Twiggy (12 page)

Goodyear’s “rusty nails” quote would inspire Forrest and his team
to take the fight to the majors even more aggressively. Fortescue lodged plaints, or legal challenges, over BHP ground near the Chichester Range, claiming the miner had held the tenements for decades but failed to spend adequately on them. The move, although legal under the WA Mining Act, was generally frowned upon in the iron ore industry. But “plainting” was a method of obtaining mining leases
and blocking rivals that Forrest had also used at Anaconda Nickel, which had lodged challenges over more than 100 tenements in the Goldfields.

BHP and Rio scoffed at Fortescue’s prospects, telling journalists and analysts that the company’s iron ore quality was poor and would never be accepted by the Chinese. Fortescue responded by arguing – correctly, as it turned out – that although much
of its ore was of a lower grade, it had fast-burning qualities in sintering which would be welcomed by steel mills. The big miners also attempted to block Fortescue’s groundbreaking plan to use special machines called surface miners, rather than traditional drill and blast methods. The surface miners had only ever been used on minerals that are up to ten times harder than iron ore. As it turned
out, the German-made machines proved to be effective in cutting through the flat layers of rock at Cloudbreak. But Forrest, acting on the advice of mining boss Jim Williams, took a big gamble on their success: if the method hadn’t worked, Fortescue would have faced a two-year delay and missed much of the iron ore price boom.

Forrest and his executives also came to believe that BHP and Rio
were warning Australia’s big investment banks against working for Fortescue or even publishing analysis of the stock. There is no direct evidence of this. However, in 2007, BHP dumped its long-standing broker, JP Morgan, after the firm acted as lead manager for Fortescue in a $504 million share placement. BHP and Rio did brief journalists regularly and convinced many of them that Forrest was doomed
to fail. The former head of Rio’s Pilbara iron ore operations, Greg Lilleyman, admits that BHP and Rio did talk down Fortescue, but he denies threats were made to investment banks. It’s worth recalling, he notes, that most analysts will only cover a stock when a company has a tangible project, which Fortescue did not have until 2008.

Only one Australian mining analyst, the late John Veldhuizen
at the small Sydney brokerage BBY, openly supported Fortescue in the early days. Forrest’s old business partner, Warwick Grigor, never bought any Fortescue shares and was happy to tell journalists that he was suspicious of the speculative nature of the stock. “You can quote me as saying that when a stock rises on rhetoric and promotion, rather than hard-nosed facts and fundamentals, it guarantees
a judgment day, eventually, that more often than not ends in tears,” he said in 2005.

The mere perception that BHP, Rio and others were out to destroy them was enough to galvanise the Fortescue team and boost Forrest’s efforts to create a culture defined by a David-versus-Goliath struggle. It wasn’t a difficult analogy to make; Fortescue’s market value in 2004 was a minuscule $60 million,
whereas the combined worth of BHP and Rio was more than $100 billion. As John Clout recalled: “The more they threw at us the more we’d regroup, make sure we got our facts right and make sure that we got everything right and come back fighting, you know. It enormously energised the team. We were going to prove them wrong.”

By refusing to share any of their infrastructure, BHP and Rio effectively
forced Forrest to raise the money to build his own railways, which was to become the catalyst for much of Fortescue’s future growth. Fortescue’s company secretary, Mark Thomas, believes the big miners failed to understand the potential impact of their actions. “If they’d embraced us a little more, we wouldn’t be what we are now,” he said. “We’d be a little 20 million tonne per annum producer
begging for space on their infrastructure. But by choosing to block us they forced us to become their nemesis.”

I’ve met a lot of entrepreneurs, but Forrest was the best I ever saw.

—BRIAN BURKE

By 2004, Brian Burke had done his time in prison and was frantically reinventing himself as the most brutally effective lobbyist Perth had ever seen. The charismatic former Labor premier could open doors to ministerial offices and government departments
at the drop of a hat – usually the well-worn Panama that would become famous a few years later when Burke was forced to explain his actions to a corruption inquiry.

