Lessons for Fortescue in Twiggy's past
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Christine St Anne is Morningstar's online editor.
In a May 2001 letter to shareholders, Anglo American highlighted concerns about a resource company, citing "too much debt, over-ambitious expansion plans, poor corporate controls, unrealistic forecasts and failure to deliver".
The company was Anaconda Nickel, a previous venture of Fortescue Metals Group's (FMG) colourful founder Andrew Forrest, better known as "Twiggy".
The concerns identified by Anglo American could easily apply to the Fortescue of today. Indeed, a comparison was made between the two companies by Morningstar senior resources analyst Mathew Hodge back in 2008.
With Forrest at the helm, Hodge acknowledged Anaconda was a "pioneer with an exciting concept".
Vast nickel deposits were cheap and extensive, and if low-cost production was viable, "expansions could bring huge upside". And expand is what the company did.
The company began production on its $900-million Murrin Murrin nickel project four years after it floated.
Further nickel production began in Mount Margaret in Western Australia (WA). A joint venture was started with the now defunct Centaur Mining and Exploration to develop a number of projects in WA. By 2010, the company was producing 25 per cent of the world's nickel supply.
However, start-up issues plagued Murrin Murrin. Anglo American, which had a 25 per cent stake in the business, pushed for new management. Hodge says Anglo American took the unusual step of publicly criticising the board. By April 2001, the company had "lost confidence" in Anaconda.
"Anaconda's governance practices and speculative style of its management do not provide the sort of leadership required to elevate Anaconda from its current status into a responsible, reliable, world-class producer," Anglo American said.
Forrest resigned from the company in November 2001. Murrin Murrin was restructured and expansions were put on hold. Anaconda eventually became Minara Resources.
In his 2008 report, Morningstar's Hodge wrote that "viewing Fortescue through Anaconda's prism shows interesting similarities".
"Financing was via US debt. Construction and expansion plans fast tracked. Huge deposits in vast exploration acreage, but lower grade and previously considered marginal," Hodge wrote.