The Distillery: Fortescue footwork

Ahead of Fortescue’s production results, jotters say the miner’s decision to offload of a stake in its infrastructure assets will hinge on the iron ore price.

Fortescue Metals Group will release its quarterly production update with all eyes on whether Andrew Forrest’s ‘third force’ will offer an update on attempts to sell a minority stake in its infrastructure. Two commentators give their analysis on the state of play at FMG.

Meanwhile, the share price of mining contractor Leighton Holdings is falling, catching the attention of a respected Fairfax writer in the process, and Australia’s life insurance market is heading into very troubled waters.

But first, Fairfax’s Elizabeth Knight says Forrest has to make up his mind as to whether, in the words of another character familiar with dry and hot climates, he’s feeling lucky.

“Does he feel like taking a punt that iron ore prices will remain above $US100 a tonne? If he does, Fortescue could reverse (or at least stall again) the decision to sell a minority interest in its rail and port infrastructure business. Forrest is prepared to take risks. It’s one of the reasons he continues to be tagged an entrepreneur. Fortescue originally intended to make a decision on selling part of The Pilbara Infrastructure by the end of June but Forrest has extended this deadline by three months. The company said that the additional time was needed to sift through the various proposals of numerous buyers, but the more likely reason is the company wants to ascertain whether it can get away with retaining 100 per cent of this asset.”

The Australian Financial Review’s Matthew Stevens also considers what the situation might be like for Fortescue boss Nev Power by looking at the context with which the infrastructure stake sale was first announced.

“When Power went to the market back in December, Fortescue was emerging with some considerable credit from another existential crisis, this time the rather surprising product of iron ore prices sustaining a drift to well below $US100 a tonne…We know that Aurizon’s interest founded on Fortescue’s sensible refusal to deliver control or direction of its system of to a third party. Brookfield’s departure is said to have the same trigger. What makes that interesting and informative is that Fortescue always said it was looking at selling a minority stake, a commitment that implied plainly an intention to continue to manage the rail and port operations. The potential, then, is that buyers and sellers have been talking different languages through this process and that iron ore’s price recovery, in concert with the righting of the debt and cost components of Fortescue’s balance sheet, has eroded the leverage potential bidders expected to exercise here.”

Now that’s an interesting idea! It might be that Fortescue can’t be trampled, so the would-be tramplers are taking their boots elsewhere. We might find out whether that’s the case today.

Meanwhile, Fairfax’s Adele Ferguson perhaps reveals a little about her movie tastes in her piece this morning. Ferguson – one of The Distillery’s favourites – notes that Leighton, which is still experiencing problems in Indonesia, Australia and the Middle East, has slid 10 per cent in the last few days as fellow mining contractors succumb to the slowdown.

“Against this backdrop the move by Hochtief on July 17 to officially breach a long-term gentleman’s agreement with Leighton Holdings by increasing its stake above 55 per cent cannot be underestimated. In some ways the relationship can be likened to Tolkien’s Lord of the Rings, which is based on the story of a long-term strategy to conquer middle earth by controlling one ring that rules the other rings of power.”

Elsewhere, The Australian Financial Review’s Chanticleer columnist Tony Boyd has a concerning yarn this morning about the decision by life insurer Reinsurance Group of America to suspend all total and permanent disability quotes in Australia due to instability and unreasonable premiums. The group lost $300 million in Australia in the three months to June alone.

“Those in most danger of being hit with higher premiums are members of industry superannuation funds, which have been playing with fire by offering automatic total permanent disability cover to anyone who becomes a member of the fund. That was dangerous because automatic cover does not involve the normal life insurance underwriting practices including a health check for the policy holder. Chanticleer has heard about several financial advisers who told people to take out automatic cover even though they were ill and likely to die. Industry fund members have already experienced premium increases for TPD of 35 to 50 per cent in the past year. But that is just a taste of what is to come.”

In other company news, The Herald Sun’s Terry McCrann says the Takeovers Panel did the right thing declining to make interim orders for the refinancing deal that Billabong International has struck with Altamont Capital Partners.

In a separate piece, the News Limited veteran previews the release of a policy agenda document from the Business Council of Australia that he says will be “comprehensive” and “wide-ranging”.

In international news, Business Spectator’s Stephen Bartholomeusz notes the decision by China to remove the floor on lending rates “isn’t regarded as a revolutionary piece of financial reform”. However, it could be the beginning of a wider deregulation of the financial sector from the People’s Bank of China. 

“It is…a significant first move away from the regulated rate environment where the PBoC sets a floor price on bank loans and a ceiling (currently 3 per cent) on deposit rates. Deregulating deposit rates would be a far more meaningful, and difficult, step. Full interest rate deregulation would mean the abolition of the old Chinese model of regulating bank margins by ensuring wide spreads in order to ensure funds flowed to state-owned enterprises and large businesses.”

Meanwhile in domestic affairs, The Australian’s John Durie reports that actuaries Rice Warner have thrown their strong support behind the government’s Future of Financial Advice reforms, adding that the benefits will outweigh the costs by a factor of three times over the next 15 years.

The Australian’s contributing editor Judith Sloan argues that close competition in federal elections is not always good for democracy because it can result in a bidding war.

And perhaps underlining that message somewhat, Fairfax’s Tim Colebatch begins his analysis on the viability of an East-West tunnel in Melbourne with this quote from the state’s premier:

"I’ll urge Kevin Rudd to come down to Melbourne and ... stand at the top of Hoddle Street and have a look at the Eastern Freeway between 7.30 and 8am and I think he’ll get his chequebook out.’’

Premier Denis Napthine, July 16.

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