Fortescue’s revolving door must stop

Unfortunately, Forrest didn’t front Monday’s call with analysts and media, which ostensibly was to discuss the group’s 2023 full-year profit. Instead, Hutchinson was left to claim that Hick’s resignation had been mutual and friendly, and sell this shock as a chance to “expedite” the elevation of chief operating officer Dino Otranto to the mining boss role.

Otranto is very highly regarded inside Fortescue, but the lack of explanation of Hick’s departure and the attempt to spin Otranto’s appointment as planned is frankly an insult to investors – as analysts led by Goldman Sachs’ Paul Young rightly told Hutchinson.

Forrest might like to play the scrappy-underdog-made-good card and there is unquestionably a mercurial element to his leadership style that has delivered huge returns for investors and taxpayers.

Double standards v the ‘dinosaurs’

But those 2023 results are a reminder of what this company has become: a $64 billion iron ore giant with annual revenue of $26 billion, 175,000 shareholders and an ambitious plan to deploy billions of dollars chasing an ambitious green hydrogen vision.

This really is the third force of Australian iron ore. But its size and scale demand strong, stable and consistent governance, not a revolving door in the management suite. Instead, the company has farewelled a CEO and a CFO – Ian Wells – in the course of eight months.

Maybe BHP and Rio are dinosaurs that lack the ambition and innovation that Forrest has brought to Fortescue. But imagine for a second if BHP and Rio’s chief executive were out the door in six months. Investors quite rightly would be howling about a failure of succession planning and leadership standards, and looking for heads to roll at board level.

Of course, Fortescue insiders rightly point out that part of the company’s magic comes from the very fact that is it not BHP and Rio; had Forrest and his board run the business in the same way as those two giants, then Fortescue would not have pursued the projects it has, nor introduced the innovations it has, nor even made the crazy-brave call to take on iron ore’s established order in the first place.

Insiders paint Hick’s departure as an example of this mindset: when a change needs to be made, it’s made quickly. What matters is what’s best for the business, not what makes the board look good.

It’s a good point about the company’s culture. But as CLSA analyst Robert Stein pointed out on the Fortescue analyst call, another big part of the group’s competitive advantage has been the ability for generations of Fortescue management, particularly under former chief executives Nev Power and Elizabeth Gaines, to create a culture of continuous operational improvement, finding cost savings and productivity improvements in a way its rivals have often struggled to match. Is there a risk this culture is damaged by executive turnover?

Otranto says that’s not the case, and insists the culture remains strong and executive turnover remains relatively low; Fortescue’s 20,000 staff are swimming, rowing and galloping in the same direction, he says.

Nonetheless, minority investors will want directors to stay alive to cultural risks. On the day Fortescue revealed Hick’s departure, it announced that the company’s lead independent director and deputy chairman of the board, Mark Barnaba, will relinquish that role in calendar 2024, after holding the position since November 2014.

Investors will hope the remaining independent directors – Sebastian Coe, Jean Baderschneider, Penny Bingham-Hall, Li Yifei and new director, former CSIRO boss Larry Marshall – will ask hard questions of executives and executive directors about this leadership mess.

Otranto’s challenges are not insignificant. The 2023 results suggest he starts from a strong base – record iron ore shipments, solid cost control, and the third-highest underlying earnings in the company’s history, despite pressure on iron ore prices.

But the shadow of a slowing China looms large over the iron ore sector, and Fortescue’s mining business has guided to higher capital expenditure, higher costs and tepid growth in shipments, with any rise on last year likely to come from the ramp-up of the Iron Bridge magnetite project, which has had a somewhat rocky road to establishment.

Indeed, it was subject to another $1 billion write-down on Monday, cutting the carrying value of the asset by a third while it is still in its ramp-up phase in a move that clearly surprised investors.

FFI is tipped to announce the flagship projects it will pursue this year. But there are signs the leash is being tightened there, too. Guidance that 10 per cent of Fortescue’s mining profits would be poured into funding FFI has been rescinded; now all FFI projects will have to compete for capital with every other project in the group.

Shareholders sent Fortescue shares down as much as 6 per cent on Monday, which probably reflects concerns over Hick’s departure and fears that FFI could now end up with much more than 10 per cent of Fortescue’s mining profits.

Hutchinson says Fortescue will put capital into the projects that offer the best returns for shareholders, but analysts including Barrenjoey’s Glyn Lawcock questioned whether the returns on Hutchinson’s FFI’s energy projects would ever eclipse those of Otranto’s mining projects.

Hutchinson remains resolute that FFI’s projects will be winners, and stresses that the energy projects and mining projects he and Otranto bring to the board will look different, not just in terms of the returns involved but also of the level of risk.

“So the board will have to look at all the risks involved in assessing which is the best place to put capital.”

How that plays through will be closely watched, and it may be that the investors can have the best of both worlds; if FFI projects have an average return profile above 10 per cent, for example, and mining projects deliver returns above 20 per cent, both could prove lucrative.

As executive chairman, Forrest will be key decision-maker. He is obviously a man on a mission, and a leader unafraid to make big calls very quickly.

Over Fortescue’s life as a listed company, investors have won big from backing Forrest, but days like this are a reminder that there are bumps along the way, despite Fortescue’s sheer size.