I think $68 might get touched in declines in Gold but I think we both agree, gold prices will rebound and so will the price of BHP. I expect $100 BHP by next year. JMHO
(Fortune Magazine) -- I'm wedged into a corner of the Wild West Saloon in Kalgoorlie, Australia, listening to a couple of investment bankers from Sydney discuss the tight market for Maseratis, when my new pal Ashok Parekh, the saloon's owner, interrupts.
"Hey, Fortune," he shouts over the AC/DC on the jukebox, placing a racquetball-sized piece of raw gold in my hand. "Take a look at this."
Parekh, 51, is a local kid who made good -- more precisely, a local of Pakistani descent who was born in Dublin and moved to this mineral-rich part of Western Australia as a teen. By day he runs an accounting firm that keeps the books for hundreds of private gold miners. (Thus the supersized $30,000 nugget, which he bought from a client two years ago.)
But it's his role as the proprietor of the Exchange Hotel, which houses the saloon -- he also owns the Palace Hotel and its Gold Bar across the street -- that makes him possibly the most popular man in town. He also has an awesome middle-part haircut, which looks to be modeled on that of Journey singer Steve Perry, circa 1981.
Over his shoulder I spot one of the pub's porn-star-tan, bikini-clad waitresses -- they're known in these parts as "skimpies" -- climbing up on the bar, topless but for her pasties, to perform an evocative and startlingly athletic dance routine. The other half-dozen barmaids on duty have also removed their shirts. (That means the beer pitcher they use to collect tip money must be full again.) With his eyes on the dancer, one of the bankers expresses surprise that so many highly attractive local lasses are interested in serving drinks in nothing but a G-string.
"Oh, no," says Parekh, smiling. "I flew in a dozen girls from back east. Yeah, got to have the best this week." Pausing, he gestures at the crowd: "It's all about promoting mateship."
"To mateship!" says the banker, lifting his pint.
Fortune Global 500
This is not just another night in the outback. It happens to be the final evening of debauchery at Diggers & Dealers, the biggest mining conference in the Southern Hemisphere and possibly the rowdiest corporate confab anywhere. For starters, it's in Australia, where quaffing copious amounts of beer is a national pastime. But it's also in Kalgoorlie, one of the few places on this island continent where you might actually see a real-life Crocodile Dundee belly up to the bar.
The Exchange and the Palace were built during the 1890s gold rush that spawned this desert town, 350 miles inland from Perth. The conference itself started 15 years ago when the former owner of the Palace got together a couple hundred local gold prospectors who were looking for investors and hired some ladies from a local bordello to serve drinks.
That frontier mindset is still in effect. For three straight nights the moneymen from Sydney and Melbourne have been drinking -- in many cases until 5 a.m. or later -- alongside local miners in dusty work clothes. If they were at the Exchange, they even got treated to at least one fistfight that turned into an Ultimate Fighting-grade pummeling before the bouncers stepped in.
The gonzo spirit of the conference hasn't changed much over the years, but its scope and influence has. This year there are a record 1,700 attendees from all areas of the mining world. (That's the maximum that can be squeezed into the one-acre tent on a local mining college's campus that houses the bulk of the official daytime events.)
Tonight at the Exchange are a good many of the mining executives and bankers who run Australia's resource economy, scores of men and a handful of non-"skimpy" women -- swilling pints, glancing up at Aussie-rules football on the 20-odd TVs, and trading tales of 10-cent stocks that now trade at $3.
Life is so good for them at the moment that it's a wonder they're not all up dancing on the bar themselves. During the past five years the Australian stock market's benchmark index, the ASX 200, has produced a total return of 170%, reaching new highs regularly this fall. Over the same time span the ASX index of mineral stocks has doubled that performance, returning 340%.
What's driving all this is a mining boom unlike anything this natural-resources-rich country has ever seen. Prices of all kinds of metals have been skyrocketing in recent years -- in large part because of increasing demand from China.
Australia is the world's second-largest producer of gold (up 150% in price in the past five years), zinc (up 250%), and uranium (up 750%). It's the third-largest producer of nickel (which has more than tripled in price) and the fifth-largest producer of copper (which has almost quadrupled). In short, it's a good time to be digging stuff out of the ground Down Under.
