Twiggy (14 page)

You will look back and know you were part of history, like building the Sydney Harbour Bridge.

—ANDREW FORREST

Although he was a superb salesman and entrepreneur, Forrest could never have realised his dream alone. He badly needed capable executives around him and, like any boss, he relied on a mix of luck and skill in finding
them. In Eamon Hannon, David Mendelawitz and John Clout, Forrest had found people who understood iron ore and geology better than most. Most of his other early appointments were also successful, although some had to be convinced to leave safe jobs to join Fortescue.

One day late in 2003, however, a young man Forrest would soon look upon as crucial to Fortescue’s success actually came looking
for him. David Liu had read about Forrest’s idea to start a mine and phoned Fortescue’s office in Perth looking for a job. Liu, who had recently finished university in Perth, was descended from a long line of steel mill executives in Nanjing and was keen to join the iron ore industry in Australia. During the phone call, he discovered that Forrest and his senior executives were at a steel conference
in the Chinese city of Maanshan. He flew straight there and began helping Forrest voluntarily, in the hope that he’d be put on the payroll back in Perth. It was the same method Forrest had used to break into stockbroking in the 1980s. Liu was soon assigned to Fortescue’s iron ore marketing team – his first real job apart from teaching English.

Forrest asked Liu and others to fly to China
and demand pre-payment from the steel mills for iron ore that hadn’t even been pulled out of the ground. In the world of iron ore sales, this had never before been attempted – and at first it proved impossible. Philip Kirchlechner, then head of marketing, recalls: “Working for a junior, it’s terrible – people don’t want to talk to you and don’t take you seriously. And there was all of Forrest’s baggage
from Anaconda, so it was an uphill battle.” Executive director Russell Scrimshaw, who made more than 100 trips to China in only a few years while overseeing Fortescue’s commercial operations, says it was imperative that the company secure long-term sales contracts if it was to have any chance of raising the money to build a mine, port and railway.

While Kirchlechner used his high-level contacts
to market iron ore to the larger steel mills in China and Japan, Liu went to work on selling the Fortescue vision to the small end of the industry. Liu and Scrimshaw adopted Forrest’s foot-in-the-door approach to business, often sitting in the lobby of a Chinese steel mill until someone would come and see them. But in the early days, few were interested in talking to them. On one embarrassing
occasion, Scrimshaw recalls, the only person they managed to speak to about their iron ore was the cleaner: “Every time we would go to this mill, we thought we had meetings but we’d get there and the key guy had gone off to a conference or gone interstate or suddenly disappeared. So David and I just decided this was ridiculous, we decided we were going to sit in the lobby of their head office
until someone of note came to see us. Unfortunately, it was late afternoon and we were getting bored with this little strategy that didn’t seem to be working, and this person came in. We were engaged in a good discussion and I thought, ‘We’re getting somewhere here,’ but it turned out he was the cleaning supervisor and he was just moving in to start work for the night. So David and I went from this
moment of, ‘We’re making some headway here,’ to, ‘This is ridiculous.’”

As time went on, Fortescue raised its profile in China and the marketing task became easier. As it turned out, Fortescue’s timing was ideal because the Chinese mills were becoming desperate for a new iron ore supplier to break the stranglehold of BHP Billiton, Rio Tinto and Brazil’s Vale. “You had three players supplying
the majority of the world’s iron ore and there were a couple of hundred steel mills, so the odds were weighted heavily in favour of the supplier,” Scrimshaw says.

The smaller Chinese mills were the first to sign up. At the time, they were being forced to pay premium prices for iron ore through the high-priced cash market because the traded ore market was dominated by long-term deals between
the three big suppliers and the major steel mills. Scrimshaw recalls: “When someone else came along and said, ‘Okay, I’ll supply you at the benchmark price,’ the smaller guys said, ‘Where do we sign?’”

Forrest became a devotee of Liu, who handled many of the big negotiations with China. Like Forrest, Liu was a born hustler who knew how to tell a good story. “David Liu is the guy who … personifies
courage and would go into these steel mills or ring these people up who wouldn’t take a call normally from a little twerp, which is how they have seen him,” Forrest said. “But he’d ring them up with authority in his voice representing Fortescue and speak with such courage about what we were going to achieve, when it was just a game plan.”

