'Twiggy' Forrest: opportunities ahead in Asia

The often-controversial founder of iron ore giant Fortescue Metals knows how to ride liquidity cycles and thinks Asia should build a debt market to rival Wall Street.

Twenty years ago, Andrew “Twiggy” Forrest had abandoned his pastoral roots and was plugging away at a modest nickel project in Western Australia. The processing plant used new technology, involving leaching igneous rock with sulfuric acid in huge high-pressure autoclaves, but production delays and a liquidity squeeze saw Anaconda Nickel default on its bonds. Eventually Forrest’s small shareholding was swallowed up by bigger investors.

It was a taste of what hostile capital markets can do to a high-growth, high-risk business and Forrest has vowed never to be caught out again. “Instead of thinking there’s something wrong with your business, you have to ride liquidity squeezes like other cycles and be ready to protect your company from takeovers,” Forrest told FinanceAsia in an exclusive interview for its 20th anniversary. “To do this you need to be a substantial shareholder.”

Undaunted by the failure of Anaconda Nickel, Forrest perfected his knack for luring equity buyers into blue-sky ventures and turned his attention to bulk exports. He bought discarded iron ore tenements in the far north Pilbara district and built Fortescue Metals, today the world’s fourth largest iron ore exporter behind BHP Billiton, Rio Tinto and Vale. Fortescue has an annual turnover of A$9 billion ($6.71 billion) and Forrest owns a third of the company, making him the eighth richest man in Australia with a personal wealth of A$3.33 billion.

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He was quick to spot Asia as a key market. “I started visiting Asia in the mid-80s and formed a strong view that the region would become the economic powerhouse of the world,” he said. “That’s where I wanted to be.”

One of Fortescue’s largest shareholders is China’s Hunan Valin Iron and Steel, and the company ships 95% of its product to China.

Increasingly Forrest has taken a regional leadership role, sponsoring the Boao Forum in Hainan for the past eight years and representing Australia as co-chair of the Bali Process, an international framework set up to end people smuggling and human trafficking.

SELF BELIEF

One of the keys to his success, said Forrest, has been believing in China’s economic forecasts and designing his businesses around them. “Over the years we have had any number of investment banks and consulting firms tell us China’s growth figures are wrong, and we have ignored them all. There’s no point doing business in China if you’re fundamentally sceptical of the government’s macroeconomic statements.”

In the past decade Fortescue has issued and refinanced over $30 billion in debt, often in tough markets. Known for his straight talk and boundless confidence, Forrest has a reputation for playing hardball with deal arrangers, and admits it has been “a bumpy ride” for the company’s underwriters and investors.

He recalls Fortescue nail-biting first foray into global bond markets in 2006. “We were looking to raise $2 billion in bonds and we had $400 million in equity from US fund Leucadia which was contingent on the bond deal closing,” Forrest said. “In the final hours of the book-build, Citi was just shy of securing enough orders and I really expected them to use their balance sheet to cover the very minor shortfall, but they stalled. So I rang a contact at a competing bank on speaker phone and told him he could have the deal if he promised to close. He said he would.” Citi got the message and immediately closed the book.

Forrest is a fan of debt and believes it to be critical to growing a business. “If you have a solid underlying business and a bullet proof Plan B, then borrowing in the capital markets makes a lot of sense.” Plan B might be raising equity or asset sales assets, he said.

Over the years Fortescue has issued debt in almost every major market and currency. “But ask me if I would have liked the opportunity to issue debt closer to home, in Asia, the answer is a categorical yes,” said Andrew Forrest, the company’s chairman.

Forrest believes the depth of liquidity in Asia puts it in a unique position to develop a vibrant note and bond market. “I’d like to see regulators and market makers step beyond their borders to establish an Asian bond market centre to rival Wall Street.”

There are a number of cities that could play host to the market, he said, but discussions shouldn’t be hijacked by nationalistic interests. “It would be up to the exchanges to get together to decide on the right location.”

Fortescue’s current challenge is a stubbornly low iron ore price, which the company has attempted to offset with some brutal cost cutting. In the past 15 months it has reduced its debt by $2.5 billion and in March this year Forrest announced a surprise deal to sell a 15% stake to rival Brazilian miner Vale via a placement.

However, these measures were not enough to stop Moody’s downgrading the company’s credit rating to two notches below investment grade a week after the Vale announcement.

Analysts predict commodity prices will stay depressed for a further five years meaning more bumpy times ahead for Fortescue, but Forrest is undaunted. “Having a large shareholding and a role in management means I can continue to defend the company from opportunists,” he said, suggesting the wounds from Anaconda Nickel haven’t yet healed.

Aside from his role as chairman of Fortescue, much of Forrest’s time is now spent running large tracts of pastoral land owned by Minderoo – the family’s holding company and the name of the cattle station where he grew up. Through subsidiary Harvey Beef, Minderoo processes over 130,000 head of cattle a year with much of the meat sold for export. “Australia has done really well at selling resources to Asia and the next wave is food security – supplying Asia with high-quality food products.”

If this prediction is right, Forrest’s farming interests could add further to his enormous wealth, though he has pledged to give away nearly all of his fortune during his lifetime.

ENDING SLAVERY

Some of that money is going to the Walk Free Foundation set up by Forrest, his wife Nicola and daughter Grace in 2012. It aims to end modern slavery around the globe and in June this year issued a report naming India, China, Pakistan and Bangladesh as the four countries with the highest number of enslaved people.

Nicola and Andrew Forrest

Forrest has a stern warning for company bosses who don’t actively look for forced labour practices within their supply chains. “They are standing on a burning platform,” he said, pointing to shareholders’ increased nervousness about hidden legal liabilities. “Modern slavery is a criminal activity and just won’t be tolerated by the capital markets in the future.”

He has already run the rule 3,000 Fortescue suppliers, asking them to prove workers are not held against their will, either in debt bondage or by threat of violence. “We found 12 companies that warranted further investigation, and one that required action. I had an immediate conversation with the CEO of that company and told him if he didn’t clarify his knowledge of the law and return his workers’ passports, I would call the media.”

His next step is to bring together business leaders under the Bali Process to champion the end of modern slavery in their countries. “I am looking for a senior level executive from each of the 42 signatory nations. So any chairperson or CEO reading this article who thinks they can drive this initiative at home, I invite them to give me a call,” said Forrest, never missing an opportunity for a quick promotion.

¬ Haymarket Media Limited. All rights reserved.

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