During the first quarter of 2008, Andrew Forrest took over the title of Australia’s richest man from James Packer. His wealth was boosted by the increase in share price of Fortescue Metals Group (FMG), an iron ore mining company that he establised 5 years ago which he now owns 36%. In contrast to James Packer who owns a well-established and a very diversified holdings in media and gambling businesses in Australia and abroad, Andrew’s fortune is just situated in FMG.
It should be noted that the market value of his Company is based on the share price traded in the exchange which takes into account not only the current mining site the Company owns and being operated but also includes all future operations and future iron ores that they’re going to mine. Share prices in the stock exchange are very sensitive to information released by the Company and some analysts. When the entity’s management or some analysts release favourable information to the public like for example, the Company discovered a huge deposit of iron ore in their mine site and the value of these is billions. This information will be incorporated into the Company’s share price as the investors speculates that the market value of the Company will grow in the future even though it has not happened yet. Even just a false rumour can affect stock prices. A false information of a mergers deal of two Companies will increase the share price of the target company and decrease the price of the acquiring company. This is because traders and investors speculate that the acquiring company believes that the target company is undervalued and will therefore buy it at a premium from its current market price.
Going back to Andrew Forrest’s riches, his wealth may not actually represent the current value of his Company. Is he able to sell his shares at the current market value? Probably not because selling such a huge number of shares will create liquidity bubble in the market causing the price to decrease. It may also bring negative signal to the market like the Company is not actually doing well and has negative prospects in the future that’s why the major shareholder is selling his shares and eventually will cause the share price to decline. In short, we can probably say that his fortune is just “in paper” and not a real wealth yet to think the Company only made its first shipment of iron ore to China this month (May 2008). There are a lot of questions to ask. Is the Company able to sustain in several years and attain stability? Do their mine sites have enough iron ore reserves that will make the Company grow and meet investors expectations? Will the management be able to uphold and maintain the current culture and structure to keep the operations going? No one knows. We’ll see in the future.
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What would happen if a Chinese firm offered to buy his stake in FMG?
Then he might get full price for his shares and really become that rich.
This is still unlikely, but after the Chinese raids on Rio it is a posibility.
He is probably making a lot of money from Dividends, so what would you suggest he invest in to Diverisfy? What has the lowest correlation coefficient to Steel?
Coconuts? I heard they can be a very good investment, with a good strong revenue stream.
Nice post Wilson.
A news report today says that Andrew Forrest’s wealth may now almost be twice that of James Packer! This is because his media and casino holdings fared poorly this year. And also Fortescue stocks have increased in recent days after Sinosteel confirmed it was in talks with an institutional shareholder to take up to 8% of the company. Fortescue shares are now trading above $10!
But I think this only proves that he needs to diversify his investments.
I’ve heard about chinese firms interested in buying his shares but I think the government is trying to block them as it may have a negative impact on Australia. At the moment there is still a possibility that Forrest might be able to cash in his shares through a block sale.
Unfortunately, the Company has not declared any dividends yet since they started operations. They will only start earning revenue from sale of iron ore this year and start reporting income and probably start paying dividends next year.
However, he can partly liquidate his ownership by selling few shares in the market and investing the money in other Companies in other industries with low correlation to steel to diversify his investments. Example of these are companies producing agricultural products like coconuts or wheat.
I don’t think he will sell his shares lah!..
already got their own railway, mine site… he probably wants to make it big like rio / bhp…
do you think the shares will go to $45 like bhp?… better buy some now since its only $10…
Andrew Forrest is on the headline again today for being the first Australian to hit $10 billion net worth! He’s now called a man of steel! Can we call him Ironman instead?
Michelle you should buy FMG shares now. I think it will still go up but probably not till $45 haha..