Thanks a billion for Forrest fortune

LITTLE more than a year ago Andrew “Twiggy” Forrest stood shakily on the threshold of joining two fellow billionaires in being “de-billionairised”, writes Terry McCrann.

Andrew Forrest’s fortune is now almost back to its boomtime peak.

LITTLE more than a year ago Andrew “Twiggy” Forrest stood shakily on the threshold of joining two of his three fellow boomtime billionaires in being “de-billionairised”.

Nathan Tinkler’s coal-based fortune had plummeted all the way to zero. Clive Palmer’s nickel and bluster fortune had shrunk to somewhere between the same zero and a billion.

While with Forrest, from a peak of around $6 billion, the value of his shareholding in what might be termed “The Third Mine”, his Fortescue company, had dropped well below $2 billion and seemed to be heading inexorably south.

Only Gina Rinehart among the China boomtime quartet looked secure in the ranks of down under billionaires, thanks to the money that kept flowing to her as royalties from Rio Tinto’s fabulous Pilbara mines. Although even she was by then a longway from her peak, briefly reached, as the world’s richest woman.

Well, Forrest’s fortune is now almost back to its boomtime peak and he can thank in no particular order: China, Fed head Janet Yellen and, even more, Reserve Bank governor Glenn Stevens, and Fortescue management and staff led by his right-hand man, Nev Power.

Also, interestingly and might I add, ironically, Forrest’s Fortescue has generated healthy profits from doing exactly what he attacked BHP Billiton and Rio Tinto for doing, and doing, absolutely rationally: producing and selling more iron ore because every additional tonne sold was net and significantly profitable.

Forrest is someone well able to recognise when he gets it wrong — and then both change direction and also be prepared to try again.

Perhaps he would now concede that all of the big Aussie three, Rio, BHPB and Fortescue, and the Aussie iron ore industry overall, are in a far better place precisely because the big two did not do what he wanted a year or so back.

And that further, the flipside also applies: that if they had done what he wanted and unilaterally — and highly irrationally — cut their production and shipments, the Aussie industry would actually be in a worse place, whatever is coming in 2017 and years later.

Yes, presumably — but not absolutely certainly — all three miners would have got higher prices over the past year and so higher profits per tonne shipped, but not necessarily higher profits overall as they would have been shipping fewer tonnes. Or would that only have been Rio and BHPB shipping fewer tonnes?

But it would have been at the cost of leaving in place an oversupplied global iron ore industry. Instead, what has emerged is three local Pilbara producers at the absolute bottom of the cost curve able to very profitably ship over 700 million tonnes of the product into the global market. And squeeze everybody else, and squeeze them, by acting perfectly rationally.

That’s good for the companies; it’s also good for Australia overall and the taxman in particular. (Knock, knock, do we even begin to realise that big — bank and other — profits mean big tax revenues?) And it’s good for the shareholders in all three companies; and no one is bigger than Twiggy.

All of the big three got most of their profit bang from cost cutting. In the case of Fortescue, lower prices took $1.74 billion away; lower costs brought all that and then some, $1.96 billion in total, back.

Thank you CEO and staff: over the last three years Fortescue has cut its operating`ating costs by a staggering $3.5 billion; and the profit benefit has been leveraged over far more tonnes mined and shipped.

BHPB and Rio have done as well. All three now sit right at the bottom of the global cost curve — Fortescue can now break-even on an all-up cost base of $US28.30 a tonne.

But it was far more urgent — indeed, ultimately existential, which was not the case with the big two — for Fortescue (and Twiggy). And it also had to be accompanied by a major reduction in the level of debt which a year or two back was a parallel existential threat.

Twiggy can thank Power & Co for achieving that as well. He should also thank Yellen and Stevens for the global financial environment in which Fortescue was able to not only cut its debt, at a significant discount, but repackage it at lower interest rates.

The combination of Yellen and Stevens also delivered a lower Aussie exchange rate. Almost all Fortescue’s operating costs are in Aussie dollars but its revenue is, of course, in US dollars.

Fortescue said the lower exchange rate only delivered a $70 million benefit; that would seem to underestimate the indirect benefit it would have delivered into the cost savings.

We’ve ended up with the big three of global iron ore where Fortescue is not just no longer the “marginal — and so highly vulnerable — producer” that it was two years ago, but sits right at the bottom of the cost curve with the other two.

But they remain three significantly different companies. Fortescue is 100 per cent iron ore and so fully leveraged to the Chinese steel industry and China more generally.

Rio remains mostly “pot-committed” to iron ore — it generated 64 per cent of its gross operating profit in the June half. But it has a major “sideline” in copper, in still-fabulous Escondida and hoped-to-be fabulous Oyu Tolgoi.

BHPB of course has similar if relatively smaller exposures to copper and iron ore — plus of course, for better or worse, petroleum and coal and especially coking coal which is leveraged to steel and so back to China’s iron ore appetite.

Fortescue gets around 10 per cent-plus less for its slightly lower-grade premium iron ore than the other two. This means it has a lower gross operating margin — just under 50c in the revenue dollar; the other two are both around 54c.

And because it’s newer it has higher depreciation charges on its invested capex, further reducing comparative bottom-line iron ore profitability. But it gets the depreciation back in cashflow — very helpfully for debt reduction.

MORRISON AND TRUTH

CAN Treasurer Scott Morrison look his colleagues in the eye this morning and swear that he isn’t embarked on crippling the superannuation system, sending their children and grandchildren back onto the old age pension and lumbering the ever-dwindling number of future taxpayers with billions of dollars of extra Budget costs?

Can he also look them in the eye and swear the tax increases on super that he announced in the Budget weren’t all and only about raising revenue?

That but for the ultimately piddling amount of money (in the overall likely $100 billion aggregate deficit over the next four years) to be raised, he wouldn’t have been able to announce even the utterly laughable total of $1.7 billion of net Budget ‘savings’ over the whole of the next four years?

When he was “stopping the boats”, taking his cue from Maggie — “the lady’s not for turning” — Thatcher was admirable. More importantly, it worked. The technique though, does not work when you are digging a hole: then, you should at least, stop digging.