Twiggy (10 page)

Forrest does not deserve to shoulder all of the blame for Anaconda’s woes. Fluor was responsible for many of the design
flaws and delays that cost the project dearly. Forrest’s Anaconda vision has also been vindicated by the belated success of Murrin Murrin, now fully owned by Glencore, in recent years. Some of the brickbats that have been thrown at him since 2001 are simply a result of the old adage that history is written by the winning side. But his plan for Anaconda was too big and too hurried. His failure to
take advice from some of the experts around him was also an error. Says one former Anaconda executive: “Andrew knew it all – that was his biggest problem. He didn’t have a clue [about the technical side] … he should have taken more advice.”

For his part, Forrest has never publicly accepted any of the blame for what happened at Anaconda, preferring to cast himself as the victim of forces motivated
by greed. “It taught me cynically that the bigger the numbers become, the more powerful are the interests to act indecently or act purely for business and not for moral or social responsibility, or for a grounding of social values,” he said in 2012. In private, however, Forrest has told friends that his biggest mistake at Anaconda was not ensuring that he was briefed about the design changes
made along the way.

Anglo American sold out of its disastrous Anaconda investment in 2003, leaving Glencore to take full control, with the aim of spending even more money to rebuild the company from the ground up. A bitter Forrest, who still owned a 4.5 per cent stake in Anaconda, would later back a hostile $450-million takeover attempt by US vulture fund MatlinPatterson, arguing it was
needed on the grounds that Glencore’s capital raisings were diluting other shareholders. The bid failed and Forrest sold all his remaining shares.

A former Western Mining Corporation executive, Peter Johnston, succeeded Forrest as chief executive and began to put his mark on the company, which was in 2003 renamed Minara Resources in a bid to disassociate itself from the Forrest era. Johnston
soon ditched Anaconda’s much-hyped “three nickel province” strategy and focused on making the Murrin Murrin plant work. The company was effectively insolvent and Johnston had to fly to New York to convince 100 bondholders owed $US400 million to take a big haircut. In the end, they received less than 25 cents in the dollar on their investment. Johnston says Forrest deserves credit for driving Anaconda
as far as he did. “There’s no doubt it wouldn’t have happened without him,” says Johnston, who took more than ten years to fully fix the problems he inherited in 2001. “But basically he was an entrepreneur, and I think fundamentally he didn’t understand the technology. I think his lack of experience in the end told. But boy, was he an entrepreneur!”

More than 100 Anaconda staff with links
to the Forrest era were dismissed at the end of 2001. But even as he walked out of the Anaconda office for the final time, Forrest maintained a veneer of positivity. Recalls one former employee: “I remember Andrew coming through the office and saying, ‘Guys, I’m off, Peter Johnston is a terrific fella, he’ll look after you.’ Of course
,
that afternoon we were all retrenched.” The former employee
suggests he and his colleagues felt their years of intense work and loyalty to Forrest were not fully repaid. “Andrew didn’t even have a beer with us. He asked everyone to sell their souls and give up everything for him, and yet he sailed off in reasonable shape. Did he know we were all going to be retrenched? I suspect he did. He demands great loyalty and I’m not sure he gives as much back.”

What nobody realised at the time, however, was that Forrest was not in reasonable shape. In fact, he was facing a personal financial crisis in 2001 that at one stage threatened his family home in John Street, Cottesloe, a historic mansion set on an 1860-square-metre block that he and Nicola had bought a year earlier, around the time that their son, Sydney, was born. Forrest had borrowed heavily
to buy most of his 32 million shares in Anaconda and had watched in horror as the price plunged, triggering margin calls from his stockbroker. Forrest has never publicly commented on his brush with financial ruin. But in a statement lodged with the Administrative Appeals Tribunal in 2007 as part of an unrelated legal case, he admitted he had been under “financial pressure” from his bank in September
2001 because he had borrowed “substantial amounts of money” to buy Anaconda shares.

Forrest sought advice from several people on how he might rustle up a few million dollars quickly and was told to get on a plane to see Shayne Heffernan, a shadowy Australian expatriate who had become prominent in Asia as a high-risk venture capitalist. Heffernan, who stands about 190 centimetres tall and
is heavily built, appeared to be making serious money and was living in the penthouse suite of the Shangri-La Hotel in Hong Kong, with a chauffeur on call to ferry him around the city. But he was never in one place for long and would be forever darting around the region.

Heffernan had a colourful past. He had been arrested in Sydney in 1987 and charged with supplying heroin as part of a “sophisticated
network” that had allegedly sold more than $5 million worth of the drug. The Central Court was told that Heffernan sold the heroin at street level and had also investigated an abortive mission to take $40,000 cash to South-East Asia in a “narcotics-related exercise”. After a ten-month trial in the late 1990s, he was found not guilty by a jury of selling heroin, but was convicted on the
lesser charge of supplying marijuana and imprisoned.

