Twiggy (16 page)

Another big winner was a young Chinese metal tycoon called Wu Yueming, who turned an initial outlay of $7 million into a $700 million
bonanza in just four years. After meeting Forrest at a steel conference and arranging a site visit to the Pilbara in 2004, Wu bought 7 million Fortescue shares for $1 each – a hefty 47 per cent premium on the share price at the time. As part of the deal, he also handed over $US20 million to lock in a supply deal of 4 million tonnes of iron ore a year for his Fengli Group, based 100 kilometres
from Shanghai. Wu was among those celebrating with Forrest when the first batch of iron ore was unloaded in China.

Graeme Rowley, who had accumulated 19.5 million shares and become a top-twenty shareholder, was worth more than $200 million on paper at the peak of the Fortescue share price boom. Five years earlier, he’d had only $80,000 in savings to his name. Forrest’s mother, Judy, also
did well out of her son’s success. She appeared on the Fortescue register in its early days with a parcel of 600,000 shares. By 2008 her stake was worth more than $50 million. Today she remains a top-twenty shareholder in the company. Breeding resilience in her son from an early age had helped deliver Judy Forrest a stunning windfall.

Stories also began to emerge of everyday people who’d
put money into Fortescue when it was just a tiddler. For Louise O’Reilly, an Irish migrant who took a job as Forrest’s personal assistant at his Cottesloe home in 2003, investing in Fortescue shares was a life-changing experience. Forrest convinced O’Reilly to put $11,500 of her savings into what was then still called Allied Mining and Processing. She sold the shares two years later for a $140,000
profit, putting the money down as a deposit on a house. It was Forrest’s self-belief that had convinced her to buy the shares. “It was Andrew, basically. He is certainly a man of vision,” she said.

For a brief time in 2008, Forrest’s stake in Fortescue was worth a staggering $13 billion. In those days, his net worth would soar or decline by $1 billion between breakfast and lunch, depending
on the vicissitudes of the stockmarket. But with Fortescue suddenly becoming a runaway success, hard questions were being asked about why local institutions had shunned the company, thereby depriving more Australians from sharing in the spoils. Even in 2007, when it looked highly likely Forrest would achieve his dream, none of the blue-chip broking houses in Australia had recommended Fortescue
to their clients. The mining analysts failed miserably to foresee the approaching boom in iron ore prices and the fact that Fortescue was ideally placed to capitalise on it. In 2006, some analysts declared the run in the iron ore price to more than $US50 a tonne would not continue, yet in 2008 the price would surge to more than $US200 a tonne. In late 2007, Macquarie Equities put an “underperform”
recommendation on Fortescue and a target price of $3.56. Within five months, however, the shares had climbed above $10.

It was no surprise, then, that Australian institutions accounted for a meagre 3.9 per cent of the Fortescue share register. Besides John Veldhuizen at BBY, the only real supporter of Fortescue in Australian stockbroking was Charlie Aitken of Southern Cross Equities. “The
company is building the most significant new resource project in Australia, yet nobody in the Australian investment community takes it seriously,” Aitken told his clients in May 2007. “Our investment community has made the mistake of playing the man and not the ball.” Aitken’s rivals scoffed when he predicted that shares in Fortescue, then trading at $2.50, would soar to $10 within three years.
Yet he was proven right within a few months.

One of the most foolish-looking doubters was the anonymous fund manager quoted in the
Australian
in October 2007: “I’m happy to be chained to the tracks somewhere between Cloudbreak and Port Hedland in May next year because I know that I will not be killed by a train.” In the Fortescue office, David Mendelawitz framed the quote and mounted it
on the wall, accompanied by a picture of a fund manager in a suit standing on a railway line with the caption: “Ever wanted to flatten a banker?” It proved to be another motivating tool. Needless to say, the fund manager was nowhere to be seen when the first train hurtled down the tracks seven months later.

As Mark Twain said, reports of my death are greatly exaggerated.