Burke served two stints in jail during the 1990s – once for rorting his travel expenses while premier and again for stealing $122,585 in campaign donations (a conviction that was quashed on appeal). By the end of that decade he
was desperate to make a quid. He went into business with his old Labor ministerial colleague Julian Grill, and the pair marketed themselves as Perth’s lobbyists of last resort.

Some in Perth were convinced Burke had been unfairly treated in the wash-up of the 1980s WA Inc. scandals and that the charges brought against him had been petty. Everyone knew he was highly intelligent. As former
prime minister Paul Keating said, Burke was “smarter than two-thirds of the WA Labor Party rolled together – that’s why he keeps bobbing up”. But plenty of others had never forgiven Burke for behaviour found by the WA Inc. royal commission to have been “improper” and “reprehensible”.

The Labor Party’s surprise victory at the 2001 state election was a godsend for Burke and Grill. Dozens of
companies that needed help with government approvals were magnetically drawn to the pair. They boasted an enviable list of old mates and contacts extending from the outer reaches of the bureaucracy right up to ministers sitting around the cabinet table. Burke’s influence within the Labor Party’s factional system also meant he held sway over those members of parliament and ambitious staffers who
needed help with fundraising or preselection. These networks of patronage meant he could easily call on favours as a lobbyist. It was a back-scratching exercise that took the art of political lobbying to new extremes. The memories of WA Inc. had been erased.

Grill, a Kalgoorlie boy, had excellent contacts in the mining industry, while Burke was a compulsive networker who was glued to his
phone, cajoling ministers and public servants to get things done for his expanding client list. In 2006, his best year in business, “Burkie” racked up a staggering 25,389 telephone calls, faxes and text messages, according to the state’s Corruption and Crime Commission (CCC), which was secretly bugging his phone lines for the entire time.

After being warned that Burke and Grill had begun
to infiltrate his government, premier Geoff Gallop banned his ministers from contact with the duo in 2004. That simply forced them to adopt more subterranean methods of approaching decision-makers, although several Labor ministers did flout the ban. “Whatever the intention, we would relish another ban,” Grill said in 2004. “The effect has been quite the reverse, as we have engaged a lot more clients
since. Brian, in particular, saw it as a personal challenge to circumvent.”

One of those clients was Andrew Forrest, whom Burke’s magic would help to become a billionaire many times over. But when Burke first met Forrest, on 5 July 2004, the former premier was far from convinced about the young wheeler-dealer’s chances of success with Fortescue. He knew the iron ore tenements the company
had inherited from Allied Mining and Processing were far from impressive and he’d heard whispers in financial circles that Forrest was trying to make a quick buck rather than build a real company. But Grill, who had known Forrest from his time at Anaconda Nickel, had more faith in the mining promoter’s abilities and convinced his business partner to meet Fortescue’s executives to see if they could
help.

Burke recalls that Forrest, at that initial meeting, was obsessed with gaining access to BHP Billiton’s railways through the application he had recently made to the National Competition Council. But Burke says he told Forrest and his team that previous state governments, including his, had failed to force BHP and Rio Tinto to open up their infrastructure because it was too legally
difficult. “I told him it’s extremely complex. Sir Charles Court tried to do it and I tried to do it, but we both failed. It was clear to me that BHP was never going to let anyone on their railway line. I told him it was absurd to embark on a strategy of putting all your eggs in one basket, that he would be tied up in the courts for fifteen to twenty years. I said, ‘You may win some rounds but BHP
and Rio will not permit third-party access to their rail lines until every single legal challenge has been exhausted.’ Well, you could have heard a penny drop. They all said to us: “‘What should we do?’”

