Jan. 4 (Bloomberg) — Andrew “Twiggy Forrest isnt the
most likely candidate to become the poster boy for Australias
mining boom. His last big venture ended in disaster for many
investors.
U.S. bondholders who bet US$400 million on an Australian
nickel mining company he founded in the 1990s, Anaconda Nickel
Ltd., recouped only 26 cents on the dollar. Anglo American Plc,
the worlds second-biggest mining company, fared even worse. It
walked away with just 7 percent of its US$200 million investment
in Forrests company.
Today, Forrest, 46, has once again charmed investors, in
Australia and beyond, this time with the promise that hell
become one of the largest suppliers of iron ore to China.
Leucadia National Corp., a New York-based holding company
with interests ranging from wine to real estate, invested US$400
million for a 9.92 percent stake in his publicly traded Fortescue
Metals Group Ltd. Russian steel billionaire Victor Rashnikov owns
a 5.3 percent slice and plans to raise it above 15 percent.
Birmingham, Alabama-based Harbert Management Corp. already owns
15.6 percent.
Fortescue shares were the best performers in Australias
benchmark index in 2007, rising more almost sixfold. On Dec. 19,
the company enacted a 10-for-1 share split. Forrests 36 percent
stake in the company was worth 7.8 billion Australian dollars
(US$6.9 billion) on Jan 3.
So far, Fortescue hasnt produced a single ounce of iron
ore.
`Feeding Frenzy
“Theres a feeding frenzy going on over Australian
resources, says David Parker, 42, director of the Chamber of
Minerals and Energy in the state of Western Australia. The
countrys economy has been soaring along with the global
commodities boom. Emerging giants, led by China, are battling one
another for a share of Australias natural resources to fuel
their continuing economic expansion.
Australia is the worlds No. 1 exporter of iron ore, coal
and alumina, which is derived from bauxite. It ranks second in
zinc and lead; third in gold, nickel and manganese; fourth in
copper; and fifth in liquefied natural gas (LNG), according to
the Australian Bureau of Agricultural and Resource Economics, a
government agency. It also has the worlds biggest known uranium
reserves and is the No. 1 producer of diamonds by volume.
Australia may be riding a commodities super cycle in which
prices will rise for decades, says Alan Heap, Sydney-based
director of commodities analysis at Citigroup Inc. Per-capita
steel consumption in China, with 1.3 billion people, is less than
half that of other developing countries. That means it could take
decades for the countrys commodities demand to slacken, he says.
Ore Prices Triple
Iron ore prices have tripled in the past five years. Gas
prices are rising too. In September, PetroChina Co., the worlds
biggest oil company, said it would buy as much as US$60 billion
of Australian LNG at prices estimated to be three times those
Chinas Cnooc Ltd. agreed to pay in 2002.
Previous predictions of a super cycle havent always proven
correct. Australian resources fueled Japans industrialization in
the 1960s and 70s. Amid the euphoria, stocks such as Poseidon
Nickel Ltd. soared to A$280 in February 1970 before plunging to
A$39 the same year, when the company turned out to have less
nickel than anticipated.
“It was a manic phase, says Hans Kunnen, 53, who helps
manage the equivalent of US$117 billion in equities at Sydney-
based Colonial First State Global Asset Management, recalling
that earlier boom. “This time, the question is, Is it a super
cycle or just another cycle that will end in tears?
Some Australians are already suffering. Inflation hit 3.1
percent in 2007 — above the Reserve Bank of Australias mandated
ceiling of 3 percent. The benchmark interest rate, meanwhile,
jumped to 6.75 percent from 5.25 percent in the first quarter of
2005, boosting the cost of home mortgages.
Housing Costs Soar
The average Australian family has to spend 36.6 percent of
its income to keep a roof over its head, behind only New Zealand
and the Netherlands among members of the Organization for
Economic Cooperation and Development.
The rise in interest rates was one reason voters dumped the
countrys prime minister of 11 years, John Howard, 68, in a Nov.
24 general election and chose Labor Party leader Kevin Rudd
instead. Rudd, 50, a former diplomat who speaks fluent Chinese,
portrayed himself as better equipped to keep inflation and
interest rates under control.