Liu and his colleagues had one big advantage: by 2005,
Chinese demand for iron ore was swelling at a rate that neither Forrest nor anybody else had anticipated. The Chinese steel industry was also angry with BHP, Rio and Vale over what it saw as their bullying tactics in rapidly forcing up the price of iron ore. Forrest skilfully cast himself as the good cop of iron ore mining, as opposed to the greedy triumvirate which controlled more than 75 per
cent of global exports.

Efforts by BHP and Rio to talk down Fortescue were backfiring badly on them. When they told the heads of China’s biggest steel mill, Baosteel, not to believe anything that Forrest uttered about his new project, the executives demanded to know more about the new entrant. In 2004, Baosteel signed a memorandum of understanding to buy iron ore from Fortescue, an agreement
that was later converted into a long-term offtake contract for 5 million tonnes a year. By the middle of 2006, more than twenty sales agreements had been signed for almost all of Fortescue’s planned annual output of 45 million tonnes of iron ore.

All the offtake deals in the world, however, were worthless unless Fortescue could find the big money needed to build the project. This is where
Forrest’s promotional skills were fully tested. When cash was again running low in 2005, he convinced billionaire New York hedge fund boss Phil Falcone to invest tens of millions of dollars. Falcone later built up a 16 per cent stake in Fortescue that was worth billions of dollars at the height of the mining boom. Forrest regarded Falcone, who owned Harbinger Capital, as one of his most loyal
supporters – he had also invested in Anaconda – and he saw plenty in the money manager’s risk-taking approach that he admired.

But like so many others Forrest had befriended, Falcone’s reputation was about to take a turn for the worse when he lost billions of dollars in a series of bad investments. The US Securities and Exchange Commission later laid fraud charges against Falcone, alleging
he used $113 million of his clients’ funds to pay his personal taxes, and that he manipulated bond prices and violated trading rules intended to stop manipulative short selling. His fall from grace was complete in May 2013, when he agreed to a two-year ban as an investment adviser. By then, Forrest had nothing to do with Falcone, who had dumped his entire stake in Fortescue.

After securing
Falcone’s support in 2005, Forrest brought in another American investor, the secretive hedge fund Leucadia International Corporation. Leucadia kicked in $US400 million for a 9.9 per cent equity stake in Fortescue and lent the company a lifesaving $US100 million. The dazzlingly high interest rate on the Leucadia thirteen-year convertible note – equating to 4 per cent of Fortescue’s future sales revenue
– was a reflection of Forrest’s short-term need for cash and his desperation to attract support from financiers. Before throwing their money at Fortescue, Leucadia’s shrewd founders, Ian Cumming and Joseph Steinberg, had asked hard questions about Forrest, and they liked what they saw. In a letter to shareholders the following year, they explained their investment: “FMG is the creation of a
hyperactive, smart, energetic Australian entrepreneur named Andrew Forrest; imagine the Energizer Bunny,” they wrote.

Forrest still needed to raise another $US2 billion to fund construction of the project. But every financing scheme he tried had failed. A deal for Chinese construction companies to build the mine, railway and port had collapsed spectacularly in March 2005, sparking an investigation
into Forrest’s conduct by the Australian Securities and Investments Commission that led all the way to the High Court (see Chapter 11). Forrest also held funding talks with Indian steel magnate Lakshmi Mittal, but pulled out of a proposed deal because he feared the tycoon would seek control over Fortescue, just as Anglo American had done at Anaconda. The big Australian banks were not an
option for Fortescue because none wanted anything to do with Forrest – they were suspicious of his business methods and were still scarred by their experiences with Perth’s brat pack of deal-makers in the 1980s.

The last hope for Twiggy – as it had also been at Anaconda in 1997 – lay with the high-yield bond market. Only those with a taste for risk would back him. A prominent Jewish banker
in New York, Eddie Sugar, whom Forrest had known from his time at Anaconda, helped promote the Fortescue story to US investors, who were more prepared than their Australian counterparts to back an entrepreneur who had previously failed.

