Forrest gets his eight cents worth

Fortescue Metals Group Ltd boss Andrew Forrest laid the groundwork for his current wealth four years ago this month when he negotiated a deal with Allied Mining & Processing that would turn the struggling minerals explorer into the ‘third force’ in the Pilbara iron ore industry.

The 44-year-old Mr Forrest’s move into iron ore followed his early career as a stockbroker and his role as founder and managing director of Anaconda Nickel Ltd (now Minara Resources Ltd), which he left in a state of crisis in 2002.

Mr Forrest teamed up with a US private equity fund to try and regain control of Anaconda during 2003, and the failure of that bid was probably the best thing that ever happened to him.

Soon after, in April 2003, he moved into the iron ore industry through his deal with Allied, which had been pursuing opportunities in the Pilbara for nearly five years.

Allied (now FMG) decided its best chance of success was to team up with Mr Forrest, and in return it granted him five million shares and 100 million eight-cent options.

From the outset, Mr Forrest had grand visions of building a new port and railway and becoming a major player in the Pilbara.

He plunged into the project with enormous vigour and seems to have barely paused for breath.

In the early days, there was a lot of talk about partnering with Hancock Prospecting’s Hope Downs project and Consolidated Minerals’ Mindy Mindy project.

Those opportunities came and went, but Mr Forrest always had something new to talk about.

Recruiting high calibre executives such as Graeme Rowley, who previously ran Rio Tinto’s Pilbara port and rail operations, provided a big boost.

Taking on industry giant BHP Billiton over third-party access to the Pilbara’s existing railways has gained Mr Forrest a lot of attention.

Announcing “binding contracts” with Chinese corporations, which were meant to design, build and finance FMG’s infrastructure, was another stunning development.

The Australian Securities and Investments Commission is pursuing the company and Mr Forrest over the veracity of these announcements – charges he and his company intend to vigorously contest.

As FMG’s share price rose during 2004 and 2005, Mr Forrest progressively exercised his 105 million options, enabling him to buy the stock at just eight cents per share.

This instantly delivered a big gain – on paper – to Mr Forrest and other directors who exercised their share options.

Arguably Mr Forrest’s biggest achievement was raising $3.2 billion in debt and equity for FMG’s Pilbara project.

Most pundits thought this would never happen, since Australian institutions have largely shunned the company – even though it is now a top 50 stock – and it was assumed investors in the US would steer clear of Mr Forrest after they incurred big losses on their Anaconda investments.

Mr Forrest proved the sceptics wrong, as he does time and time again.

FMG’s $530 million equity raising was structured so that existing shareholders like Mr Forrest were not heavily diluted.

The trade-off is that US investor Leucadia National Corporation will earn a generous royalty equal to 4 per cent of the revenue from FMG’s Cloud Break and Christmas Creek mines.

The $2.7 billion debt issue was ranked as the largest “high yield” debt issue ever completed in the Asia Pacific region.

FMG recently copped a flurry of bad publicity when it failed to evacuate workers in the path of Cyclone George. Two workers were killed and several others died, and the damage is likely to put the company’s construction activities behind schedule.

However, FMG has already moved onto its next deal, announcing a massive 10-year off-take agreement with giant Chinese steelmaker Baosteel.

The two companies also plan to form a joint venture to consider developing the region’s magnetite iron ore deposits.

The end result has been a continued rise in FMG’s share price, which hit an all time high last month of $24; that’s a long way north of eight cents.