By Stephen Mayne
January 8, 2008
Fortescue Metals founder and controlling shareholder, Andrew "Twiggy" Forrest, is Australia's third richest man so Stephen Mayne, who owns just 5 Fortescue shares, travelled to Perth for the AGM on November 8 to meet the man in person and find out what all the fuss is about.
Andrew “Twiggy” Forrest may be the controlling shareholder in a $17 billion company, but he still runs it likes it's some two bob speculative mining stock.
I turned up 45 minutes before the appointed time in the Freshwater Room of the Hyatt Regency, a tired looking place on Adelaide Terrace that is still one of Perth's best hotels, and the minions were only just starting to put up the signs and load the presentations.
When I came back at 2pm, they didn't even take registrations or issue voting cards, anyone off the street could just walk in and TV cameras did indeed roam unchecked through the room during the meeting. So much for collecting any proxies or calling a poll because Computershare was nowhere to be seen.
When it came to re-appointing boutique accounting fims BDO as auditor, I raised the point that it was time Fortescue started acting like a top 30 company.
Herb Elliott's chairman's address in the annual report even had a typo in the first paragraph and there were loads of other obvious blunders in a report which only arrived 20 days before the AGM, when the rules say 28 days is the minimum.
Then again, such nit-picking was utterly insignificant because we'd come to talk about The New Force in Iron Ore which is so confident about its surging share price, that the board announced a 10 for 1 share split, meaning we'll be having an EGM to turn my 5 $60 shares into 50 shares each worth $6. This announcement led most of the press coverage, including the second story on the local ABC TV on the night of the AGM.
THE TWIGGY CHARM OFFENSIVE
Twiggy was joking with a few journalists when I arrived and he quickly made it his business to personally meet all the shareholders attending.
I hate getting sweet-talked before an AGM and tried to avoid him but he came to shake hands and ask the name, so I just said “Stephen” and then he said “Stephen who” and the game was up.
The iron ore evangelist just oozes a charm and he was straight away begging for tricky questions before offering me a deal – “when I surprise my team be getting each of them up to talk, can you throw a few questions at them?”
It didn't turn out like that but the questions session was still very interesting.
Olympic legend turned wealthy Fortescue chairman Herb Elliott opened with a brief 10 minute address and then went straight into the formal business without giving Twiggy a chance to say boo.
THE FORMAL BUSINESS
There were seven resolutions and I got up for one crack on each one, given that no-one else was interested in having any debate, which is apparently what has happened at all previous Fortescue AGMs.
The press coverage was quite limited today but The AFR's Rear Window column did note the following:
“Chairman Graham Rowley (sic: it was Herb) proved a dab hand at answering a series of tough questions about the meeting's resolutions from serial AGM inquisitor Stephen Mayne. And few were enjoying the exchanges more than Forrest himself, who said at the end of proceedings that he was disappointed to have run out of resolutions.”
This is how the seven resolutions unfolded:
ITEM ONE: THE ACCOUNTS
Why don't we raise more capital and pay out these costly loans from US investor Leucadia National Corp which is now looking very expensive?
Twiggy joked that he'd never raise capital at these current cheap prices and then the CFO explained that Leucadia can't be paid out for another 12 years anyway. A $500 million investment is looking like returning several billion dollars for the lucky Americans, who were good enough to send equal largest shareholder and billionaire Joe Steinberg to the AGM. Joe told me after the meeting that Fortescue was his best ever investment with profits already easily exceeding $US1 billion. Joe invited me to attend his AGM in New York and given he is the only American billionaire serving on an Australian board it was good fun drawing him into the debate.
ITEM TWO: REMUNERATION REPORT
Only a tiny vote against so there were no Telstra or AGL-style revolts at Fortescue because the pay packet are actually very modest as the foundation executive team have all made many millions out of the surging share price.