The Aussies are convinced that the party won't end anytime soon either. Everyone you speak to -- from mining executives to government officials to miners themselves -- believes that the massive economic growth of China and India will drive unprecedented demand for resources over the next two decades.
If this superboom pans out, the biggest economic opportunity for Australia will probably be in mining a not-so-sexy yet economically crucial commodity: iron ore. The raw material in steel is mined and exported in far greater quantities than nickel and copper and the like. Global iron ore production reached 1.7 billion tons last year, up from one billion in 2000. Australia is the largest exporter of iron ore in the world, and China's insatiable demand for it -- to build skyscrapers, cars, and washing machines -- is growing faster than analysts can reset their estimates.
The price of iron ore has more than doubled in the past three years, to a benchmark price of $51 a ton, and is projected by analysts to rise 30% or more again next year. The country's two largest producers of the metal, Australian mining giant BHP Billiton (Charts) (with a $230 billion market capitalization) and Anglo-Australian powerhouse Rio Tinto (Charts) ($120 billion), have each pledged billions of dollars to increase production by two or three times over the next five years. (In fact, BHP is so confident about the broader boom that it initiated a takeover bid for Rio in early November.)
The iron rush is no longer confined to giants. A host of smaller companies --virtually all with soaring share prices -- are racing to cash in on what has long been BHP and Rio's exclusive turf.
Just a few years ago an independent, or "junior," iron ore miner was virtually unheard-of. Now some 50 companies have entered the iron ore business in Western Australia. Increasingly they are being financed by direct investments from Chinese companies eager to lock up new sources of supply. No less an eminence than Chinese President Hu Jintao stopped in Perth in September to tour an iron ore smelter and other facilities.
On the last day of Diggers, one of the prime beneficiaries of the euphoria flew in and took the town by storm. His name is Andrew Forrest, and he's a high-profile and controversial figure in the Australian resource world. He founded his iron ore company, Fortescue Metals Group, in 2003 and has become a billionaire several times over as his company's stock rocketed over the past year -- despite the fact that he has yet to ship an ounce of ore to his customers in China.
In front of a packed house that afternoon, he talked about Fortescue "upsetting the oligarchy" of BHP and Rio and fended off skeptical questions from the press about his ambitious infrastructure-building schedule. At the gala wrap-up dinner, he received the Dealer of the Year award in recognition of the $3 billion in financing he had secured -- mostly from U.S. and European investors. And then, inevitably, he hit the Exchange for some celebratory pints with his wife and his executive team, staying out till 1:30 a.m.? Not that Parekh was surprised. "Oh, yeah," he says. "Andrew's a good bloke."
That may be. But he's certainly a perfect example -- actually, one of several I came across Down Under -- of the potentially explosive benefits of being on the right side of a once-in-a-lifetime boom.
The following day I went to see Forrest at his office in Perth, the bustling capital of Western Australia. The coastal city combines the surfer sensibility and perfect weather of San Diego with the go-go feel of a boomtown. About two million people -- or 10% of the country's population of 20 million -- live in Western Australia, which is almost four times the size of Texas and produces about 60% of the country's exports. Perth, with about one million residents, is the only big city in this suddenly flush region.
The effects of economic expansion on the city are manifest. Luxury retailers such as Gucci and Hugo Boss have recently come to town. Sales of Lamborghinis, Ferraris, and Bentleys are spiking. Home prices have averaged a 33% annual gain over the past five years. Property expert Collier International recently declared Perth the tightest market for office space on the planet, with a vacancy rate of just 0.7%.
On the day of my visit to Fortescue's headquarters, on the second floor of the Hyatt Centre, there was a palpable sense of urgency inside -- a reflection, perhaps, of the breakneck pace at which Forrest is attempting to build what he calls the "new force in iron ore." Most of the roughly 500 employees in the office were eating lunch in their cubicles while a large digital display counted down the time remaining for the company to meet its target of "first ore on ship" in mid-May (or 234 days, 18 hours, 18 minutes, and 49 seconds after my arrival).
Despite the celebration the night before, Forrest was looking fresh. Short and ruddy-faced, with reddish curly hair, the excitable 45-year-old didn't waste any time launching into his pitch. He led me to a seven- by seven-foot map of Fortescue's holdings in the Pilbara, the 193,000-square-mile area of northwestern Australia that is the heart of the country's iron ore industry.
