On the face of it, Andrew Forrest’s announcement that he wants to turn Fortescue Metals Group into the world’s biggest renewable energy producer is an outrageously ambitious pipe dream. But his call on iron ore was just as outrageous when Fortescue was born.
Right now, given Fortescue’s success, it would be a brave person who bet against Forrest. From an upstart hopeful with poor-quality tenements, and no railway line or port, Fortescue is now one of Australia’s great corporate success stories.
It is as much a triumph of vision as the energy play would be. In 2003, when Forrest put the Pilbara iron ore play into the shell of little-known hopeful Allied Mining and Processing, the commodity was worth about $US30 a tonne, and the idea of challenging Rio Tinto and BHP’s dominance of the trade was similarly outrageous.
But go back and have a look at the presentations Forrest delivered to shareholders before they voted on the deal — Forrest’s projections on the China growth story, and the size of the seaborne iron ore market, were close to bang on. Fortescue got there at the right time to capitalise, and succeeded when most others fell away.
Clearly, the billionaire sees the same curve in the renewable energy market. He may, again, be bang on and Fortescue could again be the early mover that permanently establishes itself as a major player in the energy industry.
Now, as then, the question is whether Fortescue can deliver into the opportunity.
Fortescue is churning out cash now, but had a few debt-driven near-death experiences along the way. And Forrest’s latest play into hydrogen and green ammonia, both as yet unproven technologies at commercial scale, might tempt older mining investors to reminisce more about the Anaconda nickel play than about Fortescue.
Anaconda involved a revolutionary treatment plant, using high-pressure acid leaching, to treat difficult-to-process laterite nickel ore. It tested successfully at pilot-plant level, but proved far more difficult to translate to full commercial scale.
The courts later attributed problems to the plant’s contractors, and Forrest still maintains the company was in great shape when he left. But Anaconda was still plagued by technical problems for a decade after its construction, and remains a reminder that vision is not always enough.
Fortescue has the cash to do far more work on the technical side of its new vision than Anaconda ever did. And, while questions remain over whether its vaunted culture can successfully be exported to new jurisdictions, there’s no doubt its balance sheet and obvious success opens the necessary doors to get access to project opportunities.
But the other question is whether Fortescue shareholders want to join a new ride. In 2003 it was a brash, speculative play, with investors that were prepared to roll the dice on a big risk.
Now its register is full of institutional investors that may well look at the cash rolling in and wonder whether they want to risk the spectacular returns from a simple company, with operations in a well-understood industry and jurisdiction, for a multi-billion-dollar speculative bet on new industries sprawled across multiple developing nations, with a payback off in the never-never.
On form, you may not want to bet against Forrest and Fortescue. But not everybody will want to jump on the new rollercoaster.
More Coverage
Read related topics:Fortescue Metals