I asked why the company wasn't using options to lure new executives into the team for when it starts operating next May and Twiggy seemed quite proud of the stability of his team and the fact he didn't need to issue a single option in 2006-07.
ITEM THREE: APPOINTMENT OF BDO KENDALLS AS AUDITORS
For a $15 billion company, these boys come real cheap at just $99,023 for the audit in 2006-07, so no wonder the board is keen to hang on to them. I told them it was time to go “Big Four” but Herb talked a bit about loyalty and good working relationships.
ITEM 4: ELECTION OF GEOFF BRAYSHAW
Noticing that 10 million proxies were voted against, I asked what the problem was and Herb confessed that the proxy advisory firms didn't like the fact Geoff was an accountant who hailed from BDO Kendalls. Oh dear, shades of HIH. However, Herb said Geoff had been out of the firm for more than two years but he then refused to answer the question as to whether he and Twiggy were old mates. No answer raised suspicions but Twiggy latest confessed they only met for the first time in May this year, so Brayshaw would be a perfectly good independent director and audit committee chair if the Fortescue board got with the program and went with a Big Four firm.
This protest vote against Brayshaw and the BDO conflict was the focus of The West Australian's coverage the day after the AGM, although no-one else pursued this angle.
ITEM FOUR: RE-ELECTION OF RUSSELL SCRIMSHAW
Russell is a former senior CBA executive so he's given lots of credibility to Fortescue during its early years and clearly deserves his $50 million fortune for taking the punt. My only question was why he had dumped 277,600 shares during the year reducing his holding to 800,000 and whether he planned to stay at that level.
Director share sale questions often hit a raw nerve and Herb gave it the dead bat saying there would be nothing further to add to the ASX disclosures at the time of the sale.
Russell also copped a $200 million protest vote based on too many executives on the board but the proxy advisers can't hurt Fortescue because Australian institutions have such tiny holdings.
ITEM FIVE: RE-ELECTION OF KEN AMBRECHT
By this stage I was on a roll and the meeting was expecting a question with each resolution so with Ken I asked how it worked having two directors based in the US and why he was paid $318,295 last year when chairman Herb only got $85,766.
It turns out Ken helped Fortescue raise its $3.2 billion financing package last year and collected a bonus for his work. Twiggy later confessed to being an old mate of Ken's, given that he was the bloke who helped raise the original $400 million for Anaconda Nickel, which largely went down the plug hole when it was recapitalised as Minara Nickel after Twiggy's ouster in 2002.
With two American directors Herb said they aim to physically get together four times a year, which is what they did at the board meeting held on the morning of the AGM. The rest is on the speaker-phone and video-conference.
ITEM SIX: RATIFYING ISSUE OF SHARES
Just asked about future capital raisings and got confused about the rights of major shareholders and lender Leucadia.
ITEM SEVEN: BOARD PAY RISE FROM 500K TO 750K
Spoke is favour of this one and pointed out that Fortescue needs another couple of independent directors given the presence of three executives, one financier, two major shareholders, one audit form associate and the cross-directorship of Herb and Twiggy having sat together on the Athletics Australia board for a few years.
Herb just took it as a comment and moved on.
UNLEASHING TWIGGY'S BOYS ON THE MEETING
Once the formalities were dealt with, Australia's third richest man was unleashed on the meeting and he did indeed surprise several of his senior team by spontaneously getting them to address shareholders.
Former Rio Tinto executive and head of operations Graeme Rowley talked about “culture” with almost the same evangelical zeal as Twiggy.
Chief operating officer Alan Watling had returned from his Pilbara base the night before and provided a detailed update and then promised with great determination that the first shipment would be made by May next year.
We even heard how the mining team had got so far ahead of schedule that they were now helping the rail boys catch up.
The naughtiest element of the AGM was when Exploration Chief Eamon Hannon, looking like a tradie in jeans and a short sleave shirt, got up to do his spontaneous bit and blurted out that shareholders would receive a Christmas present of a 1 billion tonne resource announced from the Solomon tenements.