We have [15,000 square miles] here -- an area the size of Switzerland -- in one of the richest ore bodies in the world," he said. "We've got massive resources. And there is a massive market demand in China. Connect the two and you've got a massive business opportunity and tremendous shareholder value."
Forrest makes it sound simple. (And, of course, "massive.") But plenty of Australians are skeptical of the man and his plan, in large part because of his colorful past. His great-great-uncle Sir John Forrest was a famous explorer who became the first premier of Western Australia.
In his own career, Forrest first attracted attention as a hard-charging, Harley-riding stockbroker in Sydney in the '80s. Ever since, he has shown a penchant for ambitious and sometimes wacky propositions -- like the time he rounded up $2 million in capital to import alpacas from Chile -- which often seem to end in lawsuits.
In the '90s he led a company called Anaconda Nickel, which made a huge bet the metal could be successfully extracted from clay in a remote area of the outback using an experimental technique pioneered in Cuba. He raised more than $1 billion to get the project off the ground, but construction delays and technical setbacks eventually sent it spiraling down, and Forrest was pushed out. Today renamed Minara Resources, the company is one of the world's biggest nickel miners.
Forrest is an exceedingly gifted promoter. And this time he may actually be on the verge of gigantic riches. On paper he already has them. Since the beginning of 2006, Fortescue's stock has risen from around $5 a share to $45 at presstime, giving it a market cap of $12 billion. Forrest himself owns 36% of the shares outstanding, which makes him the third-richest person in Australia.
Also benefiting nicely are the U.S. investors who provided capital when his fellow Aussies were sitting on their hands. One of his biggest backers is Leucadia National (Charts), a New York City holding company that put in $400 million in 2006 and received a 10% equity stake at $11 a share, which is now worth more than $1 billion on paper.
Is Forrest bothered that not all of his old mates back in the Sydney banking world have bought into his story? "I love it! I love it!" he says gleefully. "And they can stay in charge of their underperforming portfolios. They clearly haven't bothered us, but I do feel sorry for their investors -- the mums and dads out there who probably don't know any better -- who might ask, 'Why, in my portfolio, don't I have the best-performing stock in the resources sector in Australia?'"
The scale of what Forrest is trying to accomplish is stupendous: Five years after he launched the project, Forrest plans to begin shipping iron ore to steel mills in China next year at a rate of 45 million tons annually and raise that to 100 million tons within a few years. For context, BHP produced 108 million tons in the Pilbara for the 12 months ending in June, and it has been mining there for about four decades.
There are some details to take care of first. Like finishing the 160-mile railroad he's building to move the ore from his Cloud Creek mine site to the $2 billion facility he's still building in Port Hedland. He can't afford delays. With $200 million in annual interest payments to make on his junk bonds, cash could get tight if the project falls behind schedule.
But if Forrest manages to get everything to work, Fortescue will serve as a market validation for other new players around Australia -- which is why so many of them are rooting for him. "I hope Andrew makes it, and I believe he will," says George Jones, a 35-year industry veteran who is chairman of two junior iron ore miners, Gindalbie and Sundance. "If he does, it's good for the lot of us."
Report: Rio Tinto may answer $131B bid On Nov. 22, 1952, a 43-year-old farmer and former asbestos miner named Lang Hancock was flying himself and his wife from their estate in the Pilbara to Perth when, according to Hancock, they encountered storm clouds and he had to take his single-engine Auster down low, through the gorges of the Turner River. "I noticed that the walls looked to me to be solid iron," he said later.
At the time the Australian government believed that the country's iron ore resources were scarce -- so much so that there was a ban on exporting the metal. The Western Australia government prohibited would-be miners from even staking claims for iron ore.
But Hancock began flying back to the area to gather ore samples and quietly have them tested. He soon realized that he'd found one of the world's great metal deposits. He spent the rest of the decade lobbying to lift the restrictions, and by 1961 he was able to begin filing his claims. Hancock's patience was rewarded. By the time he died in 1992, he was one of Australia's richest men. And by bringing in Rio Tinto as a partner to develop his claims, he helped lure bigtime mining to the Pilbara.
It is not a hospitable place. The climate is arid, and the land is red and dusty. In the summer the temperature is usually brutally hot. One town, Marble Bar, once recorded 160 straight days of 100-degree or higher temperatures. Major cyclones hit the west coast two to three times a year.
