Investors back Fortescue’s clean energy moonshot

Peter KerResources reporter

Feb 28, 2021 – 3.30pm

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Investors have backed Fortescue Metals Group’s plan to pump a slice of its iron ore profits into clean energy generation, saying it was an important step in diversifying the company.

Fortescue surprised investors on February 18 when it vowed to devote 10 per cent of profits to the Fortescue Future Industries (FFI) subsidiary that is pursuing business opportunities in renewable energy generation and green hydrogen production.

Fortescue chief executive Elizabeth Gaines says the FFI allocation will be closer to $100 million this year. Philip Gostelow

Fortescue had earned the right to take a risk given its success in both building a globally significant iron ore business and eliminating the debt that it used to build that iron ore business, Tim Gerrard from Janus Henderson’s Global Natural Resources Fund said.

“As a single commodity business they must think about diversification and I couldn’t think of a better thing to choose for their long term future than clean energy,” he said.

“I think Fortescue has certainly earned the right and the goodwill in the market to take a risk and think about its next-generation business.”

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FFI would notionally receive more than $US827 million ($1.07 billion) in the year to June 30 based on expectations Fortescue’s iron ore business will generate a record full-year profit of $US8.27 billion.

But chief executive Elizabeth Gaines stressed that FFI projects would only be approved if they were worthy and the subsidiary would receive closer to $US100 million this year.

Mr Gerrard said he viewed the 10 per cent limit as a sign of discipline, rather than a sign of extravagance.

“To me, it is a line in the sand to give people some idea of the magnitude of the risk they are willing to take,” he said.

“The 10 per cent limit tells the market this is not some big, out of control bet. It is not open slather.″⁣

The whole world is talking about going green and decarbonisation, including the big miners, so I think it is a good idea.

— Anton du Preez, Pengana’s Australian Equities Fund

Todd Warren from Tribeca Investment Partners’ Global Natural Resources fund said Fortescue’s punt on clean energy was no different to BHP’s plan to spend billions entering the potash industry in the decade ahead.

“FFI doesn’t make any money today, but if you ask BHP how much money they have made out of potash recently, you will find they’ve put a lot of money in the hole and not got much out,” he said.

“They are not building a potash business for today or even tomorrow, they are building it for five or 10 years down the track. They see this as the iron ore of the future and that is clearly the way Fortescue see hydrogen”.

Mr Warren said the FFI projects were not as foreign to Fortescue as they may seem at face value, given Fortescue had built and owned power generation assets to support its iron ore mines in Western Australia’s Pilbara region.

“They are not complete newbies to power and renewables specifically and there is nothing to say you can’t buy the expertise as well, you just hire the right people,” he said.

“Let’s face it, no-one is an expert on green hydrogen as it stands today because it is not an economic proposition just now.”

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In a reference to Fortescue’s mammoth debt reduction campaign over the past six years, Anton du Preez from Pengana’s Australian Equities Fund said the company had proved it could be disciplined with money.

“The whole world is talking about going green and decarbonisation, including the big miners, so I think it is a good idea, it is a necessary thing to do,” he said.

“I think the internal discipline they demonstrated over many, many years, that will stand them in good stead, so I trust management in this regard, they won’t do something stupid.

“At the end of the day, it is project management”.