October 20, 2009
A Night In The Pilbara, And Other Chinese Tales: Frugality Is The New Watchword For Fortescue, But The Australian Boom Rolls On
By Our Man in Oz
www.minesite.com/aus.html
If you’re sitting in London still somewhat bemused by the revival of the resources boom and the strength of the Australia economy, then an overnight stay in Western Australia’s Pilbara iron ore region might provide all the answers you’re looking for. In fact, it was at around 10pm on Sunday night, in preparation for a full day tour of the operations of Fortescue Metals Group (FMG), that the penny dropped for Minesite’s Man in Oz. There he was sleeping in Chinese-made “donga” - a fully-equipped flat, complete with washing machine and satellite television - in an Australian port city, getting ready to look at a Chinese ship being loaded with Australian iron ore. But wait, there’s more. The ore from FMG’s Cloudbreak mine had been delivered to Port Hedland in a Chinese-made railway wagon, riding on Chinese steel rails, and loaded via a Chinese-built shiploader, driven by an Australian crew.
The integration of the economies of these two radically different countries does not come more complete than that. A close parallel to the relationship between Australia (the quarry) and China (the factory) might be found in nature where remora (sucker fish) attach themselves to sharks to feed off the leftovers. In the case of Australia and China, it is China playing the role of shark, as it carves off a large helping of global economic growth, at the expense of the US and Europe, while Australia cruises along selling it the raw materials to do its job.
Minesite’s visit to Pilbara, which included a half-hour private chat with FMG’s founder and chief executive, Andrew Forrest, in the back-end of an ancient Fokker 100 commuter jet, confirmed what has been coming through in the numbers. Rather than decline, like other western economies, Australia has continued to grow throughout the global downturn, not by much, but grow nevertheless. Unemployment, tipped to soar by the boffins working in the cloistered silence of Canberra’s economic ministries, has not moved to within a bull’s roar of the forecast 8.5 per cent. It is holding at 5.7 per cent, and while job creation is always last in a rebound, that official number now looks silly, with accelerating growth triggering an uptick in interest rates, and with more rises expected before Christmas.
Forrest, effervescent as ever, and looking forward to a quiet night with his wife on their 18th wedding anniversary on Monday evening, is in no doubt that demand for resources from China will not slow for decades to come. Always a man with a tendency for hyperbole, he is now glowing in the spotlight of success. A 30-man (and woman) media pack hang off every word when he holds an impromptu press briefing on the edge of one of seven pits being worked at Cloudbreak, as his “surface miners” scrape away in the background as they hasten to meet his forecast of 40 million tonnes of ore shipped this financial year.
Rivals and critics, of which there remain many in Australia and overseas, are simply being overpowered by the force of Forrest’s personality. His absolute confidence in his own decisions is the stuff normally seen in rhino-hided politicians justifying outrageous expenses, or indeed, outrageous policies. But Forrest has put his own money into FMG (and been well rewarded with the title of Australia’s richest man and a fortune of some A$4 billion), and he has used the funds of willing shareholders and New York dentists via bonds issued in the US.
Perhaps the best way of putting into perspective what Minesite saw during this hot day and night in the field is to stack up the positives of what’s happening right now in Australia against the negatives. On the plus side, shipments of iron ore, and other commodities from Australia to China and other Asian economies, have barely missed a beat over the past 12 months. There was a scare at the end of 2008 and early 2009 when global trade ground to a halt because banks could not (or would not) finance cargoes, but that blip has been more than overcome. The best example of the strength of demand came in the third quarter report of Rio Tinto, one of FMG’s arch-rival in the Pilbara region, which last week revealed that shipments of iron ore were up 12 per cent.
Other plus-side evidence on the ground is a strong revival in exploration spending, and last week’s remarkable offer by BHP Billiton to acquire United Minerals Corporation for A$204 million. That single deal yelled “the boom is back!” more loudly than any other single event in the past year, and for several reasons. Firstly, because BHP Billiton was only one of four “tyre kickers” interested in UMC. Secondly, because the price set a new benchmark for undeveloped iron ore in the ground, and thirdly because BHP Billiton was clearly flagging that it is interested in dealing with mining minnows, if there’s a profit to be made which is, hopefully, a sign that the arrogance shown by the big miners is dissipating.
One day, when time and space permits, Minesite’s Man in Oz will try to explain a seminal event in 2003 when companies such as BHP Billiton and Rio Tinto were forced under State Government law to relinquish exploration tenements they had held for almost 40 years. Back then, in the pre-boom days, even the companies involved recognised that it was fair to apply “use it, or lose it” laws in order to open exploration acreage. But perhaps it was no surprise when people like Forrest, acting on the advice of his trusty second-in-command, Graeme Rowley, pegged almost everything surrendered, and smaller explorers, such as the Rhodes family pegged high-grade chunks such as the Railway tenement which ended up in UMC.
