THE founder of Fortescue Metals, Andrew Forrest, has hit back at suggestions by a US hedge fund operator, Jim Chanos, that his company was over-promoted and a "value trap".
Mr Forrest believes Mr Chanos has an active short position in Fortescue shares - ie, placing a bet that Fortescue's share price will fall. The Perth billionaire told BusinessDay he was also aware of numerous negative rumours surrounding the company, including one suggesting the Russian steel magnate Victor Rashnikov's MMK is looking to sell its 5 per cent holding in Fortescue.
Mr Forrest disputed that suggestion, revealing that until recently MMK and Fortescue had been working on a joint venture to develop a steel mill in the Pilbara region. The plan had been talked about on and off for several years. The talks were abandoned because the gas price was too high to make the project feasible, said Mr Forrest, whose complaints echo those of many large Australian businesses.
Fortescue does not consider MMK as a seller but falls shy of directly accusing Mr Chanos of starting the talk.
Mr Chanos, the boss of Kynikos Associates, exposed Enron as a fraud and famously bet against Macquarie in 2007, saying the bank's model could not last.
In a presentation to a New York private investment forum, Grant's Spring Conference, earlier this month, Mr Chanos told investors iron ore miner Fortescue had "a somewhat promotional management team".
"It's got about $2.8 billion in EBITDA [earnings before interest, tax, depreciation and amortisation] but it's got a capex [capital expenditure] program last year of $1.5 billion, and it's going up," Mr Chanos said.
"Increasingly, with any kind of reversion to the mean of iron ore prices to $US100 per tonne or less, we're going to see a dramatically lower ability to service the debt and to service the capital programs they have. And a stock price materially lower than it is today."
But Mr Forrest said Mr Chanos was a China bear - unlike BHP, Rio Tinto and Fortescue, which have been uniformly positive on the medium-term outlook for iron ore demand.
"We have seen China defy its sceptics by doing just what it said it would do. It has already delivered its 12th five-year plan, despite the smoke in the background from global economies," Mr Forrest said.
Fortescue is waging war against time, the current government, and sceptics. Mr Forrest stepped up his attacks on the Treasurer, Wayne Swan, and the Prime Minister, Julia Gillard, over the weekend, saying their ousting of the former prime minister Kevin Rudd was "in my mind the very lowest point in Australian politics".
Meanwhile, Fortescue remains on track to reach an annualised production level of 155 million tonnes a year out of its Chichester mines and the newest addition, its Solomon mine. The company is in the early stages of exploring a third area, Nyidinghu, which the company believes has a resource of about 2.5 billion tonnes which could ultimately add another 50 million tonnes a year to production.
Over the past six months,resource stocks including Fortescue, Rio Tinto and BHP Billiton have underperformed the broader market, thanks to slippage in the price of iron ore - down from $160 a tonne to $140 a few weeks ago. It is now sitting a little higher at $US148 a tonne. There remains plenty of profit margin at these price levels but the market gets concerned that bigger falls will take the gloss off the massive returns.
The big players in the iron ore industry are voting with their wallets. Fortescue, BHP and Rio are pouring unprecedented amounts of capital to increase supply from the Pilbara in what appears to be a race against time.
Getting one's hands on producing mines and infrastructure could be the fastest and most expedient way to boost production and export sales. This explains why Mr Forrest describes Fortescue as "the prettiest girl at the dance".
The Pilbara "dance" now has almost as much to do with infrastructure as it does with reserves - part of the appeal of Fortescue, which has four berths at Port Hedland and a railway.
Fortescue has been allowing smaller miners onto its rail lines but is also charging a hefty rental as a track landlord. Last week smaller producer Atlas outlined plans to undertake a study into building a new Pilbara rail line in partnership with Queensland Rail, thus allowing it to increase its export to 46 million tonnes a year.
This rail line would be open access - in much the same way QR National operates in the Queensland coal region.