Err, should this have been announced to the market first? It is hard to tell whether this comment or the BHP-Rio merger kerfuffle sent Fortescue shares soaring 15% the day after the meeting.
I suspect it's the merger question because iron-ore will have the most competition policy implications for BHP and Rio, so Fortescue is sitting pretty to extract better infrastructure access and maybe even a mine or two in any merger approval deal.
THE FINAL QUESTIONS FOR TWIGGY
It was then time for general questions and after a couple of other shareholders got up to have a go, I hit Twiggy with five questions in one and they played out as follows:
JAMES PACKER
SM: Given that Twiggy attended the big Packer wedding earlier this year and the two have personally toured Fortescue's Pilbara operations, why didn't Australia's richest man write out a cheque and get on board the iron ore juggernaut in the recent $504 million placement at $36.
Twiggy gave his shortest answer for the day: “Look, he's a mate and he's a great Australian – end of story.”
The day after the Fortescue AGM, the value of Twiggy's stake in Fortescue hit $5.3 billion, surpassing the value of James Packer's PBL stake for the first time.
OTHER BOARDS
SM: Why is Twiggy sitting on other boards when this is such a huge undertaking? I'm a shareholder in Moly Mines (capped at $300m) and Poseidon Nickel (capped at $200m) but from a Fortescue point of view want him focused on the real deal, our $17 billion company.
Twiggy said he wasn't chairman of Moly any more and Poseidon Nickel was just a hobby that would turn into a 20,000 tonne a year nickel operation.
ASIC
SM: If ASIC does succeed in having Twiggy banned from being a director and does indeed fine the company $8 million for making misleading ASX announcements, who will run the company and what contingency plans do we have in place?
Twiggy said everyone at Fortescue was really looking forward to having their day in court and clearing the company's name and he said his wife Nicola would be delighted if he was banned because they could spend more time together.
THE RUSSIANS ARE COMING
SM: What's been the approach since Vladimir Putin's $10 billion mate, Victor Rashnikov, bought a 5% stake. Are we going to flog some iron ore to his massive Magnitogorsk Iron and Steel Works? Why did we show him around the operations last Christmas?
Twiggy said Victor is a gentleman and very close to the Kremlin, so he assumed Putin signed off on the investment. It did come as a surprise but he warned Victor not to go hostile given the size of Twiggy's controlling shareholding.
INDUSTRIAL RELATIONS
SM: What will Labor for mean Fortescue and how do we play the AWAs?
Twiggy has largely got where he is thanks to the WA Labor Government so he played a pretty straight bat and said unions do have a place and he would work flexibly with whatever rules existed.
BURKE AND GRILL
This was the one issue in the group of questions that Twiggy didn't answer, which was partly my fault because he checked if everything had been covered and I only reminded him of the James Packer question rather than mentioning the dodgy Labor spinners that Fortescue used to great effect in getting their project up.
POST-AGM DEVELOPMENTS
Fortescue Metals shares soared 19% on Thursday, November 15, after announcing a big iron ore discovery. The only problem is that part of this news was blurted out spontaneously at the AGM a week earlier in Perth, which we said later was a clear breach of disclosure rules at a time when Fortescue is already under the gun from ASIC.
The big mouth even had the audacity to send a letter to Crikey complaining, as you can see below. Anyone who read the Mayne Report could have made plenty punting Fortescue shares. This is the sequence of disclosures:
November 8: Fortescue exploration manager Eamon Hannon blurts out to the AGM after the market had closed that he's found a 1 billion tonne resource at Solomon which will be delivered as a Christmas present.
November 9: Shares rocket 15%, partly due to BHP bid for Rio. The above Mayne Report commentary was emailed out to our tiny number of subscribers, including detail of the Solomon discovery and criticism that this was market sensitive information.
