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Fortescue Metals Group chairman Andrew Forrest.

Nightmare scenario as iron ore passes $50/t on the way down

Andrew Forrest’s worst nightmare is that he will one day relive his painful experience with pioneering low-grade nickel ore processor Anaconda Nickel; so surely he must have suffered an ‘Anaconda moment’ when the iron ore price fell below $US50 a tonne overnight.

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And what everybody now wants to know, is when the tide would turn ...

Perth
Tim, Two main differences between Anaconda and Fortescue strike me forcefully, with BOTH indicating 'takeaways/NO-NOs' that Andrew learned the hard way at Anaconda: [1] DON'T UNDERESTIMATE TECHNOLOGY RISK: While I can't claim to have read it, I DOUBT that "TECHNOLOGY RISK' was even mentioned in the obligatory "Risk" chapter of Anaconda's Prospectus, much less as Anaconda's #1 Risk. However, the untried "High-Pressure Acid Leach" treatment of low-grade laterite nickel ore turned out to be only SLIGHTLY more technically feasible than Rio's HIsmelt® process to turn iron ore into pig iron without the massive expense/volume/pollution of a BOF, PLUS the advantages of a continuous process over a batch process. [As Rio Tinto says on its website, "The HIsmelt process has the potential to revolutionise the global steel industry." Unfortunately, the key word here is 'POTENTIAL,' since the now-mothballed HIsmelt facility is NO CLOSER to 'commerciality' now than when it started over 20 years ago! See http://www.riotinto.com/ironore/hismelt-process-10659.aspx ] While Andrew somehow managed to lay off the financial risk of BUILDING the plant with a fixed price engineering contract with deep-pocketed Fluor Daniel, the operating risk of reaching its ambitious 'nameplate capacity' was another matter, one that hobbled the business throughout its entire history as an ASX-listed company. [In 2000, Anaconda sued FD for US$532 AND WON: While the eventual award was far less, the $xxx Millions that they collected was a useful payday!] 2) DON'T LET ANYONE ELSE GET A CONTROLLING STAKE IN THE EQUITY: Anaconda had NOT ONE,but TWO '800-pound gorillas' on its share register ("commodities trading house Glencore and mining giant Anglo American"). While Andrew managed to keep them in a 'Mexican standoff" for years, in 2001 the two finally ganged up and ejected him from the company he founded. At FMG, by limiting outside equity through taking on FMG's multi-billion dollar debt load, Andrew has managed to maintain a controlling stake near 35% of the company. That would be considered AMAZING by a 'Tech entrepreneur' whose company has been funded by round after round of Venture Capital.

Perth
Another important difference between Anaconda and FMG is the HIGH TECHNICAL RISK that Anaconda faced versus FMG's MINIMAL TECHNICAL RISK! ==> Iron ore mining (at least for open-cut mining of DSO) is a TRIVIAL MINING/PROCESSING EXERCISE married to COMPLEX AND COSTLY LOGISTICS CHALLENGES.

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Share Price

Closing price for the last 90 trading days
Source: Morningstar

BN30 Index

Index = 100 as of 4 Jan 2016
Source: Morningstar

Total Shareholder Return as at 31/01/18

1 year TSR5 year TSR
195thMineral Resources59%18%
231stSouth3245%0%
393rdWoodside Petroleum9%4%
568thFortescue Metals Group-19%5%
722ndAtlas Iron-45%-55%
709 WA (and selected non WA) listed companies ranked by 1 year TSR relative to other companies with similar revenue
Source: Morningstar

Share Transactions

10/11/17
$0 Bought
03/10/17
$9k Issued
29/09/17
$0 Bought
Total value as at the date of the transaction
Source: Morningstar

Revenue

1st-Fortescue Metals Group$10,999.7m
2nd-South32$9,392.9m
3rd-Woodside Petroleum$5,715.9m
4th-Mineral Resources$1,470.4m
5th↓Atlas Iron$896.6m
499 listed resources companies ranked by revenue.
Source: Morningstar

Remuneration from Fortescue Metals Group

617thMark Barnaba$223k
731stSharon Warburton$170k
792ndElizabeth Gaines$161k
Ranked by total remuneration from all listed WA companies

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