Wary of China
China, already Australias No. 1 minerals customer, has
become its fourth-largest foreign investor as well, with A$42
billion of projects. Chinese companies have also expressed
interest in buying Australian mining firms. On Dec. 7, Sinosteel
Corp., Chinas second-biggest iron ore trader, launched a A$1.2
billion bid for Perth-based Midwest Corp., trumping an earlier
bid by Murchison Metals Ltd., a company backed by Japanese and
Korean rivals. If successful, it would be the biggest overseas
metals acquisition by a Chinese company.
That makes some Australians wary. “If an Australian company
tried to become involved in a key aspect of the Chinese economy,
the Chinese would block it, says Barnaby Joyce, a senator whos
a member of the National Party, which governed with Howards
Liberals until November.
Joyce says hell demand that the countrys Foreign
Investment Review Board intervene if Chinese government-linked
companies try to acquire Australian assets. In 2001, the country
blocked a bid by The Hague-based energy concern Royal Dutch Shell
Plc to take over Woodside Petroleum Ltd., Australias biggest oil
and gas company, citing national interest.
The Chinese pay as much as US$50 a metric ton less in
shipping costs for iron ore they buy from Australia because of
its relative proximity compared with, say, Brazil, according to
the Baltic Exchange Ltd.
`Hot Spot
“Australias a hot spot — everyone wants to grab a deal,
says Moya Zhang, Chinese-born managing director of Reachco Ltd.,
a Sydney-based consulting firm that advises Chinese companies.
“Unlike resource-rich countries in places like Africa, Australia
is also politically very stable and has a good investment
environment.
The boom has been good for Australian investors and the
economy. The benchmark S%26amp;P/ASX 200 Index almost doubled in the
four years ended on Dec. 31 to 6,340 from 3,300 compared with a
32 percent rise in the Standard %26amp; Poors 500 Index. Australia now
has the worlds fourth-largest fund management industry, with A$1
trillion of assets.
Gross domestic product grew 4.3 percent in the third quarter
of 2007 compared with 2.6 percent a year earlier. Unemployment
was hovering around a 33-year low at 4.5 percent in November,
according to the Australian Bureau of Statistics. The Australian
dollar, once derided as “the Pacific peso, almost doubled in
value in six years, reaching a high of 93.6 cents against the
U.S. dollar on Nov. 7 compared with a low of 48 cents in
September 2001.
Bottlenecks
There could be too much of a good thing. Bottlenecks in
overcrowded ports and rail lines have sent costs of Australian
minerals and energy soaring. The price of power station coal
exported from the worlds largest thermal coal port, Newcastle,
100 miles (160 kilometers) north of Sydney, jumped 73 percent to
US$89.69 in the week ended on Dec. 28 from US$51.84 a year
earlier, according to the weekly GlobalCOAL Index.
Rising prices could make shipping from Africa or Brazil
comparatively more attractive, Citigroups Heap says, adding that
the cost of mining iron ore in the Pilbara region of Western
Australia has doubled.
BHP Takeover Bid
Melbourne-based BHP Billiton Ltd., the largest mining
company in the world, cited potential cost savings as one of the
reasons for its US$125 billion proposal to take over London-based
competitor Rio Tinto Group. If the deal, which Rio is opposing,
goes through, it would create the worlds fourth-biggest company,
after PetroChina, Exxon Mobil Corp. and GE Co., with a market
value of US$368 billion.
BHP Chief Executive Officer Marius Kloppers is lobbying Rio
shareholders. “We are very patient people, Kloppers, 45, said
at the companys annual meeting in Adelaide, Australia, on Nov.
28.
The potential economies of scale are most evident in the
Pilbara, a 500,000-square-kilometer (190,000-square-mile) region
of northwestern Australia that holds most of Australias iron ore
and natural gas deposits, and where the two companies have iron
mines.
The competing mines sit side by side in some places on the
sun-scoured, rust-red landscape, so close together that miners
can hear blasting from the rival camps. “They call it the Iron
Curtain, says Parker of the Chamber of Minerals and Energy,
gesturing out the window of an 18-seat aircraft as it makes a
shuddering descent. “Its the dividing line between two great
corporate empires.
Long Trains
Once the iron ore is dug out of open-cut pits up to 3
kilometers wide, its loaded onto separate 2.5-kilometer-long
trains and freighted 300 kilometers to the coast. BHP and Rio
Tinto have separate railroads and ports that Kloppers says could
be consolidated.
“Our customers will see more product, more quickly, at a
lower cost, Kloppers said at the companys annual meeting.