—ANDREW FORREST

Forrest’s exhilaration at proving the doubters wrong was fleeting. Within a few months of Fortescue’s first shipment of iron ore, the world was gripped by the worst economic downturn since the Great Depression of the 1930s. In one sense, the global financial
crisis vindicated Forrest’s uncompromising push to begin exporting iron ore in May 2008, when the iron ore price was still at its peak. A delay of just four months would have meant launching the project as Lehman Brothers filed for bankruptcy in the United States, an event that triggered a severe collapse of economic confidence and a downturn in commodity prices.

When Chinese iron ore demand
crashed in late 2008, Fortescue’s share price came back down to earth with a thud. From a spectacular zenith of $12 in June 2008, the shares were trading below $2 by January 2009. Forrest’s paper fortune of $13 billion had slumped to little more than $2 billion in just seven months.

Even in the darkest days of the global downturn, the perennially self-assured Forrest maintained that demand
for commodities would bounce back quickly and that the urbanisation and industrialisation taking place in China and other Asian economies still had decades to run. In early 2009, the
Australian Financial Review
surveyed the nation’s top chief executives for its half-year profit wrap and found they had little hope about the coming year. The only dissenter was Forrest, who said in his folksy style:
“If you think everything is crook in Tallarook … think again.” Few knew of the turmoil at the time behind the scenes at Fortescue. Bottlenecks at the Cloudbreak and Christmas Creek mines meant production fell well behind during 2009, just when the company desperately needed to maximise revenue. As well, it was facing huge losses as a result of a disastrous foray into shipping contracts.

Fortescue was burning through cash at a worrying rate and only survived due to a $645 million equity injection from one of its key customers, state-owned Chinese steel-maker Hunan Valin, which bought 16.5 per cent of the company and became the second biggest shareholder after Forrest. After years of wrangling with Beijing, Fortescue had finally done a major funding deal with China Inc. Hunan Valin
was the first Chinese steel-maker to take a large stake in an Australian iron ore miner, and Forrest hailed the agreement as an example of the economic cooperation that was needed between the two nations. Valin’s enterprising chairman, Li Xiaowei, also earned a seat on the Fortescue board, although the company agreed not to increase its stake beyond 17.5 per cent, thereby assuaging concerns within
the Rudd government about Chinese companies swooping on Australia’s undervalued mining assets. The deal still came as a surprise to many who had long expected China’s biggest steel-maker, Baosteel, to be the logical vehicle for any state-owned investment in Fortescue.

The iron ore price gradually recovered from the shock of the global financial crisis and by 2010 Fortescue’s shares were
again trading above $5, making Valin’s purchase at $2.48 per share at the depths of the doom appear prescient. Fortescue’s production problems in the Pilbara were being ironed out and the company managed to export 41 million tonnes of iron ore in 2010 to earn revenues of $3.5 billion, most of which went towards paying down debt. When Fortescue was able to make its first dividend payment to its
52,000 shareholders in 2011, it appeared to have finally arrived as a serious public company. As the biggest shareholder, Forrest received a cheque for $29 million that year and a further $80 million in dividends over the next twelve months.

On 18 July 2011, exactly eight years after founding the company, Forrest stood down as chief executive and handed over to Nev Power, a physically imposing
former Thiess executive from Queensland whom Twiggy had recruited after years of searching for the right person to succeed him. Forrest declared he wanted to spend more time on his philanthropy, denying that his decision to resign as chief executive was linked to his ongoing battle with the Australian Securities and Investments Commission over allegations he had misled the market.

Nev Power
shared Forrest’s passion for overly ambitious targets, but he also boasted the operational expertise that the company had badly needed ever since it began exporting iron ore. Forrest had proven to be a brilliant fundraiser and a visionary leader, but his time at Anaconda had shown that running an established company was not his speciality. Soon after announcing his retirement as chief executive,
Forrest even admitted at a business conference that his day-to-day management skills were lacking: “I think there are some Fortescue Metals people here in the audience that will shake their heads if I say I’m a good manager. I’m not such a great manager.” Despite Forrest’s move into the background, Nev Power was never going to become the sole public face of Fortescue. Forrest stayed on as non-executive
chairman and still owned a controlling 32 per cent of the company, ensuring he had the ultimate say on all the big issues.

