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Saturday, July 28, 2012

Andrew Forrest's gamble on the future

Andrew 'Twiggy' Forrest's Fortescue Metals Group is banking on iron ore prices remaining firm to pay down its debt as the company plans an expansion that will almost triple exports in the future. The iron ore price continued to slide towards $US117 per ton yesterday, 13 per cent lower than a fortnight ago and 38 per cent lower than last year's high of  $US190 per tonne.

Fortescue's debt will soon peak at $9 billion and if future forecasts are correct and the price averages $US135 per tonne over coming years, all will be well.  But JP Morgan's Lyndon Fagan wrote "If the benchmark price averages below $US115 per tonne for the next 18 months, FMG may need to look at funding options outside of debt."  He added "FMG's debt and cash flow would then be insufficient to complete the planned expansion."

A spokesman for Fortescue said "We are seeing a short term price reduction driven by a soft steel market and mills running down iron ore inventories as a result."  He thinks JP's Morgan's scenario is "highly unlikely" and expects the price to return to between US$120 and $US150 within a few months.

Fears of declining demand from China saw almost 20 per cent wiped off its share value over the past 12 days but closed 15 cents higher at $4.15, well below its $6 value back in April.

Twiggy Forrest is a generous man.  "I don't aspire to great wealth, I don't admire it and I don't intend to leave this earth a rich man" he said "I intend to give it away."  He has donated millions to Aboriginal causes and gave shares and options worth $80 million to The Australian Children's Trust, his Forrest Family Foundation.