* Fortescue Metals borrowed big to ride China steel boom
* Plunge in iron ore price coincided with peak debt and mine
* Announcement on debt restructure due by Tuesday
* Founder Forrest fighting dilution of $3 bln stake
By Sonali Paul
MELBOURNE, Sept 17 Andrew "Twiggy" Forrest bet
$15 billion of mostly borrowed money on a China steelmaking
boom, defying doubters to build mines, a railway and a port to
create the world's no.4 iron ore miner under the noses of giants
Rio Tinto and BHP Billiton.
Now, hammered by a halving in iron ore prices in the past
year and saddled with $10 billion in debt, his Fortescue Metals
Group faces a critical week.
Fortescue plans to announce a debt restructuring with
bankers by Tuesday, likely to involve the sale of assets or
shares as it seeks to secure access to much needed funding lines
and to see off hedge funds "shorting" the stock in a wager its
fortunes will suffer further.
The crisis is the latest episode in what has been a wild
ride for mining magnate Forrest and his backers.
"He builds iron ore mines on a vast scale. Then he borrows
money on a vast scale. And he presumes the iron ore price will
deliver him a pile of loot that is also unimaginable to
mortals," said John Hempton, chief investment officer at Bronte
Capital, one of many funds that have betted against the stock.
"The world is not complying."
From 2001, Forrest started snapping up remote iron ore
assets in Western Australia's red Pilbara desert, which were at
the time stranded without access to railways or ports to export
the product, saying no one understood how fast China's hunger
for iron ore would grow as its steel production took off.
In 2003, Forrest pitched the company as the "new force in
iron ore", lining up Chinese customers who did not want to be
captive to the three iron ore giants - Brazil's Vale,
Rio Tinto and BHP - at a time when they were
extracting massive hikes in iron ore contract prices.
"FMG is the creation of a hyperactive, smart, energetic
Australian entrepreneur named Andrew Forrest; imagine the
Energizer Bunny," Ian Cumming and Joseph Steinberg, the chairman
and president of U.S.-listed diversified investment company
Leucadia National Corp, Fortescue's first big backer,
said in a letter to shareholders in 2007.
He was so exuberant in the early days that it landed him in
trouble with Australia's securities regulator, which took him to
court over allegations the company exaggerated claims about
lining up Chinese companies to build a mine, port and railway.
Forrest, who declined to be interviewed for this article, is
awaiting a High Court ruling on the company's appeal against a
lower court decision that Fortescue's public announcements had
misled investors about the level of commitment from the Chinese
firms. The company has argued that it believed the commitments
Fortescue also declined a request from Reuters to speak to
Chief Executive Nev Power, and CFO Stephen Pearce did not return
a telephone call seeking comment.
Between 2006 and 2008, Forrest and Fortescue secured $3
billion in debt and equity, built a mine, a port, and a 256-km
(160-mile) rail line, and the company shipped its first ore.
Shares rocketed from 3 Australian cents in 2003 to a record
high of A$13.15 shortly after its first shipment, which made
Forrest Australia's richest person at the time. Leucadia, which
sold its stake between 2011 and July 2012, reaped a profit of
more than $1 billion on its $444 million investment in
The production ramp-up went so well that in 2011, when iron
ore was trading at record levels above $180 a tonne, the firm
fast-tracked its expansion plans, aiming to triple annual
capacity to 155 million tonnes over two years instead of three
so it could reap revenue faster at the top of the market.
But the market and China did not cooperate.
The $9 billion expansion was to be almost entirely debt
funded, with $645 million in equity from China's Hunan Valin
Iron & Steel Group plus cash from its existing
Unlike its larger, more diversified neighbours Rio
and BHP, Fortescue is totally dependent on selling iron
ore to China - it has no other product and virtually no other
Hedge funds spotting those factors pounced earlier this
year, betting the company would not be able to withstand a drop
in iron ore prices likely if Chinese growth slowed.
Short-selling interest in Fortescue - investors betting its
share price will fall - has been mounting this year as the iron
ore price slides amid weak demand from Chinese steel mills.
As of early September, short-sold positions accounted for
almost 8 percent of shares in Fortescue, up from less than 4
percent in May and under 2 percent at the start of the year,
data from the Australian Securities and Investments Commission
"When management got up and said they didn't think iron ore
could go below $120 for a sustained period they were talking
about things they could not possibly know," said Bronte
In July, iron ore prices dropped below $120 a tonne, a level
at which all the major miners had - wrongly - expected China's
high-cost miners to stop producing. But prices kept sliding, to
a three-year low of $86.70 this month.
Fortescue's value has halved since March to $9.3 billion.
Forrest's stake has shrunk to $3 billion.
Caught out by the steep drop in iron ore prices, the company
earlier this month put on hold nearly half of the 100 million
tonnes expansion to save $1.6 billion in capital and slashed
around 1,000 jobs, with even some long-serving lieutenants
sacked, to cut $300 million in operating costs.
The moves, quickly followed by the $300 million sale of a
power plant at one of the mines, shocked investors as they came
less than a week after Fortescue CEO Power had said the company
was comfortable with its funding, remained on track with its
expansion and was confident iron ore prices would recover in the
The U-turn sent the shares crashing below A$3 for the first
time since the depths of the financial crisis. Forrest has spent
close to $180 million during the share price slide to take his
stake to 32.8 percent.
The company is pulling every lever possible to avoid
diluting his one-third stake to shore up funding - selling
assets, cutting spending and seeking debt waivers - even as
speculation builds it may need to sell new shares.
"Twiggy's not someone who's going to hand over control of
his business very readily," said John Robinson, chairman of
Global Mining Investments, a $172 million fund that
owns a small stake in Fortescue.
A relative of the first premier of Western Australia, the
50-year-old father-of-three is a passionate advocate for
improving conditions for Aborigines and works on a number of
affirmative action projects.
While analysts, bankers and deal advisers say Fortescue may
have to bring in a new partner or sell its prized railway,
Forrest is unlikely to engage in a fire sale.
"He will keep everyone at the negotiating table until all
hours of the morning if necessary, always looking for the better
deal, leaving no stones unturned," said an executive for another
mining company who has known Forrest for more than a decade.
For the one-time Perth stockbroker raised on a cattle
station in Australia's outback, the iron ore downturn may only
be a temporary setback.
"Hard work and survival are in his DNA," Leucadia's leaders
said in 2007.