“These two companies are worth more put together than they are
apart. Rio hasnt ruled out accepting a higher bid.
What BHP and Rio Tinto do agree on is that the
industrialization of China will offer them growth opportunities
for decades. BHPs move on Rio is just one of a score of deals
being proposed and struck around the outback. Billionaires from
Australia, Russia, Ukraine and the U.S.; international fund
managers; and Chinese, Indian, Japanese and Korean conglomerates
are attempting to buy stakes, form joint ventures or win control
of Australian mining companies.
Mining Stocks Rise
The rush for resources has driven up mining stocks. In 2007,
BHP rose 59 percent to A$40.14 and Rio Tinto doubled in London to
5,317 pence. An index of nine small and medium-sized iron ore
stocks tracked by Commonwealth Securities, the brokerage arm of
Commonwealth Bank of Australia, soared 1,500 percent from January
2003 to November 2007.
“Even the technology boom of the late 1990s pales in
comparison with the recent performance of the Australian iron ore
sector, says Craig James, 45, Commonwealths chief economist.
“And the tech boom was only built on ideas and concepts. With
iron ore, its been something much more concrete: demand from
China.
Chinese Investments
Chinese companies are pouring money into deals to lock in
supplies of natural resources. In September, Chinese President Hu
Jintao witnessed the signing of a A$1.8 billion iron ore joint
venture between Anshan Iron %26amp; Steel Group, the countrys third-
biggest steel company, and Gindalbie Metals Ltd. to develop two
iron ore projects in Western Australia.
In December, Citic Pacific Ltd., the Hong Kong arm of
Chinas biggest state-owned investing company, said it would
spend A$5.2 billion in the Pilbara region to export 27.6 million
tons of iron pellets and concentrates annually for at least 25
years.
Aluminum Corp. of China, the countrys biggest producer of
the lightweight metal, in May won approval from local Aboriginal
landowners to develop a A$3 billion bauxite mine and refinery at
Aurukun, a remote community on Cape York, the northeastern tip of
Australia that points toward Papua New Guinea.
“China is no longer interested in just being a buyer,
says John Saunders, chairman of Yilgarn Infrastructure Ltd.,
which has joined with five Chinese companies to bid for contracts
to build a rail line and port worth A$3 billion to ship iron ore
out of Australia. “They want to control the means of production
and the transportation infrastructure.
Chinese steelmakers and the government are even studying a
joint bid for Rio Tinto to counter BHPs offer, Chen Hanyu, a
director at the resources office of Beijing-based Shougang Corp.,
the nations ninth-largest steelmaker, said in December.
Fortescues Customers
Fortescue Metals Forrest is well aware of Chinas financial
might. Fortescue counts 10 Chinese steelmakers, including its
biggest, Baosteel Group Corp., among its future customers. In
addition, Fortescue teamed up with Baosteel to jointly develop a
mine in the Pilbara.
Near the BHP and Rio Tinto iron sites in the Pilbara,
Fortescue has secured 40,000 square kilometers of mining leases
and is completing a mine, railway and port at a cost of A$2.7
billion.
Forrest, the descendant of a pioneering Western Australian
family that included the states first premier, says the
concession will be able to produce and export 45 million tons a
year to start with, rising eventually to 200 million tons — more
than either BHP or Rio currently produces in the area.
“Its the worlds richest, most-under-explored mineral
region, Forrest said at a mining conference called the Diggers
and Dealers in the outback gold mining city of Kalgoorlie in
August. He declined to be interviewed for this article.
May 15 Deadline
In Perth, the Western Australian state capital, where
Forrest and other Fortescue executives work in an open-plan
office, a countdown clock ticks off the days, hours and minutes
to May 15, when Forrest has promised shareholders and customers
such as Baosteel that the first ore will be loaded. Once it does,
Leucadia will start to receive 4 percent of the companys revenue
from two of its mines for the next 13 years.
The Chinese face lots of competition for Australias mining
assets, as Sinosteels bid for Midwest shows.
Rival bidder Murchison Metals is backed by Japans
Mitsubishi Corp. and South Koreas Posco. Both Murchison and
Midwest, which already has a joint venture with Sinosteel, are
mining iron ore in the desert as far as 400 kilometers from the
sea.