Over three hectic weeks in the middle of 2006, two teams of Fortescue executives travelled to fourteen cities across the world. The “blue team” of Forrest,
finance executive Peter Thomas and John Clout headed to Europe, while the “red team” of Scrimshaw, Graeme Rowley and Chris Catlow went to the United States. In the middle of the trip, they crossed over in Hong Kong. During a blur of endless breakfasts, lunches, dinners and boardroom presentations, the Fortescue executives pitched their plans to hundreds of fund managers. They were accompanied by
executives from global bank Citigroup, which, by accepting the role of lead manager to the bond issue, had become the first mainstream institution to back the fledgling company.

The fundraising roadshow encountered several near-fatal setbacks. A week before the bond issue was due to be finalised, Standard & Poor’s issued a credit rating for the notes that was two levels below what it had
previously indicated, a move that effectively killed off the financing. Scrimshaw recalls he found out about the Standard & Poor’s rating late one night in New York. “I went to bed at 1am thinking, ‘We’re finished here, we won’t be able to raise the money.’”

Forrest didn’t go to bed that night. Instead, he stayed up and convinced the Standard & Poor’s executives in New York, the United Kingdom
and Australia of the untold potential of his project. They only relented after several hours of his ear-bashing, agreeing to boost the rating on the bonds by two levels to BB. That was still three levels below investment grade, but it was enough to attract those risk-taking funds attracted by the high yield. Scrimshaw recalls that the Citigroup bankers in New York were amazed by what Forrest
had achieved. They had seen bonds talked up by one level before, but never by two.

Just as the raising appeared to be getting back on track, however, liquid explosives were found at London’s Heathrow Airport and Israel invaded Lebanon in retaliation for the kidnapping of two soldiers. These events spooked global markets, leading to one major investor threatening to pull out of the bond deal
unless key changes to the terms were made. With only fifty hours remaining until settlement, Citigroup and the bondholders reached an agreement.

But even that wasn’t the end of the drama. With a few hours left, the bond raising looked likely to fall about $150 million short. Forrest needed to move fast. He called an old contact, Richard Handler, the head of US investment bank Jefferies,
to ask if he would underwrite the balance. Recalled Scrimshaw: “There was a silence that seemed like forever, with our hearts beating hard because we knew we were playing our last card. And he came back after what I thought was forever, it was probably ten seconds, and said, ‘Andrew, I’d be happy to help you.’ So we looked at the Citigroup guys, they looked at us, and within minutes we were watching
the bonds be posted.”

Aided by the blood, sweat and tears of his troops, Forrest had raised $US2 billion, ensuring that his reputation as a master promoter and fundraiser remained intact. It was the biggest high-yield bond issue ever to come out of Australia and one of the biggest bond raisings ever seen in the mining industry. What’s more, most of the funding had come from American investors,
suggesting the US bond market had forgiven Twiggy for his Anaconda sins.

One of Perth’s top investment bankers, Eddie Rigg, said after the record-breaking raising that he believed Forrest would become known as the “greatest visionary in the Australian resources sector”. The secret of his money-raising genius, Rigg suggested, was an ability to pitch a story on such a huge scale to attract
the major-league financiers, which nobody else had the “balls” to even contemplate.

Rigg knows from personal experience that behind Forrest’s bright façade is a ruthless businessman prepared to do almost anything to realise his ambitions. A year before the 2006 bond raising, Forrest sued one of Rigg’s clients over the rights to a massive iron ore deposit in the Pilbara. The Federal Court
heard evidence of a crucial phone conversation between Rigg and Forrest, the details of which were heavily disputed. But the judge threw out Fortescue’s case. Rigg now says of Forrest: “How he achieves things is questionable, but are the people of Western Australia better off because of his vision? Absolutely.”

Another key ingredient of Forrest’s success lay in his impeccable timing. Fortescue
had raised the money in 2006 as the global iron ore price was soaring and international investors finally began to accept that China’s seemingly inexhaustible hunger for commodities was part of a “resources super cycle”. The predictions Forrest had made about China’s awakening at the Celtic Club in West Perth had been realised in just three years.