In Forrest’s words, at 30,000 feet over a Bundaberg rum and coke: “they [the majors] said it wasn’t a problem because one day they would just buy it back” – an astonishingly conceited view which failed to take the China boom into account, and failed to recognise that the door had been opened on their once closed shop. It is now companies such as FMG, Atlas Iron, BC Iron, Brockman Iron, Iron Ore Holdings, FerrAus, Giralia, Aquila, and a flotilla of smaller fry which has stampeded through the open door, that are willing to do the basics which BHP Billiton and Rio Tinto forgot – to explore, develop, be nice to customers, talk to investors and the media, and never assume that being a big company means you sit closer to God.
The negative aspects to what’s happening right now are related to the prevailing prices of raw materials and the corrosive effect of the rising value of the Australian dollar against the sinking US dollar in which most commodities are traded. Earlier this year iron ore prices took a 33 per cent haircut. Everyone knows that. What’s less often considered is the additional 20 per cent haircut caused by currency movements. It’s the corresponding fear of falling revenue which has caused FMG to adopt a new corporate slogan, on display in the Cloudbreak mine mess room: “Fortescue frugality”. Given that the food flowed freely, if not the booze because of alcohol restrictions on mine sites, it was obvious that the new-found frugality applies to operating costs. Rowley says that the aim is to slice A$400 million out of annual expenditure.
Overall, investors in far-away places can be reassured that the Australian resources boom is not only intact, it is building up speed again after a temporary diversion caused by the global financial crisis. Currency is a worry, but underlying demand from Asian customers is strong, and customers are keen to see supply lines not only kept open, but expanded. If there are problems ahead they fall into the category of speed bumps, not brick walls. Skilled tradesman are in short supply again, and will become even harder to find once the promised boom in liquefied natural gas gets underway next year. Professionals, such as engineers and geologists, are also commanding higher salaries, while on a personal note it is sad to report that car parks are once again getting hard to find in West Perth, and the price of a fish lunch at the infamous Black Tom’s bistro is rising. Fortunately, though, most talented scribblers can find a mining company somewhere within 50 metres to foot the bill.
A Night In The Pilbara, And Other Chinese Tales: Frugality Is The New Watchword For Fortescue, But The Australian Boom Rolls On
By Our Man in Oz
www.minesite.com/aus.html
If you’re sitting in London still somewhat bemused by the revival of the resources boom and the strength of the Australia economy, then an overnight stay in Western Australia’s Pilbara iron ore region might provide all the answers you’re looking for. In fact, it was at around 10pm on Sunday night, in preparation for a full day tour of the operations of Fortescue Metals Group (FMG), that the penny dropped for Minesite’s Man in Oz. There he was sleeping in Chinese-made “donga” - a fully-equipped flat, complete with washing machine and satellite television - in an Australian port city, getting ready to look at a Chinese ship being loaded with Australian iron ore. But wait, there’s more. The ore from FMG’s Cloudbreak mine had been delivered to Port Hedland in a Chinese-made railway wagon, riding on Chinese steel rails, and loaded via a Chinese-built shiploader, driven by an Australian crew.
The integration of the economies of these two radically different countries does not come more complete than that. A close parallel to the relationship between Australia (the quarry) and China (the factory) might be found in nature where remora (sucker fish) attach themselves to sharks to feed off the leftovers. In the case of Australia and China, it is China playing the role of shark, as it carves off a large helping of global economic growth, at the expense of the US and Europe, while Australia cruises along selling it the raw materials to do its job.
Minesite’s visit to Pilbara, which included a half-hour private chat with FMG’s founder and chief executive, Andrew Forrest, in the back-end of an ancient Fokker 100 commuter jet, confirmed what has been coming through in the numbers. Rather than decline, like other western economies, Australia has continued to grow throughout the global downturn, not by much, but grow nevertheless. Unemployment, tipped to soar by the boffins working in the cloistered silence of Canberra’s economic ministries, has not moved to within a bull’s roar of the forecast 8.5 per cent. It is holding at 5.7 per cent, and while job creation is always last in a rebound, that official number now looks silly, with accelerating growth triggering an uptick in interest rates, and with more rises expected before Christmas.