Burke told Forrest he needed what’s known in Western Australia as a State Agreement Act – a special long-term contract between the government and a company that allows mines and infrastructure
to be built with government support. State agreements are usually difficult and time-consuming to negotiate because they send a strong signal to investors that a project has the government’s imprimatur. The major iron ore mines established by BHP and Rio in the Pilbara all operate under such agreements.

Burke and Grill say they promised Forrest they could get Fortescue a state agreement to
allow it to build its own railway
,
while providing the tiny company with a certain prestige that would boost its efforts to raise money and sign sales contracts. The pair signed on as Fortescue’s lobbyists on a retainer of $10,000 a month – plus a success fee for negotiating the state agreement. They say they told Forrest they’d prefer to take the success fee in Fortescue shares, which were then
trading at just 40 cents each. Forrest refused, offering $150,000 in cash instead. An angry Burke would never forget the millions of dollars he forewent as a result of Forrest’s staunch refusal to hand over any shares.

Within a fortnight, Burke and Grill had made startling progress. On 22 July, the state development minister, Clive Brown, sent a letter to Forrest saying he would ask cabinet
for approval to start negotiating a state agreement with Fortescue. When cabinet approval was gained, Burke and Grill went to work on the bureaucrats in various departments to sort out the details. But even the master lobbyists had trouble convincing some public servants that Fortescue had a genuine project that deserved the standing of a state agreement. “BHP had contacts in the department,” recalls
Burke. “They were saying, ‘This company is never going to get up.’ We kept running into obstacles that were BHP-inspired.”

The Gallop government’s decision to back Fortescue’s bid to enter the iron ore industry had incensed BHP and Rio, who pointed out that they had invested billions of dollars in Western Australia over decades, employed tens of thousands of people and paid $550 million to
the state in mining royalties that year alone. Rio believed that the approvals it needed to expand its Pilbara operations had been unfairly delayed because Department of Industry and Resources staff had been redirected to work on Fortescue’s state agreement. “Appropriate support should be given to companies that have invested billions of dollars in the state and have real projects and real plans,
rather than promises,” a senior industry source told the
West Australian
at the time.

Encountering resistance, Burke and Grill say they worked during 2004 to coax the bureaucrats into quickly drafting Fortescue’s state agreement. “We got them to meet deadlines – we got a bit obsessive,” Burke admits. By 28 October a draft agreement was in place and by 10 November the deal had been signed
by premier Geoff Gallop. What normally took eighteen months had been done in less than four. The announcement of the deal helped to boost Fortescue’s market value by a stunning $90 million in a single day.

But Burke and Grill – who worked closely with Fortescue’s head of government affairs, Julian Tapp – still needed to get the agreement through parliament for it to have any legal effect.
To achieve this, they faced a potentially major hurdle: parliament was due to sit for only a few more weeks before retiring for the summer break. Worse, a state election was to be held in late February, meaning it would be longer than usual before parliament would return, with no guarantee that Labor would retain power against Colin Barnett’s Liberals.

Burke came up with a novel way of rapidly
moving the Bill rapidly through parliament. He asked one of his old mates, Labor MP Norm Marlborough, to petition his colleagues for the Bill to be introduced in the upper house rather than the lower house, an unusual manoeuvre that enabled it to be passed in a single day. (Marlborough would later become a minister and kept a secret mobile phone purely for the purpose of communicating with Burke.)

When the Fortescue State Agreement Bill came before the lower house on the final day of the final week of parliament of 2004, Colin Barnett was outraged. The Opposition leader, who had served as resources minister in the government of Richard Court and prided himself on his knowledge of the industry, told parliament that such agreements were usually entered into only when the government was
“absolutely confident” a project would proceed.

