"cast the first stone", page-6

Good read, sour grapes from former senior Fortescue executive !

Chinese vowed to teach Fortescue a lesson

Chalpat Soni, Perth


April 9, 2009
ONE of China's most powerful bureaucrats vowed to get back at Andrew Forrest and his Fortescue Metals Group for not giving up enough of the iron ore company in exchange for developing its projects, a court has heard.

And a former senior Fortescue executive who quit after a disagreement over shares says he does not remember the details of vital meetings between the company and various Chinese state-owned entities that eventually erupted into a dispute that could see Mr Forrest, if convicted, banned from Fortescue.

Mr Forrest and Fortescue are the subject of civil proceedings in the Federal Court in Perth. The Australian Securities and Investments Commission claims Fortescue and its head misled the market and investors in 2004 by referring to agreements it had with three Chinese state-owned entities as "binding contracts" when they were not.

He Lianzhong, the deputy director general of the National Development and Reform Commission - which approves Chinese investment overseas - told a Fortescue consultant in February 2005 that the Chinese were about to teach the company a lesson after Mr Forrest told them he would not let the company fall into majority foreign ownership.

John Karkar, QC, representing Fortescue, told Justice John Gilmour that Mr He and Fortescue consultant Lawrence Xin knew each other from their school days and Mr Xin had mentioned he had "a friend" who held shares in Fortescue.

The friend had heard that Fortescue had signed contracts with the Chinese, but the Chinese were demanding a majority stake in the company in return.

"You better tell your friend to sell his shares immediately," Mr He is claimed to have told Mr Xin.

Chinese companies wanted control of Fortescue, and as the company was resisting "we will teach them a lesson", Mr He said.

Mr Karkar said: "It seems the lesson took the form of the story that prompted the ASIC probe appeared in the AFR in March 2005. In it, the Chinese said there were no binding agreements with Fortescue, that they were not prepared to build and finance the project and its associated infra structure, and they doubted there were enough proven ore reserves to sustain a
planned 45million-tonne-a-year mine for 20 years.

A key ASIC witness in the case, former Fortescue head of marketing Philip Kirchlechner, was present at some meetings between the company and the Chinese entities in 2004 when the so-called "framework agreements'' were being negotiated.

Mr Kirchlechner, who told the court he resigned from Fortescue after Mr Forrest reneged on a promise to give him shares in
the company, provided documents to ASIC outlining discussions where the Chinese sought an equity stake.

Cross-examined by Mr Karkar, Mr Kirchlechner said he could not remember several meetings he attended in China in 2004 or why he did not bring up his concerns in writing with Mr Forrest, who he reported directly to. He spoke to Mr Forrest about those concerns.

Mr Kirchlechner said he did not remember if he had seen the draft of a media release in August 2004 in which Fortescue claimed to have a "binding contract'' with the China Railway Engineering Corporation to build a rail line from the mine to Port Hedland.

Mr Kirchlechner said there was "no doubt in my mind the parties were entering into an agreement'', but under questioning
could not say it was a "serious'' agreement.

"The thing I remember most clearly about (a meeting with Mr He in China in August 2004) was this was the first time (Mr Forrest) actually agreed for the Chinese to buy an equity stake in FMG,'' Mr Kirchlechner said.

ASIC contends that Fortescue knew its agreements with the Chinese could not be binding until the equity issue was sorted.

At a later meeting, China Metallurgical Construction Corporation executives told Mr Forrest a majority stake in Fortescue was the basis for any deal. But Mr Forrest told CMCC president Ma Yanli that the project would never be majority owned by foreign interests.

Two months later, Mr Forrest proposed a 50-50 joint venture in a 480million-tonne ore resource, but this was rejected by Mr Ma.