Australia's new gold rush
"We have [15,000 square miles] here -- an area the size of Switzerland -- in one of the richest ore bodies in the world," he said. "We've got massive resources. And there is a massive market demand in China. Connect the two and you've got a massive business opportunity and tremendous shareholder value."
Forrest makes it sound simple. (And, of course, "massive.") But plenty of Australians are skeptical of the man and his plan, in large part because of his colorful past. His great-great-uncle Sir John Forrest was a famous explorer who became the first premier of Western Australia.
In his own career, Forrest first attracted attention as a hard-charging, Harley-riding stockbroker in Sydney in the '80s. Ever since, he has shown a penchant for ambitious and sometimes wacky propositions -- like the time he rounded up $2 million in capital to import alpacas from Chile -- which often seem to end in lawsuits.
In the '90s he led a company called Anaconda Nickel, which made a huge bet the metal could be successfully extracted from clay in a remote area of the outback using an experimental technique pioneered in Cuba. He raised more than $1 billion to get the project off the ground, but construction delays and technical setbacks eventually sent it spiraling down, and Forrest was pushed out. Today renamed Minara Resources, the company is one of the world's biggest nickel miners.
Forrest is an exceedingly gifted promoter. And this time he may actually be on the verge of gigantic riches. On paper he already has them. Since the beginning of 2006, Fortescue's stock has risen from around $5 a share to $45 at presstime, giving it a market cap of $12 billion. Forrest himself owns 36% of the shares outstanding, which makes him the third-richest person in Australia.
Also benefiting nicely are the U.S. investors who provided capital when his fellow Aussies were sitting on their hands. One of his biggest backers is Leucadia National (Charts), a New York City holding company that put in $400 million in 2006 and received a 10% equity stake at $11 a share, which is now worth more than $1 billion on paper.
Is Forrest bothered that not all of his old mates back in the Sydney banking world have bought into his story? "I love it! I love it!" he says gleefully. "And they can stay in charge of their underperforming portfolios. They clearly haven't bothered us, but I do feel sorry for their investors -- the mums and dads out there who probably don't know any better -- who might ask, 'Why, in my portfolio, don't I have the best-performing stock in the resources sector in Australia?'"
The scale of what Forrest is trying to accomplish is stupendous: Five years after he launched the project, Forrest plans to begin shipping iron ore to steel mills in China next year at a rate of 45 million tons annually and raise that to 100 million tons within a few years. For context, BHP produced 108 million tons in the Pilbara for the 12 months ending in June, and it has been mining there for about four decades.
There are some details to take care of first. Like finishing the 160-mile railroad he's building to move the ore from his Cloud Creek mine site to the $2 billion facility he's still building in Port Hedland. He can't afford delays. With $200 million in annual interest payments to make on his junk bonds, cash could get tight if the project falls behind schedule.
But if Forrest manages to get everything to work, Fortescue will serve as a market validation for other new players around Australia -- which is why so many of them are rooting for him. "I hope Andrew makes it, and I believe he will," says George Jones, a 35-year industry veteran who is chairman of two junior iron ore miners, Gindalbie and Sundance. "If he does, it's good for the lot of us."
On Nov. 22, 1952, a 43-year-old farmer and former asbestos miner named Lang Hancock was flying himself and his wife from their estate in the Pilbara to Perth when, according to Hancock, they encountered storm clouds and he had to take his single-engine Auster down low, through the gorges of the Turner River. "I noticed that the walls looked to me to be solid iron," he said later.
At the time the Australian government believed that the country's iron ore resources were scarce -- so much so that there was a ban on exporting the metal. The Western Australia government prohibited would-be miners from even staking claims for iron ore.
But Hancock began flying back to the area to gather ore samples and quietly have them tested. He soon realized that he'd found one of the world's great metal deposits. He spent the rest of the decade lobbying to lift the restrictions, and by 1961 he was able to begin filing his claims. Hancock's patience was rewarded. By the time he died in 1992, he was one of Australia's richest men. And by bringing in Rio Tinto as a partner to develop his claims, he helped lure bigtime mining to the Pilbara.
It is not a hospitable place. The climate is arid, and the land is red and dusty. In the summer the temperature is usually brutally hot. One town, Marble Bar, once recorded 160 straight days of 100-degree or higher temperatures. Major cyclones hit the west coast two to three times a year.
Today about a third of the world's exported iron ore is produced in the Pilbara, the vast majority by BHP and Rio Tinto. To get an idea of the scale of operation that Forrest and the other startup iron ore companies are attempting, it helps to examine how the process of extracting and moving ore works at a site like BHP's Mount Whaleback, the largest single-pit, open-cut iron mine in the world. The mine has been producing a very high-grade ore -- up to 68% iron out of the ground, enough to toss directly in the blast furnace at the steel mill -- since it opened in 1968, and BHP says that it has another 20 years of mine life. It is 3.5 miles long and a mile wide.
Mining goes on 24/7 at Whaleback all year. The method for extracting the ore is relatively straightforward: Four or five times a week the workers use explosives to blast it out. Then one of the front-end loaders dumps up to 240 tons of ore in one of 56 trucks, which are coordinated by a central computer system that routes traffic for maximum efficiency. The trucks transport the ore to the primary crusher to break the boulders into football-sized chunks. In the secondary crusher they're reduced to grapefruit size. Then the ore is put on a conveyor belt and loaded (at a rate of 14,000 tons per hour) onto a train for the 265-mile journey to Port Hedland on BHP's private heavy-haulage railway.
A typical train is about two miles long and has six 4,000-horsepower locomotives pulling 300 cars, with a total of about 24,000 tons of ore. Once it reaches the port, the ore is crushed a third time and dumped into stockpiles. It takes about 35 hours for conveyors to load each 1,000-foot-long ship with about 220,000 tons of ore. Then it moves off to Japan, South Korea, or most likely China.
If Andrew Forrest is the rebellious nouveau billionaire of iron ore -- tapping the capital markets to construct an empire overnight and thumbing his nose at the established powers -- then Clive Palmer is somewhere on the other end of the spectrum. He has spent the past two decades biding his time and waiting for a chance to develop his claims in the Pilbara. Now the market has come to him.