With iron ore prices creeping back towards $US200 a tonne during 2011, the value of Forrest’s stake was back up around $6 billion for much of the year, ensuring he remained near the apex of the
BRW
Rich List. But this was when hubris began to creep in. Several months
earlier, Forrest had unveiled an extraordinary target to boost Fortescue’s market value to at least $100 billion and to expand annual iron ore production sixfold
,
to 355 million tonnes by 2017. To put these ambitions into perspective, even Rio Tinto – the biggest iron ore producer in the Pilbara – wasn’t planning to be producing that much iron ore by then. “Forrest only chose that number [355
million] because it was 5 million more tonnes a year than Rio,” says a former Fortescue executive. At the time, Fortescue had not even hit its initial target of producing 55 million tonnes a year. Analysts began to worry that Forrest, who for his whole career had wanted to be the biggest and the best, was getting ahead of himself. “Right now the focus needs to be about delivering the first 55 [million
tonnes],” said a sceptical UBS analyst, Glyn Lawcock. “Let’s take it one step at a time.”

By 2012, economic growth in China was beginning to slow down and iron ore prices were retreating from their unsustainable peaks of the previous year. A well-known American hedge fund manager and short-seller, Jim Chanos, began telling his clients that he was “shorting” Fortescue shares, or betting that
the price of the stock would fall, because the miner was too highly geared, too exposed to China and was being led by a “promotional management team”. Although Forrest had handed over management to Power by then, the barb about self-promotion was aimed directly at him.

Chanos also predicted that Fortescue would have trouble servicing its huge debt pile if iron ore prices fell below $US100
a tonne. At the time, such a prospect appeared unlikely because iron ore was trading steadily at around $US150 a tonne, allowing Fortescue to meet its interest payments and still deliver a healthy return for shareholders. Moreover, Fortescue’s share price had risen 30 per cent between January and April, despite concerns about the strength of China’s economy. Both Forrest and Power went in hard against
Chanos, suggesting Fortescue would always be protected by a natural “floor” in the iron ore price of $US120 a tonne.

Within a few months, however, almost everything Chanos had warned about Fortescue appeared to be coming true. China’s economic growth rate began to slow further and the iron ore price spiralled below the so-called floor of $US120 a tonne. For Fortescue, it was the worst possible
timing: the miner’s revenues collapsed at the same time as its debt load peaked. The debt was funding most of the company’s $US8.4 billion plan to almost triple its production capacity in the Pilbara to 155 million tonnes a year by mid 2013 (Forrest’s previous extravagant target of 355 million tonnes by 2017 had by then been placed on the backburner).

Forrest had long rejected the idea –
even when raised by his fellow directors – of raising additional equity rather than taking on even more debt, because this would have diluted his controlling 32 per cent stake in Fortescue. An equity raising now made even less sense for him, given the sudden fall in the share price. Since the early days, when he recruited his inaugural directors, Forrest had ruled the Fortescue board with an iron
fist. But tensions developed when Americans Ian Cumming and Joseph Steinberg, the Leucadia bosses who both served stints as non-executive directors of Fortescue, grew critical of what they saw as Forrest’s aggressive growth strategy and his “severe exaggeration”. They told Leucadia shareholders in 2013: “His personality dominated the FMG board and the other directors were more inclined to follow his
lead as to the appropriate amount of equity, debt, leverage and the rate at which to expand, as opposed to our more conservative views.”

Ratings agency Moody’s didn’t help matters by putting Fortescue’s credit rating on review for a possible downgrade in August 2012, leading to further share price falls. Forrest tried to outsmart the short-sellers by borrowing money to buy $175 million worth
of stock himself. At last, he had some real “skin in the game”, taking a personal financial gamble on the share price improving. But his extraordinary outlay failed to halt the decline. He next embarked on a solo mission to shore up confidence in his company by talking up its prospects to anyone who would listen. “I think it’s a great investment, it’s a multi-generational company, it will be
going for many decades and will be one of Australia’s great institutions and I feel privileged to own shares in it,” Forrest said with habitual buoyancy. He added that Fortescue was in “great shape” and could “weather any storm”.