Heffernan next came to the attention of the Australian authorities in 2003, by which time he had moved to Asia and reinvented himself. The Australian Securities and Investments Commission issued a statement warning that hundreds of local investors had transferred $3.5 million to Heffernan’s Hong Kong-based company, Equity-1, on the promise
that they would receive returns of 30 per cent through international share trading. The Hong Kong Securities and Futures Commission claimed Equity-1 was involved in “boiler room” activities, a fraud involving high-pressure sales tactics.

Nobody really knew how Heffernan had made his millions, but Forrest wasn’t about to ask too many questions. On the night of 11 September 2001, he was in
Heffernan’s suite at the Peninsula Hotel in Manila, watching the television as planes slammed into the World Trade Center in New York. Heffernan says he believes he and Twiggy bonded that night, and he agreed to lend his new mate $3 million so he could pay off his debts and hang on to his house. “I called the guy at the bank to make sure it was real – and he said he was going to take possession of
the house and his credit cards were going to be cut off,” Heffernan recalls. “Forrest told me: ‘When I have cash in bank, you’re first on the list, I’ll never forget you, mate.’”

By early 2002, Forrest’s financial pressures had eased and he embarked on a twelve-month holiday to Europe with Nicola and their three children, Grace, Sophia and Sydney, who were all younger than eight. After promising
to remain on the Anaconda board, he suddenly quit as deputy chairman in March and flew out of Perth the next day. Forrest’s reputation was in tatters and his spell in corporate exile had begun.

To go back into the limelight after he’d been vilified like that, I think was incredibly brave.

—NICOLA FORREST

It’s just after 10am on Friday 18 July 2003 when Andrew Forrest rises to speak. His audience is a small group of mainly elderly shareholders who have gathered on the second floor of the 100-year-old Celtic Club in West Perth
to hand him control of their obscure company, Allied Mining and Processing. They know Twiggy has a reputation as a corporate cowboy. But by installing him as their chairman and major shareholder, they hope he can develop Allied Mining’s old iron ore tenements in the Pilbara – and perhaps even make them some money. With iron ore trading at a paltry $US30 a tonne, it might not be a lot of money,
but it’s worth a punt. Few of the shareholders listen too closely to Forrest’s bullish presentation. As soon as he’s finished, they hurry downstairs for coffee and biscuits before heading back outside into the morning chill.

Those who did pay close attention to Forrest on that day in 2003 would have heard one of the more prophetic speeches in Australian corporate history. Within a few minutes,
he had accurately predicted the imminent arrival of the greatest mining boom Australia had ever seen. Displaying a series of simple slides, Forrest declared he would transform Allied from a penny-dreadful stock into the “third force” of the Pilbara iron ore industry, directly challenging the stranglehold enjoyed by mining leviathans BHP Billiton and Rio Tinto. He told the audience that global
demand for iron ore was set to rise from 480 million tonnes a year to 700 million tonnes a year within just four years, but that existing miners would only be producing 620 million tonnes by then – a global shortfall of 80 million tonnes. Allied Mining and Processing, he explained, would fill the gap. Some may have smirked, but Forrest seemed to believe what he was saying.

As he had done
at Anaconda Nickel, Forrest made it all sound so easy. He would build a mine, a railway and a port to sell iron ore to the steel mills of China – an economy, he forecast, which would grow rapidly for decades to come. The whole thing would cost about $2 billion, which he would raise on world markets. One of the slides that flashed up on the screen audaciously spelled out his main goal: “To create
an Australian-owned iron ore group comparable in size with the current majors.”

The company would soon change its name to Fortescue Metals Group, after the Fortescue River, which snakes its way through the Pilbara heartland. Reflecting on that first meeting a few years later, Forrest said: “I thought, [it] will be like Napoleon said: let China sleep, because when she awakes she will shake
the world. We took the view in 2003 that China had awakened.” Others were making similar predictions at the time, but Forrest was among the first to stake his career on the hypothesis that the rise of China would be a multi-generational phenomenon rather than an economic blip.

Three months before the Allied shareholders’ meeting in West Perth, Forrest was sitting at home in Cottesloe mulling
over his plan to create a new mine in his native soil of the Pilbara. He had been in exile for almost a year and, still aged only forty-one, he had the itch for a new adventure. Other Perth entrepreneurs had dreamed for decades of the iron ore wealth on offer in the Pilbara – including Alan Bond, who in the 1970s had a big stake in mining company Robe River before it was taken over by Rio. Most
were deterred, however, by the fact that the best deposits had been cherry-picked by BHP and Rio, who also owned the railways needed to carry the ore hundreds of kilometres to the coast.