Today about a third of the world's exported iron ore is produced in the Pilbara, the vast majority by BHP and Rio Tinto. To get an idea of the scale of operation that Forrest and the other startup iron ore companies are attempting, it helps to examine how the process of extracting and moving ore works at a site like BHP's Mount Whaleback, the largest single-pit, open-cut iron mine in the world. The mine has been producing a very high-grade ore -- up to 68% iron out of the ground, enough to toss directly in the blast furnace at the steel mill -- since it opened in 1968, and BHP says that it has another 20 years of mine life. It is 3.5 miles long and a mile wide.
Mining goes on 24/7 at Whaleback all year. The method for extracting the ore is relatively straightforward: Four or five times a week the workers use explosives to blast it out. Then one of the front-end loaders dumps up to 240 tons of ore in one of 56 trucks, which are coordinated by a central computer system that routes traffic for maximum efficiency. The trucks transport the ore to the primary crusher to break the boulders into football-sized chunks. In the secondary crusher they're reduced to grapefruit size. Then the ore is put on a conveyor belt and loaded (at a rate of 14,000 tons per hour) onto a train for the 265-mile journey to Port Hedland on BHP's private heavy-haulage railway.
A typical train is about two miles long and has six 4,000-horsepower locomotives pulling 300 cars, with a total of about 24,000 tons of ore. Once it reaches the port, the ore is crushed a third time and dumped into stockpiles. It takes about 35 hours for conveyors to load each 1,000-foot-long ship with about 220,000 tons of ore. Then it moves off to Japan, South Korea, or most likely China.
If Andrew Forrest is the rebellious nouveau billionaire of iron ore -- tapping the capital markets to construct an empire overnight and thumbing his nose at the established powers -- then Clive Palmer is somewhere on the other end of the spectrum. He has spent the past two decades biding his time and waiting for a chance to develop his claims in the Pilbara. Now the market has come to him.
Like Forrest, Palmer has signed multibillion-dollar deals with Chinese steelmakers in the past year -- but he is operating with a different business model altogether. For starters, he has no intention of building or managing a public company with thousands of employees. His private company, Mineralogy, employs just over a dozen, and he's not spending a penny to build a mine or a port.
Instead he negotiated a deal with his Chinese investors to build the infrastructure: Hong Kong-based Citic Pacific and Beijing's Shougang Steel are investing more than $4 billion. Mineralogy's haul: more than $400 million upfront in the past year, plus annual royalty payments that should be worth hundreds of millions more down the road.
Despite his passive role, Palmer, 52, is hardly a modest, retiring type. He dropped out of college at age 20 to sell land and "retired" eight years later after building a $40 million fortune. A few years ago he taught some business classes at Deakin University near Melbourne, and ever since he's been calling himself "professor." After collecting his payments from the Chinese, he bought himself two Boeing MD-80 jets and a DC-9, which come in handy for shuttling workers and visitors to the Pilbara.
Following his deals last winter, Palmer made his debut on an Australian magazine's list of the continent's richest people, with an estimated worth of around $1 billion. But he claims that is greatly understating his wealth, sort of like "undercooking a steak."
If you factor in the royalty payments, he thinks he should probably be worth about $5 billion. But of course the deals he has completed so far give his Chinese partners the rights to only three billion tons of ore. All told, Palmer claims his land has about 160 billion tons of ore -- or more than Rio Tinto and BHP combined. "It's a funny story, isn't it?" he says. "Because you could multiple that out, and we'd be the richest people in the world."
Palmer stumbled into the world of Pilbara iron ore in 1985, when he decided to un-retire and get back into the business world. After reading that the Soviet Union was interested in joint venture deals to develop mineral projects in Australia, he heard from a friend that an American company, Hannah Mining, was looking to unload a significant plot of unmined land near Karratha (see "Region of Riches" map). He snatched up the mining claims. Then he flew to Moscow where, he says, he received an unorthodox barter offer. In exchange for the claims, the Russians offered to give him $3 billion worth of cinnamon.
"Apparently Chairman Stalin had ordered them to stockpile cinnamon after a shortage in the '50s, and nobody ever countermanded the order, so they had quite a lot," he says. Palmer turned down the Soviets, thinking that he'd develop the land himself and not realizing that it would take him more than 20 years to finally get a deal done.