But when the iron ore price dropped like a stone to $US87 a tonne in early September, Forrest had egg on his face. At that price, Fortescue was simply not profitable.
The iron ore divisions of BHP and Rio were not facing anything like Fortescue’s conundrum because they had been funding their Pilbara expansions from their own balance sheets rather than by taking on debt. Fortescue’s costs of production were also far higher than either of its Pilbara rivals and its ore was of generally lower quality, meaning its profit margins were much thinner.

Rumours
began to swirl through the market that Fortescue might go under. The sceptics who had never trusted Twiggy quickly re-emerged to point out the parallels between Fortescue’s woes and Forrest’s troubled period at Anaconda Nickel – particularly the reliance on big slabs of debt and a deep exposure to a single commodity. The short-sellers, in particular, were triumphant at what they saw as the clear shortcomings
of Forrest’s business model. One of them, John Hempton from Bronte Capital in Sydney, summed up the feeling in an interview with Reuters: “He [Forrest] builds iron ore mines on a vast scale. Then he borrows money on a vast scale. And he presumes the iron ore price will deliver him a pile of loot that is also unimaginable to mortals. The world is not complying.”

Faced with a looming disaster,
Forrest and Power took drastic action on the morning of Tuesday 4 September 2012. Over the previous weekend, dozens of staff members had been called into head office to work out how they could urgently slash costs. The senior executive team met in the morning and agreed to come back at regular intervals until 8pm to discuss the latest drafts of their cost-cutting plan. Workers munched on sandwiches
from a nearby Subway outlet as well as sweets left over from the eighteenth birthday party of chief financial officer Stephen Pearce’s daughter the previous evening. Forrest, Power and Pearce decided that their debt-funded expansion plan – which they had repeatedly promised would be unaffected by any iron ore price collapse – would need to be radically scaled back, and that 1000 employees and
contractors would have be axed if the company was to survive.

By that afternoon, hundreds of vacant desks at Fortescue’s head office provided vivid evidence of the carnage. Entire teams, including the environmental, heritage, legal, IT and exploration divisions, were cleaned out. Many of those working in the company’s indigenous relations group were also sacked, in spite of Forrest’s commitment
to improving living conditions for Aboriginal people. Fortescue said the retrenchments would save $300 million in operating costs that year.

After all of Forrest’s preaching over the years about the love he felt for his “Fortescue family”, the company’s actions that day confirmed that the quest for profits would always come before any sense of loyalty. One worker posted a note on Facebook
claiming his email account and phone were disabled as he was being escorted from the Fortescue building. “I couldn’t even say goodbye to those I wanted to in the office,” he wrote.

The biggest shocks were still to come, however, when several of Fortescue’s most respected and longest-serving senior executives were culled in the following days. Years of loyalty to Forrest and his dream suddenly
counted for nothing. Those sacked included government relations chief Julian Tapp, the key strategist behind Fortescue’s lengthy efforts to gain access to BHP’s railways and a major figure behind Forrest’s campaign against the federal government’s mining tax. Also axed was investor relations chief Rod Campbell, who had been sent out the previous day to brief analysts on Fortescue’s pared-back
expansion plans.

Tapp and Campbell, who both joined Fortescue in 2004, were blindsided by their sackings. Campbell and his wife had enjoyed a close relationship with Andrew and Nicola Forrest over the years. Like others, they struggled to understand how the decision to remove them and pay them up to six months’ salary in redundancy packages could benefit a company facing a short-term cash
squeeze.

Another senior executive, Ann Marie Lowry, had accompanied Forrest to Sydney on 4 September as he made an impassioned speech at a Philanthropy Australia conference about the evils of child labour. Lowry, the company’s senior legal counsel, was known as the “chief cheerleader” for Fortescue and had grown personally close to both Andrew and Nicola. In an in-house publication in 2008,
she said: “Of all our assets, the ones we value most and see as most powerful are our people and our culture.” But by the end of the day, even as she travelled with the Forrests, Lowry was sacked.