November 13, 1.50pm: Crikey was emailed out including a piece on Fortescue which contained the following:
"Fortescue and Twiggy personally are both facing prosecution from ASIC for over-cooking statements about Chinese contracts to the ASX. You'd think Twiggy would therefore be careful about Fortescue's public utterances but instead he surprised exploration boss Eamon Parry (sic) by asking him to address the AGM. Parry was dressed in jeans and a t-shirt (sic) and his spontaneous bit was that shareholders would receive a Christmas present of a 1 billion tonne resource announced from the Solomon tenements. Err, shouldn't this have been announced to the market first? A better board wouldn't tolerate all this yet Fortescue's directors include three executives, one financier, two major shareholders, one audit firm associate and the cross-directorship of Herb and Twiggy having sat together on the Athletics Australia board for a few years."
November 15, 2.23pm: The following lead letter was published by Crikey:
Eamon Hannon, Exploration manager, Fortescue Metals Group, writes:
Re. "Time for Twiggy Forrest and Fortescue to grow up" (Tuesday, item 29). Dear Mr Mayne, I sat in front of you at the Fortescue AGM and I must say I was impressed by your eye for detail and professionalism of questions. That was until I read your article and it dawned upon that you are none of the aforementioned. Please allow me, good sir, to correct you: 1) My name is Eamon Hannon, not Eamon Parry. 2) I was not wearing a t-shirt, rather a freshly dry-cleaned white collared shirt. I am a geologist not a banker. 3) I did not specify any grade of material, though I did repeat to the share holders the exploration target for 2007 that has been publicly shared with numerous institutions et al for the best part of this year. Therefore, as a fellow advocate for transparent reporting I suggest that you should be more diligent before you go on the public domain.
November 15, 1.22pm: STOCK EXCHANGE ANNOUNCEMENT FROM FORTESCUE METALS
Fortescue Metals Group Ltd (“Fortescue”) is pleased to announce an estimate of Inferred Resources of iron ore totalling in excess of 1 billion tonnes (Bt) for the Serenity area comprising the western one-third of its Solomon Project area (see appendix 1).
A total of 1.014 Bt averaging 56% Fe has been defined as an Inferred Resource in accordance with the JORC Code. Within this deposit Fortescue has defined 337 million tonnes (Mt) of channel iron deposit averaging 56.7% Fe.
Fortescue is continuing to drill equally prospective targets in the eastern portion of the Solomon Project area and expects to announce additional resources in that area before Christmas. Serenity is located about 60 kilometres north-northwest of Tom Price in the Pilbara region of Western Australia (see appendix 2).
This discovery is a result of a drilling programme by Fortescue aimed at providing sufficient resource with its Chichester deposits to support its planned production expansion to 200 million tonnes per annum (mtpa). This initial mineralisation comes from the Serenity area which represents one third of its total tenements in the Solomon area.
Metallurgical test work has commenced and preliminary results suggest that mineralisation is responding positively but further work is required to determine detailed process flow sheets, expected recoveries and product characteristics. This work is ongoing.
The above estimate is based upon the results of 439 RC drill holes totalling 10312 metres and using a bulk in-situ density of 2.6. All holes were sampled in one metre intervals and analysed by SGS Laboratories and Ultra Trace in Perth, Western Australia using XRF techniques. Estimation was carried out by using ordinary kriging for all of the mineralised domains and inverse distance for waste. Fortescue Metals Group is satisfied that the requirements laid down under the JORC code have been fulfilled, including internal QA/QC work to deliver this Inferred Resource Estimation to the ASX.
CONCLUSION
Wow, they've confirmed it and Fortescue shares closed up $9.67 at $61.20 on Thursday after hitting a peak of $64.99 when the company's market capitalisation briefly peaked at $18.18 billion and Twiggy's stake hit $6.65 billion. Surely Eamon Hannon's comments at the AGM are deserving of further investigation. Unfortunately, Fortescue did not even tape the meeting so it would have to come from one of the journalists who attended.
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