The Impending Doom of a Magnate

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Billionaire Andrew Forrest has had a good run. He created Fortescue Metals Group, an iron ore mining company which has seen unparalleled industry success over the past decade. It’s the country’s third largest iron ore mining company and is a bigger exporter in Western Australia’s Pilbara region than Rio Tinto and BHP Billiton. The mining magnate is one of Australia’s richest men.

Forrest is greatly involved with the issue of indigenous disadvantage in Western Australia and has a vocational training and employment centre linked to Fortescue to prepare indigenous workers with skills to find employment in the mining industry. In June 2011 the company reached its Summit 300 target of employing 300 Aboriginal people within company operations.

Forrest hit a rough patch


While others in the industry were struggling in 2009, Fortescue boasted it had plans to finance its own expansion. ABC News reported the company planned to expand its Western Australian Christmas Creek mine, spending $360 million.

Then Forrest hit a rough patch. In September 2010, ABC News reported Fortescue faced legal action by Leucadia National Corporation, one of its integral shareholders. Leucadia filed a summons against Fortescue and CEO Forrest, seeking damages for deceptive and misleading conduct over corporate notes.

Mid 2011, Forrest quit his position as CEO saying that someone else could do the job better than himself since fifty-percent of his time is spent on philanthropic endeavours. He would stay on as a chairman in the company. Quite timely seeing the Federal Court found he misled investors in 2004 in regards to contracts they held with partners in China. Though he said he had binding agreements to mine, port and rail in the Pilbara with the investment of Chinese companies, the Australian Securities and Investments Commission claimed he misled the market because they were only agreements to negotiate and nothing was set in stone. They argued that he wrongly influenced investors’ decisions.

In February 2012, Forrest found himself in the High Court defending his actions from 2009 against the ASIC who were able to get an appeal and the court ruling overturned which found him not guilty. He was accused of breaching continuous disclosure laws which requires his company to keep its financial health up to date with the investors market.

Financial distress ensues


Things turned sour once again in September of this year. Blaming a 1.6 billion dollar cut in capital spending on volatile commodity prices, Fortescue announced a cut of hundreds of jobs. Financial distress ensued. In just 20 minutes Fortescue had $1.5 billion abolished from its worth. During that short period of time, Forrest watched his personal wealth shrink by $500 million.

Forrest struck some luck in early October this year when the High Court cleared him of misleading investors, saying he did not breach disclosure laws regarding Fortescue’s dealings with Chinese investors.

Recent times proved difficult yet again. Due to falling iron ore prices, cash flow has been minimal at Fortescue. The ABC reported that the company has contacted its multiple lenders asking them that debt covenants be waived for up to a year, all but admitting they’re in troubled waters. The Daily Reckoning believes Fortescue has over $10 billion in debt. Looks like this ship is sinking.


References:

  • Chung, http://www.abc.net.au/lateline/content/2011/s3143166.htm
  • Burrell, http://www.theaustralian.com.au/business/mining-energy/andrew-forrest-wins-leave-to-appeal/story-e6frg9df-1226151417868
  • Lannin, http://www.abc.net.au/pm/content/2010/s3000998.htm
  • Weber, http://www.abc.net.au/pm/content/2011/s3233015.htm
  • http://www.fmgl.com.au/About_Fortescue/Company_Overview
  • http://dailyreckoning.com.au/china-mining-boom-2012 txtcon.php?gclid=COeyxa6ElrMCFfBHpgodxRcA7g

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Is the mining boom in Australia over?

Is the mining boom in Australia over?

No, it's just media hype.
Still plenty of resources.
There will be a second boom.
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