At his peak in early 2012, Brazilian businessman Eike Batista was worth an estimated $35 billion, according to the Bloomberg billionaire index. That made him the seventh-richest person on Earth and the wealthiest person in Brazil. He was well on his way toward a goal of becoming the wealthiest man in the world. However, a year later virtually all of his wealth had evaporated, and by 2014 Batista found himself holding another rare title, that of a negative billionaire as now he owed a net $1.2 billion to creditors. Here's how he made and lost billions.
Cashing in on commodities
Eike Batista was born in Brazil in 1965. His father served as the minister of mines and energy in Brazil and as president of Brazilian iron ore giant Vale (NYSE:VALE). Given his father's positions in the mining industry, it's no surprise that Eike was drawn by the allure of making a fortune from commodities. He did just that in the early 1980s by trading gold and diamonds -- by the time he was 23 he'd made a small multimillion-dollar fortune.
Batista then launched a gold mining company, which was the beginnings of his EBX Group. By 2000 he'd created $20 billion in value by operating eight gold mines in Brazil and Canada, along with a silver mine in Chile. From there he diversified by creating five main operating companies: MMX in mining, MPX in energy, OGX in petroleum, LLX in logistics, and OSX for the offshore industry. All of his company names intentionally had three-letter combinations ending in the letter "X" as Batista believed that was the symbol for the multiplication of wealth. It seemed to work -- his net worth ballooned to $35 billion by 2012 based on strong demand for Brazil's natural resources.
The crown jewel wasn't real
Of the five main operating companies in Batista's empire, his oil and gas business, OGX, was thought to be the crown jewel. It had undertaken a vast offshore exploration program in Brazil's resource-rich deepwater oil basins. As a result of initial exploration drilling in 2007 the company was believed to be sitting on more than $1 trillion of recoverable oil and gas deposits. That promise pushed the company's value up to nearly $19.9 billion at its peak. However, oil production from those exploration areas was ultimately much less than expected. This eroded investor confidence and impaired the company's ability to keep up with its debt payments while also financing new developments. In the end, the company was saddled with $5.1 billion in debt when it filed for bankruptcy protection in 2013.
To make matters worse for Batista, before OGX went bankrupt he made a quick profit by unloading some of his stock. He has since been accused of using privileged information to make that profit and now faces insider trading charges. The Brazilian government has been seizing all of Batista's financial assets in Brazil and he could face up to 13 years in prison.
However, the financial assets being seized are a fraction of what Batista held in early 2012. This is because most of his other businesses failed to hold up as commodity prices weakened over the past few years. In fact, four of his companies went bankrupt as falling gold and iron ore prices evaporated the market for his commodities empire.
What went wrong
Batista, though, blames the collapse not on weak commodity prices, but on the fickleness of the stock market. In an open letter to Brazilians in the Valor International newspaper he wrote that, in hindsight, he would do one thing differently:
Today, if I could go back in time, I would not have resorted to the stock market. I would have a structured private-equity firm that would allow me to create from scratch and develop over at least 10 years each company. And they would all remain private until I was sure that it was time to go public.
While Batista blames the stock market for the demise of his empire, he was really done in by debt. He borrowed billions to fund oil and gas development, and the underperforming wells undermined his company's ability to pay back those loans. Sure, investors bailed, leaving the company without access to equity capital to pay back those loans, but investors could see the company was drowning in debt. Furthermore, debt forced four of his five companies into bankruptcy, not the stock market. The lesson here is clear: mixing commodities with a lot of debt is a recipe for wealth destruction.
Matt DiLallo has no position in any stocks mentioned. The Motley Fool owns shares of Companhia Vale Ads. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.