Fortescue’s successor?

Wednesday, 2 November 2022 — Albert Park

[4 min read]

Dear Reader,

It was the year 2002…

But it may as well have been 2022, the similarities are so striking…

Any of the following ring any bells?

In 2002, global markets were falling, with tech stocks leading the downward spiral.

Supposed ‘safe havens’ like bonds were selling off too.

This left investors just as confused as they are right now.

In 2002, inflation was suddenly a threat again.

Energy bills were spiking.

War and geopolitical crisis? Today, we have Russia/Ukraine. Back then, it was 9/11 and Iraq and Afghanistan…

Policymakers were scrambling for the ‘hard stuff’ that makes economies tick over.

And in 2002, an ultimate safety flight to US dollars was underway. (The AUD had just sunk to 49 US cents!)

Just look at how the US dollar is faring against everything else as we go into 2023.

So you can see what I mean about 2002 rhyming with right now.

But while all this was unfolding 20 years ago and garnering headlines…

…an oasis of new resource-based wealth was starting to sprout in the Australian outback.

With one tiny company (previously Allied Mining and Processing but renamed FORTESCUE METALS GROUP in 2003) laying the groundwork to RULE the iron ore boom that came next…

As The Monthly writes:

‘Few would have imagined back then that Australia’s exports of this bulk commodity would increase four-fold to more than 800 million tonnes within 15 years, or that the price would more than triple to an average of US$100 a tonne over the same period, peaking at about US$230 a tonne in May 2021. But one individual who did envisage this fortunate future was Andrew Forrest.

‘“We took the view in 2003 that China had awakened,” he reflected. Not that the two big multi nationals had woken up; they were ignoring advice from the federal government’s resources agency to expand production, which meant that the ensuing boom was as much a case of short supply as it was of burgeoning demand.

‘Forrest’s astute reading of the industry was reinforced by a friend who worked for Rio Tinto and told him the company was doing little to expand capacity. The rising demand would be driven by the steel-intensive economic transformation underway in China and other emerging Asian countries. Steel requires two key components — iron ore and coking coal — and Australia was, and still is, the world’s dominant supplier of both.

‘Forrest began in 2003 to acquire a small stake in the listed exploration company Allied Mining and Processing. In July of that year he became chairman of Allied, and by January 2005 he held a 47 per cent share in the company as a result of an options deal.

‘Forrest had turned an investment of $8 million into a stake already worth $400 million — and he had made this play even though it wasn’t until early 2005 that the iron ore price began to rally, from a lowly US$30 a tonne to around double that amount. With the company under his control, Forrest renamed it Fortescue Metals Group (FMG), a nod to the colonial benefactor of the 1861 expedition into the Pilbara.’

The rest of the story from there has
entered Australian mining folklore…

…a story of towering ambition...brilliant forecasting...consummate salesmanship…burnt bridges, missteps, and misfires…

…then, ultimately, UTTERLY IMMENSE share price gains.

$5,000 invested in 2003 would be worth…get ready for this…

…$4.28 million today. (That’s excluding dividends, and Fortescue has been paying out boatloads of those for years as well…)

Now, let’s fast-forward a couple of decades…

2022 has been SOME year in the markets, right?

US$12 trillion — gone from US stocks alone.

Also, in 2022, US$7 trillion — gone from bonds.

US$2 trillion — gone from crypto.

Global house prices — tanking for months. (With far worse to come, according to the UBS Global Real Estate Bubble Index.)

And yet, as I’ve shown in The Daily Reckoning Australia over the past few weeks, amid all this, something is stirring in the Australian resources sector. Some mining stocks have started to pivot away from the wider, tech-dominated markets.

Just as they did in the early 2000s…

I’m convinced we’re entering a NEW era for our mining sector.

One that will be quite different from the China-driven iron ore boom last time. But potentially even bigger in scale.

A new think tank in October 2022 summarised the root cause of this new boom as ‘The Geopolitics of Stuff’. Stating:

‘The global pandemic and the invasion of Ukraine are proximate causes of the current turmoil.

‘But longer-running forces are driving the seize-up in supply chains…making it unlikely to let up.’

I agree. It’s not going to let up. In fact, it could well be the singular investment story of the next few years.

Also, it’s possible that Fortescue Metals’ own story, which started 20 years ago, is about to be retold.

No one will ever pull off a complete replay of what Twiggy Forrest did at the start of the last boom. That was a true one-off. But there IS another small company I’ve been following recently that has several distinct similarities.

It’s the ‘big story’ that links them both.

Andrew Forrest ‘twigged’ (sorry for the pun) to the iron ore and China growth story well before most.

This small company, I believe, is a front-runner of the next ‘big story’.

The scarcity of rare earth metals.

Rare earths are going to be the iron ore of the next Aussie mining boom.

The supply/demand equation as it stands just doesn’t add up.

Investors currently have a sniff of what’s to come in terms of rare earths.

But no one’s putting BIG money on it.

Yet…

The same was true for the China boom when Forrest made his play in 2003.

There were signs for strong growth in the early days.

But very few were investing big in this growth story (other than Fortescue).

I think we have an unknown company trying to capture a similar set-up with rare earths.

I call it ‘The Son of Fortescue’.

And we’re going to be doing a forensic investigation of this stock, starting next Monday.

Stay tuned...

Regards,

James Cooper,
Editor, The Daily Reckoning Australia