Forrest, effervescent as ever, and looking forward to a quiet night with his wife on their 18th wedding anniversary on Monday evening, is in no doubt that demand for resources from China will not slow for decades to come. Always a man with a tendency for hyperbole, he is now glowing in the spotlight of success. A 30-man (and woman) media pack hang off every word when he holds an impromptu press briefing on the edge of one of seven pits being worked at Cloudbreak, as his “surface miners” scrape away in the background as they hasten to meet his forecast of 40 million tonnes of ore shipped this financial year.
Rivals and critics, of which there remain many in Australia and overseas, are simply being overpowered by the force of Forrest’s personality. His absolute confidence in his own decisions is the stuff normally seen in rhino-hided politicians justifying outrageous expenses, or indeed, outrageous policies. But Forrest has put his own money into FMG (and been well rewarded with the title of Australia’s richest man and a fortune of some A$4 billion), and he has used the funds of willing shareholders and New York dentists via bonds issued in the US.
Perhaps the best way of putting into perspective what Minesite saw during this hot day and night in the field is to stack up the positives of what’s happening right now in Australia against the negatives. On the plus side, shipments of iron ore, and other commodities from Australia to China and other Asian economies, have barely missed a beat over the past 12 months. There was a scare at the end of 2008 and early 2009 when global trade ground to a halt because banks could not (or would not) finance cargoes, but that blip has been more than overcome. The best example of the strength of demand came in the third quarter report of Rio Tinto, one of FMG’s arch-rival in the Pilbara region, which last week revealed that shipments of iron ore were up 12 per cent.
Other plus-side evidence on the ground is a strong revival in exploration spending, and last week’s remarkable offer by BHP Billiton to acquire United Minerals Corporation for A$204 million. That single deal yelled “the boom is back!” more loudly than any other single event in the past year, and for several reasons. Firstly, because BHP Billiton was only one of four “tyre kickers” interested in UMC. Secondly, because the price set a new benchmark for undeveloped iron ore in the ground, and thirdly because BHP Billiton was clearly flagging that it is interested in dealing with mining minnows, if there’s a profit to be made which is, hopefully, a sign that the arrogance shown by the big miners is dissipating.
One day, when time and space permits, Minesite’s Man in Oz will try to explain a seminal event in 2003 when companies such as BHP Billiton and Rio Tinto were forced under State Government law to relinquish exploration tenements they had held for almost 40 years. Back then, in the pre-boom days, even the companies involved recognised that it was fair to apply “use it, or lose it” laws in order to open exploration acreage. But perhaps it was no surprise when people like Forrest, acting on the advice of his trusty second-in-command, Graeme Rowley, pegged almost everything surrendered, and smaller explorers, such as the Rhodes family pegged high-grade chunks such as the Railway tenement which ended up in UMC.
In Forrest’s words, at 30,000 feet over a Bundaberg rum and coke: “they [the majors] said it wasn’t a problem because one day they would just buy it back” – an astonishingly conceited view which failed to take the China boom into account, and failed to recognise that the door had been opened on their once closed shop. It is now companies such as FMG, Atlas Iron, BC Iron, Brockman Iron, Iron Ore Holdings, FerrAus, Giralia, Aquila, and a flotilla of smaller fry which has stampeded through the open door, that are willing to do the basics which BHP Billiton and Rio Tinto forgot – to explore, develop, be nice to customers, talk to investors and the media, and never assume that being a big company means you sit closer to God.
The negative aspects to what’s happening right now are related to the prevailing prices of raw materials and the corrosive effect of the rising value of the Australian dollar against the sinking US dollar in which most commodities are traded. Earlier this year iron ore prices took a 33 per cent haircut. Everyone knows that. What’s less often considered is the additional 20 per cent haircut caused by currency movements. It’s the corresponding fear of falling revenue which has caused FMG to adopt a new corporate slogan, on display in the Cloudbreak mine mess room: “Fortescue frugality”. Given that the food flowed freely, if not the booze because of alcohol restrictions on mine sites, it was obvious that the new-found frugality applies to operating costs. Rowley says that the aim is to slice A$400 million out of annual expenditure.
Overall, investors in far-away places can be reassured that the Australian resources boom is not only intact, it is building up speed again after a temporary diversion caused by the global financial crisis. Currency is a worry, but underlying demand from Asian customers is strong, and customers are keen to see supply lines not only kept open, but expanded. If there are problems ahead they fall into the category of speed bumps, not brick walls. Skilled tradesman are in short supply again, and will become even harder to find once the promised boom in liquefied natural gas gets underway next year. Professionals, such as engineers and geologists, are also commanding higher salaries, while on a personal note it is sad to report that car parks are once again getting hard to find in West Perth, and the price of a fish lunch at the infamous Black Tom’s bistro is rising. Fortunately, though, most talented scribblers can find a mining company somewhere within 50 metres to foot the bill.
