China dealings threaten Forrest's dream

Court case gives an insight into the mining mogul's business deals, writes Chalpat Sonti.

HE IS the man who built two empires from little more than bare ground in the middle of nowhere.

Andrew "Twiggy" Forrest has been the poster boy for the economic boom, the man who took over a struggling miner and turned himself (briefly) into the richest man in the country.

It was quite a reinvention for Forrest, after being ousted from the board of Anaconda Nickel during its near collapse in the early 1990s. The miner had convinced everyone from the toughest mining players in the business world to the convicted criminal and former FAI boss Rodney Adler to sink billions of dollars into the project in Western Australia's Goldfields.

At one time Adler announced "we are witnessing the growth of a great entrepreneur".

But his dream of becoming one of the biggest nickel miners in the world collapsed under Anaconda's debt burden as the project became plagued by cost over-runs. Forrest packed his bags, his reputation shot. Anaconda got a makeover as two international mining companies, Anglo American and Glencore, sought to protect their investment, and everyone thought they had heard the last of the former stockbroker and alpaca farmer.

So when Forrest re-emerged at the head of the iron ore hopeful Fortescue in 2003, many said he could not break the cosy Pilbara duopoly enjoyed by BHP Billiton and Rio Tinto. The majors were summarily dismissive.

But there was no denying Forrest's single-mindedness in pursuing his dreams.

Everything was apparently going swimmingly in 2004. Forrest signed deals with three Chinese companies to build the $1.85 billion infrastructure required for the project. But as a result of statements made during those early heady days, Forrest now faces court proceedings in Perth, where the Australian Securities and Investments Commission says he and Fortescue misled the market by referring to those deals as "binding contracts", when they were merely "framework agreements".

If convicted he could face being banned from the board of the company he holds a more than $2 billion stake in.

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So just how did the deals with the Chinese go wrong?

Evidence statements in the proceedings shed light on the company's difficulties, and some of the methods Forrest used to try to salvage the situation. The unravelling seems to have begun even before the deals were signed.

In April 2004 a Fortescue delegation travelled to China. There they met a Hong Kong-based money man, Lawrence Xin, who says he told Forrest of the need to deal with the National Development and Reform Commission, the main body that approves Chinese investment overseas.

Xin told the court from Tokyo, where he is undergoing treatment for cancer, that Forrest paid little heed to this advice.

In August Forrest travelled to China to sign a deal with the China Railway Engineering Corporation to build a rail line from the mine to Port Hedland.

It was on this trip that he met the NDRC deputy director He Lianzhong, a former military officer who is now in jail for accepting $200,000 in bribes, in matters unrelated to Fortescue. He told Forrest about the need to grant an equity stake in Fortescue in return for Chinese backing.

Forrest, in turn, talked about his friend John Howard, the prime minister, backing his project. "We have a problem and the prime minister has contacted me to solve this problem," Forrest told He, referring to the iron ore duopoly. The Fortescue director Chris Linegar queried the CREC deal at a board meeting shortly after it was signed. He wondered if CREC had the authority to sign such a commitment and was told by Forrest that it was "very evident" the NDRC, the "ultimate decision-making level within Chinese government" was very supportive.

Forrest continued on his spruiking way. In an email he intended to send to the veteran journalist Trevor Sykes in October Forrest wrote that "between us girls" Fortescue had signed a deal with the China Harbour Engineering Corp to build the port facility at Port Hedland, and there was "also a chance" of a deal with China Metallurgical Construction Corp regarding mine infrastructure. The email was dated 19 days before Fortescue informed the market of the deals.

But those agreements were beginning to unravel almost as they were signed. The pressure ramped up through November, as the Chinese continued to push the issue of equity. They wanted 80 per cent; Forrest offered 30 per cent.

No deal was done and CMCC engineers visited Fortescue to do due diligence later in the month. They brought up Forrest's past, including his involvement with Anaconda.

"All of the other Australian companies we have visited … have warned us about Anaconda and Forrest's involvement in it," one told a Fortescue engineer, Catherine Li.

Forrest and Ma were due to meet in Perth in January 2005. A month earlier Forrest had faxed Ma, a former mayor of China's steel capital, Anshan, saying he was "pleased to confirm" the "enthusiasm and support"of Howard and the treasurer Peter Costello for the project.

But things were not so rosy at the meetings. According to a Fortescue executive assistant, Wei Fisher, the first meeting had not gone well, with CMCC querying its iron ore resource.

Forrest called in his troops to discuss strategy. "We have no money. We might have to think about a joint venture," Forrest is claimed to have said.

Ma said the agreement he had signed was "only" a memorandum of understanding.

Forrest then offered CMCC a 30 per cent stake and gave Ma three weeks to consider.

Fisher claims Ma sent Forrest a fax on February 3, about two weeks later, saying the deal was off. Forrest's response was to say: "This is ridiculous. If anyone tells the press we have had it."

A week later he wrote to Ma, withdrawing Fortescue's offer and pointing out other sources of financing had become available to the company. Forrest prefaced his withdrawal by saying "as we have not heard from you in this (21-day period)".

Forrest and Fortescue turned again to Xin, who they had not contacted since that initial meeting. Xin said he was asked by his friend and substantial Fortescue investor Kie Chee Wong, a Sydney-based businessman, to go to Perth to see Forrest.

When he found out that Fortescue was dealing with the NDRC's He, an old school mate, Xin offered to mediate.

A phone call was made, and a barely awake He, who was in Kenya, was surprised to hear from someone he had not spoken to for five years.

Xin claims He told him that Wong should sell his shares in Fortescue as the Chinese were about to teach the company "a lesson".

The message was relayed to Forrest, who wrote to He thanking him for his "continued support" of Fortescue's project.

About a month late an article appeared in The Australian Financial Review in which the Chinese said the contracts they had signed with Fortescue were not binding.

Fortescue scrambled to respond. A public relations consultant, John Field, added into his draft media release information explaining "framework agreements" as precursors to full commercial agreements, and wrote they "nonetheless are binding".

Forrest wondered if the release was consistent with what the company had previously announced.

Field replied, saying the word framework had never before been used but was being included and explained because it was in the agreement.

"What? Where is the framework?" Forrest asked.

Field shot back.: "On the first page of the signed agreement you are proposing to release to the market - it says framework agreement!!"