Noble Group is getting set to jump on the Fortescue Metals Group bandwagon. It said in a disclosure to the Singapore Exchange earlier today that it is in discussions with Fortescue to buy a 10% stake in the firm for between US$270 mln and US$300 mln.
Noble has the money. At the end of 2005, it had current assets of A$2.6 bln, of which A$686 mln were cash equivalents. The question is whether it should be spending it on an investment in Fortescue Metals Group.
Fortescue was started by mining entrepreneur Andrew Forrest. He is well-known to Australian investors, who watched his spectacular development and his even more spectacular exit from Anaconda’s Murrin-Murrin nickel project in Western Australia. His challenge to BHP Billiton and Rio Tinto that he would become the third force in iron ore in the Pilbara region of remote Northwest Western Australia has already had to overcome significant hurdles, mostly of his own making. There was the famed denial by Chinese clients who said – contrary to claims by the company – they had not signed binding take-off agreements. Those troubles may be behind it in one way, because Fortescue disclosed in March it had sold 81% of its initial planned production. But in another, the troubles have only just begun, with the Australian Securities and Investments Commission saying it is pursuing Forrest and Fortescue for civil penalties worth A$3.6 mln for breach of disclosure obligations. Fortescue is contesting the claim.
Noble is taking a bold step by getting on his bandwagon. The execution risk of the project appears to be fading a little. Off-take contracts are in place and ground has been broken to build the port facilities at Port Hedland to freight the ore to his dozen or so customers. But the project is still a big gamble for its sheer size, and it should be ready in less than two years. Who knows what the commodities markets are going to look like then. I have mining insiders telling me that there is no end in sight yet. But nervous investors might think otherwise.
Quite apart from the project being a gamble, Andrew Forrest is a gamble. I like the guy. I’ve met him on several occasions. I have interviewed him on camera, and I have spoken to him several times on the telephone. While I have no evidence to suggest he is not trustworthy, obviously I cannot vouch for the accuracy of what he says. What is clear, though, is that Andrew Forrest is a larger-than-life character whose personality attracts a great deal of attention. Andrew Forrest is a significant sideshow – or distraction – to the main game. You have to respect a guy who was embroiled in controversy some years ago when Anaconda collapsed, to try something as audacious as challenge the two giant incumbents in Pilbara iron ore at their own game – and taking them to the competition regulator to gain access to their railway line in the process. Despite being knocked back – not least by Treasurer Peter Costello – he is still trying.
What’s important is that Fortescue Metals becomes the main game in the whole saga, not Andrew Forrest. The project has to become larger than Forrest so that Noble ends up buying into the project, not into Forrest.