Early on, a lack of power plants in the Pilbara was a problem, but recent discoveries of natural-gas reserves have solved that. There's also the fact that Palmer's ore is magnetite, which means that it comes out of the ground only about 30% iron and must go through a costly concentration process before it can become steel. All of a sudden, however, a lot of things that didn't appear economically viable a few years ago make a lot of sense at today's ore prices.
Fall of Australia's cardboard-box king To see Palmer's Pilbara property up close, I board a jet from Perth with Andrew Caruso, managing director of Australasian Resources, a public company to which Palmer recently sold a stake in his mine project in exchange for 70% of the company's equity, and Palmer's longtime right-hand man, Vimal Sharma, whom Palmer met in Fiji while trying to develop a casino project back in the mid-1980s.
After a two-hour flight to Karratha on the northwestern coast, we jump into a four-seat helicopter that takes us to Preston Island, a speck of rocky land about a half-mile offshore. Soon it will be connected to the mainland by a jetty that will define the man-made harbor. Just above us a single osprey sets its wings to hover in the wind, sliding ever so slightly to its left.
"This is where professor Palmer's port will be," says Sharma, and with a sweeping motion of his right arm he summons a vision of conveyor belts loading the ore onto ships for a quick departure out to sea. Citic Pacific is shouldering the cost of construction, and it has hired one of the largest contractors in China, MCC, to build it. When the port is completed in 2009, the stockpile area will hold up to five million tons and the facility will be able to load 150,000 tons a day onto ships, for a total capacity of 24 million tons a year.
With the sun shimmering across the Indian Ocean to the west, I mention to Sharma that it's amazing to contemplate such a massive operation rising up here. He laughs and says he's amazed at how the Chinese partners seem to take it all in stride. "We've had lots of Chinese officials out on this island, and they always say, 'Okay, great. Let's pick up some seashells!'"
After lunch we jump in a four-wheel-drive and motor up into the more mountainous, inland area of Palmer's property. Over half of Palmer's Pilbara land is made up of jagged, hilly terrain filled with gorges. The rocks here are roughly 2.5 billion years old. As far as the eye can see, the ground is burnt orange from the slabs of oxidized iron that have pushed up to the surface over the eons and broken into rocks and dust.
As we bump down the path, a pair of kangaroos hop along at high speed to our left, and a third flees to our right in front of exposed red outcroppings of ore. Says Sharma: "Usually we get to right about here, and the Chinese say, 'Okay, we get it. You've got tons of iron. Why does God discriminate and give all the iron to Australia and not enough to China?"
Actually, China is the world's largest producer of iron ore. Last year it mined 520 million tons. But much of it is low quality, and the country can't keep up with its own demand. Because of that insatiable appetite, Merrill Lynch analysts in Sydney estimate that China is responsible for 80% of the growth in the iron ore market this year. "Price is important to them," says Palmer. "But it's also about locking up the resources they need down the road."
Would you buy a bridge from this man? The Australians have a catchphrase for the gravity-defying supercycle of commodities demand that they believe lies ahead: "stronger for longer." Folks Down Under are taking the concept -- that they are living through a historic economic event, driven by China's and India's growth -- extremely seriously. One of Australia's most respected economists, Ross Garnaut, predicts that the boom is only getting started. He estimates that in 20 years China might well use more resources than all the countries in the developed world do today.
On a sunny afternoon I visited Xiaofei Cui, the 35-year-old managing director of Sinosteel Australia, in his office on the 42nd floor of the Bankwest Tower in downtown Perth.
Sinosteel is one of China's largest importers of ore. Its investment in the Channar mine with Rio Tinto in 1987 was the first joint venture mining deal by a Chinese company in Western Australia. Recently it has formed a joint venture with a junior iron ore miner and is exploring deals with a pair of others.
Cui is wearing metal-rimmed glasses, a gray pinstriped suit, and a brown sweater. As we sit across from each other at the conference table in the boardroom, a sweeping view of the Swan River below us, he seems extremely wary of my questions. But he perks up when I ask him how he identifies profitable deals for his company.
"Profitability is only one of the criteria," he says. "Our investment is based on a long-term strategy. We want to bring harmony to the relationship between China and Australia." As long as he brings his checkbook, it should be a strong and long mateship.
Reporter associate Doris Burke contributed to this article.
News 
Market Data 
Discover 
AI
