of experience in this industry and there are disappointments and pit falls and if there weren't, then leadership would really be out of a job. It's our job to manage our way through this and still achieve this massive ground-breaking Australian project in absolute record time. And if we can bring it on any time next year, then we'd have achieved that. But we are confident, very confident we'll bring it on in the first half of next year.
EMMA ALBERICI: How many contracts have you actually signed with the Chinese?
ANDREW FORREST: We have long-term contracts with 34 different companies.
EMMA ALBERICI: Are those contracts predicated on a particular delivery date? And what other conditions are built into them?
ANDREW FORREST: Each contract talks about 45 million tonnes in percentage terms. So if for any reason we were late, then there'd be no chance of harm coming to the company. We've been very careful with that and of course, that is one of the reasons why this project was so bankable, that the bankers could see that the downside of delays was very well-managed and to bring this project on in the first half of next year from a perspective of the customer, there's been no effective delays. They're very pleased with that result.
EMMA ALBERICI: When will Fortescue actually turn a profit?
ANDREW FORREST: I think within months of our first ship sailing, you'll get Fortescue in profit. The very difficult part, Emma, about the iron ore industry on a world-scale basis is getting into it. The barriers to entry are immense. You need billions of dollars, you need billions of tonnes, you need friendly sovereign government regimes, you need huge work forces. Now, we've been able to put all that together. Once you're in, you begin to see why the barriers to entry are so large and that is it's a very profitable industry. It's the very industry which has created the balance sheets and created the fortunes of not one but three of the world's largest mining companies: BHP, Rio Tinto and CVRD.
EMMA ALBERICI: When we talk about delays and cost overruns, those with long memories in the markets fear it could be history repeating itself. Anaconda Nickel, now known as Minara Resources, suffered cost blow-outs and delays under your leadership, with creditors in the end left with little more than 20 cents in the dollar.
ANDREW FORREST: Anaconda is really much-maligned. Minara Resources enjoys one of the most efficient, high-quality nickel-producing facilities in the world right now. It is a tremendous operation. It is certainly the pride of anyone who ever goes out and sees it. When Glencore, which is an international, hard-nosed juggernaut, took over our company, we left it with a couple hundred million dollars cash at bank and we left it with a strongly growing production profile. But that didn't suit Glencore. They didn't want the good news out there. It was very much in their interest to talk the company down, to malign its interest publicly and it was a full year before they were able to achieve a cascading down share price and eventually buy the debt back and try and buy the company for a fraction of what it was worth a year earlier when my team ran the company. But the experience there for me was irreplaceable. That was very hard yards and I'm grateful for that experience. I certainly couldn't have got it from Harvard or an institution. You have to go through those fires to really be able to plan for a major project like Fortescue and you will look around Fortescue and you will see a highly cooperative environment with all it's contractors, very few lump-sum contracts and certainly no overarching lump-sum contracts, and that really epitomises Fortescue, where we've been able to build strong bridge relationships with all our stakeholders and particularly our contractors. We're all incentivated to get this project ramped up to 45 million tonnes as quickly as possible.
EMMA ALBERICI: Why did you seek all your funding for Fortescue from overseas?
ANDREW FORREST: When you put on a multi-billion-dollar capital-raising like Fortescue took and the institutions and the banks are getting their information on Fortescue, their background information from the very competitors trying to keep Fortescue out, BHP and Rio Tinto, then you can understand what they'd develop a reasonably pessimistic opinion of BHP and Rio Tinto's most dangerous competitor in their most profitable field, which is Pilbara iron ore. Now unfortunately, that's what the banks and that's what the institutions went on, and they've of course paid dearly for that because the share price has gone up several times. And unfortunately those institutions are now coming onto the register, and we'd have loved to have had them on earlier but there's still enormous growth for them to participate in now.
EMMA ALBERICI: In two weeks, you'll front court in the corporate regulator's case against you. ASIC says you misled the market by claiming to have contracts signed which they say actually weren't. You could be banned from being a director of Fortescue or any other company. How are you feeling about that?
ANDREW FORREST: We have looked at that philosophically. It has been another rock in the backpack of getting this project up. I think it has cost the company and its major stakeholders in a very real sense. We dealt with highly sophisticated international business people who flagged they were going to pull out of agreements with us unless we sold them the company. We weren't interested in selling them the company and of course, that judgement has been vindicated several times over, over the last two or three years, and they went ahead and threatened to pull out of those agreements and it cost us a great deal of time. But the ASIC attention, as a result of that, will lead to our day in court and I can fairly say to you we are all, not just me, but we're all looking forward to our day in court.
EMMA ALBERICI: Andrew Forrest, thanks for joining us this evening.
ANDREW FORREST: Thanks very much, Emma.

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