Forrest’s quixotic vision really began to take hold when an old friend doing drilling work for Rio revealed to him that the mining giant was doing virtually no fresh exploration work in the vast region. Forrest
realised there could be untold riches on offer. But with his reputation at rock bottom, he had few friends in the mining game he could call on for advice. He only had to read the business pages of the newspaper each day to be reminded of the financial disaster he had left behind at Anaconda Nickel.

Forrest did have one old mentor he could turn to: Graeme Rowley, a 63-year-old former air
force pilot who had retired after working as a senior executive at Rio’s rail and port operations in the Pilbara. Forrest and Rowley had met when Twiggy dated his daughter, Lisa, in the 1980s. The avuncular Rowley happened to be driving through Cottesloe when he took Forrest’s call. “Andrew said, ‘Come and have a scotch, I’ve got an idea,’” recalled Rowley, who arrived at Forrest’s house in John Street
within minutes. Over a long chat at the kitchen table, Forrest outlined his belief that the Pilbara was chronically under-explored and told Rowley of his plan to take control of Allied Mining, which had a vaguely promising iron ore deposit called Mount Nicholas, just north of the Fortescue River. “I laid out a map of the Pilbara and I drew on it with texta where the railway line was going to
go and where the port was going to go and where I thought we could find ore points. And he [Rowley] said, ‘How much do you think this is going to cost?’ And I said, ‘Between 2 and 3 billion.’ Now the market value [of Allied] was about $6 million. He just shook his head and he said, ‘Does Nicola know anything about this?’ I said, ‘Yeah, she thinks I’m nuts, but we’re going to have a crack.’”

Rowley was so taken with Forrest’s enthusiasm that he agreed to commit his entire personal savings of $80,000 towards buying shares in the new venture, although only after Twiggy had told him he liked his executives to have “skin in the game”. It would be the best financial decision Rowley ever made. He agreed to join Forrest as his first employee, a move that gave much-needed credibility to
the new enterprise. “After that first meeting with Andrew, I knew for the first time in my life I would be putting my reputation on the line,” Rowley said. “But I had realised what I had been looking for was the buzz that happens when you are exposed.”

Rowley, Forrest and a personal assistant, Louise O’Reilly, moved in to the home’s study, with its towering bookshelves, leather armchairs
and Forrest family memorabilia. Next they hired Alan Watling, who had built heavy-haulage railways for Rio. Another experienced mining executive, Chris Catlow, was brought in as chief financial officer. But Catlow, like others in those days, hesitated before taking the job. “A few friends of mine were very questioning when I told them that I’d taken on the job,” he recalled. “They said, ‘Are you
really sure you want to associate yourself with Andrew Forrest – he’s on the nose.’ I guess that was the common view, that Andrew was a little wild, if not a cowboy.”

Forrest then attempted to recruit John Hancock, the only son of Perth iron ore heiress Gina Rinehart. Hancock, who had a strained relationship with his mother, had left Hancock Prospecting, the family company that had been established
by his legendary grandfather Lang. “That first meeting with Andrew reminded me of the grand visions my grandfather would discuss with me when I was a child,” says John. “It was familiar for me to hear about yet-to-be built railways, mines and ports – feats of engineering on a massive scale.” Forrest offered Hancock, who had experience in dealing with Chinese steel mills while at Hancock Prospecting,
a job as his new company’s head of marketing. He also wanted to throw in a big pile of share options.

John put the idea to his mother, who rejected it out of hand. “I told her Andrew was starting his own iron ore company regardless, and that Hancock should get involved at this early stage – if we had a decent equity position I would be working in Hancock’s interests rather than in competition.
She did not want to get involved. With hindsight, it would’ve been an outstanding investment. But my mother was by no means alone in the mining industry in viewing this new entrant with suspicion.”

John Hancock next proposed to his mother that Hancock Prospecting sell some of its Pilbara tenements to Forrest in return for a major stake in the new venture. In effect, he was proposing that
the two iron ore explorers should work together against the might of Rio and BHP to develop mines and infrastructure. The plan could have shaken up the Pilbara mining industry, but it was also rejected by the steely Rinehart. More than a decade later, Rinehart and Forrest have never cooperated on anything and still view each other with suspicion. In fact, Rinehart tried unsuccessfully in 2007 to
block the granting of five mining leases to Fortescue on her Mulga Downs pastoral station. Never previously known as an environmentalist, she lobbied the government to stop Fortescue because of the apparent threat that mining would pose to the endangered night parrot on her land.