Fortescue, by contrast, had not even completed a feasibility study for its Pilbara iron ore project. An angry Barnett also complained that the Bill had been pushed through the upper house “a couple of hours ago” and he was now expected to vote on it without even a briefing from the government. The future premier was mystified as to why it was
even being considered: “A state government agreement Act is a right to bank money, a right to raise money and a right to see a company’s share market price rise. It is a signal to customers, investors, equipment suppliers and contractors that a project is about to happen. That is the history of agreement Acts. However, the history is that when an agreement Act passes this Parliament, it is a judgment
by the government and the parliament that the project is at a sufficient state of development that it is about to proceed … It is not something thrown around as a political document in the run-up to an election. It is not something given to a proponent to wave at the sharemarket. The company can use its prospectus and media consultants to do that.”

Barnett also raised questions about Forrest’s
troubled past at Anaconda. “I know that the proponent has an ability to raise funds,” he said. “He did so on the Murrin Murrin project. I know that American bondholders lost $1 billion. I also know that the project got into serious difficulty. I know that a lot of people lost a lot of money on the sharemarket.”

Norm Marlborough then leaped to his feet in defence of Fortescue’s bid to take
on BHP and Rio. “The leader of the Opposition needs to stop supporting all those foreign-owned companies in the Pilbara today that are running the iron ore industry,’ Marlborough told parliament. “He ought to stop making excuses for the decisions that they make in their boardrooms in New York, London or wherever. Because the truth of the matter is that this [Fortescue] is a dinky-di Aussie company.”

After some debate, Barnett said he would not oppose the Bill because he didn’t want to jeopardise Fortescue’s chances of developing the project. The legislation passed the upper house that evening – the fastest turnaround of a state agreement anyone had seen. It only emerged later that the government had negotiated the agreement purely on the strength of Fortescue’s bullish media releases
and the “binding contract” it had signed in August with China Railway Engineering Corporation to finance and build the Pilbara railway – a deal that was later revealed as merely a framework agreement without any details of price or schedules. The government had done virtually no due diligence of its own.

Burke cites the fast-tracking of Fortescue’s state agreements – including a second one
for the mine in 2005 – as a critical development in Fortescue’s history. “All of a sudden it gave them huge credibility in China and in the US market,” says Burke. Forrest became a big admirer of Burke’s seemingly magical powers, referring to him in one meeting as a “national treasure”. Burke remembers being surprised when Forrest took him aside one day to raise concerns about the lobbyist’s weight,
even offering him to make an appointment with his own doctor to help him drop a few kilograms. Says Grill: “Andrew got really close to us, and he particularly liked Brian.”

Julian Tapp accepts that Burke and Grill did plenty of important work behind the scenes in negotiating the state agreement with public servants and that they had originally convinced Forrest to pursue the deal. But he
says the lobbyists had less influence in the government than they claimed because many were still suspicious of them. “They had their own people they knew inside the government who they would deal with, but to be seen to be involved with them was actually likely to be slowing you down, not speeding you up,” Tapp says. “I once made the mistake of taking Julian Grill with me to a meeting and I never
did it again … because they engendered such hostility in some people.”

Luckily for Burke and Grill, the state agreements were the first of many negotiations with the government that Fortescue would need to complete before it could start construction. Building an iron ore mine in the Pilbara in the mid 2000s was a vastly different proposition to the 1960s, when BHP and Rio had first charged
into the region. Back then, there was no Environmental Protection Authority or green groups to challenge projects, no native title laws to worry about and no need to pay consultants to carry out Aboriginal heritage approvals or liaise with local communities about a project’s “social impact”.

In early 2006, former ABC journalist Alan Carpenter became premier, replacing Gallop, who was suffering
depression. Carpenter immediately dropped the ban on ministerial contact with Burke and Grill, but it was a decision he would come to regret deeply. In a further stroke of luck for the lobbyists, Carpenter appointed another former ABC reporter, John Bowler, to the influential role of resources minister. Bowler was close to Grill, who had preceded him as the MP for the seat of Eyre in the Goldfields.
He also got on well with Burke, who had donated $2500 to Bowler’s re-election campaign in 2005. Bowler’s workload in 2006 was heavy; the great mining boom was in full flight and every company with the sniff of a viable project was spruiking its plans and trying to win government approval.