Rail Lines Needed
Whoever wins the day will remove competition to build a
planned rail line and port via which iron ore can be shipped to
China. “You can have the best mine in the world, but without a
railway and port, you have nothing, says Paul Kopejtka,
Murchisons chairman.
Russia and India are grabbing for Australias resources too.
In September, President Vladimir Putin visited Australia and
struck a deal with then Prime Minister Howard to buy uranium. The
Russian deal is due to be completed this year.
Australia in 2007 also agreed to sell uranium to China and
India. Rudds new government supports uranium exports. In 2007,
his Labor Party scrapped its policy of opposing new uranium
mines.
Australian miners are having trouble producing commodities
fast enough to meet global demand. Transportation snafus mean
Australia risks losing as much as A$7.9 billion in export revenue
in the next decade if port and rail congestion cant be resolved,
the Bureau of Agricultural and Resource Economics forecast in
2007.
Armadas Off Sydney
Sunbathers on the golden beaches north of Sydney who once
saw the occasional passing ship can now view an armada of bulk
carriers that have to queue for as long as a month to enter the
port of Newcastle.
Coal is Australias most valuable export, bringing in A$23
billion in the financial year ended on June 30. On July 2, a
record 79 ships were waiting in line to enter the port. BHP, Rio
and Xstrata Plc are among the exporters affected.
Components for mining equipment are in such short supply
that tires for dump trucks and earthmovers, measuring up to 3
meters (10 feet) in diameter and normally selling for A$20,000
each, are fetching up to A$100,000 on the spot market. And a
skills shortage means recruitment agencies are scouring the world
to find mining professionals.
“Theres a dramatic need to create a labor pool, says Jim
Stitt, 60, managing director of Perth-based OSS International
Recruitment, who says hes currently searching for 1,600 mining
professionals ranging from geologists to diesel mechanics — up
from 400 in 2005 — to fill the void.
Shortage of Workers
Tracey Eckerman, 34, quit her job as a community relations
officer five years ago to drive 230-ton Komatsu dump trucks
inside Rio Tintos 250-meter-deep West Angelas mine in the
Pilbara. She says she can earn as much as A$110,000 a year,
almost three times what her friends working in administration
make back in Perth.
Mines working at full capacity, maintenance downtime and
staffing shortages are increasing prices. In a single week in
December, the price of iron ore arriving at Chinas port of
Beilun rose 4.2 percent to 1,500 yuan (US$203) a metric ton. That
was four times the contract price, which doesnt include shipping
and insurance.
Pricing Power
BHPs Asian and European customers fear its bid to take over
Rio Tinto will give the worlds biggest miner even more power to
dictate prices. BHP and Rios combined share of the market for
iron ore would be 40 percent — the same share the Organization
of Petroleum Exporting Countries has in the oil market.
In November, the Brussels-based International Iron and
Steel Institute, whose members include 19 of the worlds 20
biggest steelmakers, along with the China Iron and Steel
Association, issued statements opposing the BHP deal.
Some of Australias biggest fund managers remain optimistic
that the resource boom will go on indefinitely despite the
difficulties of getting goods to market and the pressures of
inflation.
“Were looking at a massive amount of demand, says Shane
Oliver, 47, who helps manage the equivalent of US$100 billion at
AMP Capital Investors, a unit of Australias biggest life
insurer, and is overweight on resources stocks. “We are still
not at the point where valuations are excessive.
Forrest likely would agree. Fortescues shares are soaring,
and the company has yet to woo the big Australian investment
funds. “Theyre all underweight on us, says Executive Director
of Operations Graeme Rowley, a former Royal Australian Air Force
pilot and Vietnam veteran.
Stock Split
Rowley, 67, retired from a job at Rio in 2003 and bought
shares in Fortescue for 8 Australian cents apiece when he joined
it that same year. The stock was trading at A$59.50 on Dec. 18
before the 10-for-1 stock split a week later. By Jan. 3,
Fortescue shares had risen a further 29 percent.
The wariness about Forrest is evaporating, says Paul
Xiradis, who helps manage A$7 billion at Ausbil Dexia Ltd. in
Sydney, including Fortescue shares.
“There has been a lot of skepticism about what he could
achieve, but hes learned from the past, Xiradis says. Whether
investors faith in Forrest pays off depends on whether this
Australian commodities explosion turns into the fabled super
cycle or the frenzy fades.
To contact the reporter on this story:
William Mellor in Hong Kong at