Forrest, as Fortescue chairman, assembled a board of directors that drew heavily on the contacts he’d made since
1999 as chairman of Athletics Australia, where he had been enlisted to provide the sport’s governing body with some business acumen. British athletics legend and Conservative Party identity Sebastian Coe was an inaugural director of Fortescue in 2003, although he resigned the following year to work on London’s ultimately successful bid for the 2012 Olympic Games. Coe handed back his 750,000 share
options in the company when he resigned, missing out on a multimillion-dollar payday he’d have been eligible to receive at the height of the company’s success several years later. Herb Elliott, the celebrated Perth-born athletics champion who had forged a successful business career in Sydney, was recruited as a director. Another Sydney businessman whom Forrest had met through athletics, a former
executive of Optus and the Commonwealth Bank
,
Russell Scrimshaw, also agreed to join the board. The other two original Fortescue directors, Ken Ambrecht and Chris Linegar, brought strong international finance connections.

Apart from Forrest and his cohorts, few people were excited about Fortescue’s prospects in those early days. The company’s share price remained at rock-bottom levels well
after the July 2003 meeting that appointed Forrest as chairman. Where Twiggy had once been treated like a rock star at the annual Diggers and Dealers mining conference in Kalgoorlie, hardly anyone now wanted to be seen with him. One night, a desperate Forrest ended up drinking with a few journalists at the conference – and even they told him bluntly what a disaster he’d created at Anaconda.

He later described the campaign against him at the time as “corporate cruelty”, but said it taught him to be more resilient. “When you are feeling things against you – pain, unfairness and sorrow – that is when character grows,” he said. Nicola described her husband’s decision to establish Fortescue after being forced out of Anaconda as “the bravest thing he’s done”. “To go back into the limelight
after he’d been vilified like that, I think was incredibly brave,” she said.

It was both brave and incredibly clever. What few realised at the time was that Forrest had negotiated a brilliant deal with Allied Mining boss Mark Caruso that would make him a billionaire several times over when investors finally clicked to his plan. Caruso approached Forrest in early 2003 because Allied was sitting
on nearly a billion tonnes of iron ore and needed someone with the energy to develop the deposit. “I had seen what he had done at Anaconda and I knew he could sell ice to the Eskimos,” Caruso says.

Forrest acquired his controlling stake in Fortescue for a meagre 8 cents a share – the vesting price of more than 100 million options he was granted in 2003 under the deal with Caruso. He was also
given 5 million shares for free. By January 2005, Forrest had converted all of his options, paying only $8 million for a 47 per cent stake in Fortescue. He described the decision to buy the shares as a “remarkably selfless corporate act” because it had injected capital into Fortescue. Just how selfless is a matter of debate. For by this time, the Fortescue share price had soared to $4, thanks
largely to Forrest’s promotional abilities. His $8-million investment was already worth more than $400 million. It was the deal of a lifetime – and it only got better. In February 2005, just two weeks after converting the last of the options into shares, Forrest sold 3 million of them for $4.50 each, pocketing $13.5 million. The $8 million he had paid for his shares was already a distant memory: he
was ahead by $5.5 million on the deal, and he still had 102 million shares.

Forrest had pulled off a deal that within a few years would make him Australia’s wealthiest person. But he had done it without, as he had exhorted Graeme Rowley and others to do, putting any of his own “skin in the game”. In spite of this, Forrest has constantly stressed the huge gamble he took to achieve his dream.
“Fortescue was started by a few friends with big ideas sitting at a kitchen table,” he told the National Press Club in Canberra in 2012. “It was a huge risk. The very real possibility of failure was our constant companion.”

Forrest’s motivation in negotiating the deal with Caruso was not simply to get rich fast. He had learned from bitter experience at Anaconda that he would need to be the
dominant shareholder in Fortescue to call the shots and fend off potential predators. These days, Mark Caruso sees himself as the man who helped make Forrest a household name. As he relaxes on the balcony of his Perth CBD penthouse apartment, it’s clear that Caruso, who is in his early fifties and talks with machine-gun speed, has also done very well out of the mining boom. But few people realise
that it was Caruso’s decision to approach Forrest about the Allied tenements that changed the course of mining history. “Andrew hugs me when he sees me, because he knows the true story,” Caruso laughs.

Caruso, however, rejects suggestions that Allied gave away the shares to Forrest too cheaply. “Iron ore back then was sewerage shit – who wanted it?” he says. “If you didn’t own a railway
track, iron ore was no good to you.” In fact, Caruso says
,
Forrest wanted a lot more shares than the 110 million he ended up with. He recalls: “Negotiations were colourful, it’s fair to say. I went to his house a couple of times and in the end he just wore me down. Looking back, did I do a bad deal for shareholders? No, I did not. If I didn’t give the man an incentive he was never going to do
it.”