It's not all good news out there ????????????? __________________________________________________________
A curious call with hands-on Twiggy Forrest
Matt Chambers From: The Australian March 13, 2010 12:00AM
WHEN departing executive director Graeme Rowley hosted iron ore miner Fortescue Metals Group's February result conference call, there was a familiar, if muffled, whisper helping him to answer some of the analysts' more difficult questions.
Chief executives usually handle presentations with analysts after the release of their profits, but Andrew "Twiggy" Forrest was giving covert advice to Mr Rowley -- who was leaving the company two weeks later -- and acting chief financial officer Fiona Barclay.
During the presentation, the company had trouble explaining, or appeared not to know about, some items, leading to long pauses as the presenters were coached, leaving listeners bemused, to say the least. For many, the ad hoc nature, and unbridled entrepreneurialism, of Mr Forrest, who recently regained the mantle of Australia's richest person, is part of Fortescue's appeal.
The latest presentation comes amid a series of executive departures, major shareholders selling down stakes and a cooling of relations with China -- the only country that buys Fortescue's iron ore. The botched conference call appears to be a sign of growing pains, but recent events invite the question of how Fortescue tackles the next stage of its short life and consolidates its position as one of the world's big mineral producers.
If it wants to attract more traditional mining investors, the company will have to present itself more professionally and pay more attention to governance, analysts and fund managers say.
Mr Forrest may also need to adopt a more hands-off approach.
No big Australian institutions hold large holdings in Fortescue, which thanks to Mr Forrest's vision and ambition has defied expectations to build its own iron ore mines, railway and port, and become the nation's fourth biggest miner (after BHP Billiton, Rio Tinto and Newcrest).
Attracting local fund managers to the company's register has never been a priority, but that may change, as its traditional funding and shareholder base is showing signs of wavering.
Last week, Leucadia, the biggest Fortescue shareholder after Mr Forrest and China's Hunan Valin, told the ASX it had sold about $US121 million ($131m) of shares, cutting its stake from 9 per cent to 8 per cent.
It is also believed Harbinger Capital partners, another New York hedge fund and long-time Forrest backer, has sold about the same, although that has not been confirmed.
"With the broader investment community, Fortescue is probably going through an evolutionary process," said RBS analyst Warren Edney, who rated FMG a buy but said the the conference call was not a great moment.
A straw poll of some of the nation's biggest mining investors, none of which would comment on the record, returned a range of reasons for keeping away from Fortescue's register. Most mentioned governance.
Other reasons, such as lack of a dividend, shaky cashflows and not being convinced by the company's output predictions versus its ground, also contributed.
One major investment bank analyst said big institutional clients had become more interested in Fortescue since an investor trip to the assets last year.
Mr Forrest's entrepreneurial style worried them, he said, suggesting Mr Forrest might have to relinquish the chief executive seat and take a non-executive chairman role for them to come on board.
Mr Forrest was again at his spruiking best yesterday, revealing to investors in New York that Fortescue had a mid-term ambition of producing 355 million tonnes a year, and announcing plans to start building a $US5.7 billion second phase of his Solomon deposits in the western Pilbara.
Fortescue is producing about 40 million tonnes a year, while Rio and BHP combined produce about 330 million tonnes annually.
Mr Forrest only revealed four months ago he was planning a $US3bn-plus first-phase Solomon operation.
There has been no indication of how either push would be funded.
Pengana fund manager Tim Schroeders, previously a Fortescue shareholder, said Mr Forrest probably needed to relax his hold on the company (although not necessarily give up his chief executive position) and give more power to his senior executives. Sorting out company accounts would also help. "Fortescue's accounts tend to be a bit messy -- you don't really want to spend twice as much time deciphering Fortescue as you do BHP and Rio -- it should be the other way round," Mr Schroeders said.
Part of the complexity concerns a $US100m subordinated loan note from New York hedge fund Leucadia National, interest on which is 4 per cent of revenue from Fortescue's eastern Pilbara region mines over 13 years.
Every six months the company estimates future revenue for the next 13 years and adjusts net profit by movements in expected total loan note payments.
That means the better the outlook for Fortescue, the more it needs to pay and the worse its bottom line is.
FMG Price at posting:
$4.94 Sentiment: Hold Disclosure: Held
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