How much is too much when it comes to the profits of one company and one man — particularly when dealing with a state-owned resource that can be exploited only once?
Andrew “Twiggy” Forrest delivered the 2021 Boyer lecture last week and couldn’t help but drop that his beloved Fortescue Metals had made more than US$940 million in after-tax profit in December alone. Imagine measuring that in Aussie dollars before tax. We’re talking about $1.5 billion in a single month, some $50 million a day.
As so often happens with Twiggy, this disclosure to a live studio audience in Perth sailed close to the governance winds because Fortescue hadn’t actually informed the market of this achievement.
Put a fork in them, the election is almost done.
Understand what happens next with our best ever discounts.
It resulted in Fortescue making this special ASX announcement on January 21, predicting that its December half year net profit would come in at a record US$4.1 billion.
The full 15-page Boyer lecture is worth a read because it has Twiggy evangelising at his best on climate change — not unlike his performance at the recent Fortescue AGM where he was beamed in via video link from Paraguay, interrupting his world hydrogen spruiking tour. This tour even included him spending several days in a Swiss hospital battling COVID-19, something which the ASX still hasn’t been informed about.
The WA iron ore revenue and profit numbers are a bit like the $100 billion-plus JobKeeper hand-out program — we’ve never seen largesse quite like it and it would be good to know more about precisely who is benefiting.
With total WA iron ore production forecast to hit almost 900 million tonnes in 2020-21, we’re talking an extraordinary US$160 billion in industry revenue if the price holds at its current levels.
Forrest owns 30% of a business that shipped 178 million tonnes of iron ore in 2019-20, so he effectively personally profits from about 53 million tonnes of annual exports or some 6% of the statewide total.
Fortescue is capitalised at $78 billion, so his 30% stake is worth some $23.4 billion. If that sort of wealth comes from a bloke who owns just 6% of industry volumes, it suggest the whole industry is worth close to $400 billion, with BHP and Rio Tinto still representing a clear majority of this value.
On Thursday Fortescue provided justification for a super tax in its December quarter and half-year production and sales report, in which it revealed a “preliminary” profit estimate of US$4-US$4.1 billion for the December half. That will be a record for an interim result, a 60% jump on the then record US$2.5 billion reported for the December 2019 half year. A record interim dividend of US76 cents a share was paid for that period.
With a 60% rise in earnings already booked, an interim payout of US$1 a share or more is on the cards, with Forrest pocketing 30% of any payout. (He was paid a total of US$1.95 billion in 2019-20.)
BHP is expected to announce an annual pre-tax profit of more than US$20 billion in coming weeks, despite a billion-dollar-plus writedown on its NSW thermal coat assets. Juukan Gorge destroyer Rio Tinto looks set to unveil about US$16 billion in pre-tax profit. In November, Gina Rinehart’s Hancock Prospecting revealed a $4 billion profit.
Kevin Rudd and Ken Henry must be watching all this with interest given the way Forrest, Tony Abbott, Clive Palmer, Rupert Murdoch, Rio Tinto, BHP, Xstrata and others killed off their proposed resources super profits tax in 2010. If implemented, the federal government would have been pocketing tens of billions of additional annual revenue at the moment.
The Western Australian government is also in an interesting position given that it actually owns the resources.
As the chart on page 78 of the 2020-21 WA state budget shows, iron ore royalty income was only about $1.1 billion in 2007-08 before rocketing to a record $7.5 billion in 2019-20.
The forecast of a slight drop in 2020-21 is unlikely to materialise given that iron ore prices averaged about US$90 a tonne in 2019-20 but have since soared to almost US$180 a tonne (see this chart), suggesting WA state royalty income will top $10 billion in 2020-21.
Even prominent Melbourne pollster and perennial lord mayoral candidate Gary Morgan is benefiting from this extraordinary iron ore boom. His Haoma Mining, which the ASX delisted in 2018, received $600,000 from the Rinehart interests in recent weeks related to a WA iron ore royalty deal it did with Atlas Iron in 2012.
Atlas subsequently almost went broke and Rinehart then outbid Forrest and saved it with a $427 million cash takeover in 2018. She has subsequently made hundreds of millions of dollars in extra profits, a few crumbs of which are being thrown Morgan’s way, as he explained on page 10 of his latest shareholder update.
It sounds like Haoma could pocket quite a few million from Rinehart this year, keeping Morgan’s Roy Morgan Research business buoyant during the COVID crisis.
Abbott is another who is indirectly benefiting from the iron boom. The newly installed “distinguished fellow” at the Institute of Public Affairs (IPA) has a gig partly funded by the iron ore boom, given Rinehart has been the biggest backer of the IPA in recent years (although the precise contributions remain a secret).
But don’t expect Abbott to pen a reflective “I was wrong” piece on the resources super profits tax. The English-born and arguably disloyal unpaid trade adviser to Boris Johnston’s government still hasn’t been able to publicly argue that Rio Tinto should move its primary listing and headquarters from London to Australia and have a majority of Australians on the board.
This is what BHP was required to do by Peter Costello when it merged with Billiton back in 2001, and thank goodness for that.