"Fortescue have entered a whole new playing field, and they're showing what will be achieved and proven to work in-house first. That's clearly what you and the market are overlooking.
Fortescue's in-house decarbonisation fully costed plan over the next 5.5 years is going to save them US$818 million per annum in net operating cost from 2030, at prevailing market prices of diesel, gas and Australian Carbon Credit Units.
Cumulative operating cost savings of US$3 billion by 2030 and payback of capital by 2034, at prevailing market prices.That will mean that their US$6.2bn capex will only cost them US$3bn thereabouts.
Their in-house decarbonisation plan will have a dual commercial effect on the overall business going forward."I've encountered these numbers trotted out by various posters on several occasions.
But I wonder how many people actually understand what they mean in terms of actual financial benefits and value for shareholders.
For starters, lets take the "US$3.0bn by 2023" part.
The arithmetic is simple: At US$818m savings per annum, working back from 2030 means the business should already be at the US$818m run-rate by less than half-way during 2027 (around US$550m in 2027 plus US$818m in each of 2028, 2029, and 2030).
Yet, according to the schedule of the US$6.2bn of capex which is going to be spent, by mid-2027 almost a third more will still need to be spent.
In other words, they'll already be banking the full gains when only a touch more than two-thirds of the capital allocated to secure those gains has been spent, with another two years over which the balance will be spent?
On any objective measure, that doesn't pass the pub test.
But that's the minor issue; the other point is what the Net Present Value (NPV) of this exercise is; because nominal values, while they might sound good at face value, don't reflect time value of money nor an appropriate discount rate to account for the inherent risks associated with equities, especially commodity businesses.
So in terms of deriving an NPV, this US$6.2bn-for-US$818m-Savings exercise is a simple one, which an Excel spreadsheet can be used to provide a very good indicative answer.
By way of supportive document, here is the self-explanatory pro forma table of inputs into the NPV estimate (all figures in US$bn, for ease of reference):
View attachment 6431754Of course, as is invariably the case with these sorts of discounted cash flow exercises, the choice of appropriate discount rate is a matter of subjectivity, so to avoid futile debate about the right number, I've run the NPV exercise for a range of discount rates, from those that conventionally applied to risky mining stocks (say, 12%) to low-risk, utility-type business (4%), with the mid-point being 8%.
So while everyone can write their own adventure novel in that regard, what is clear that no matter what the discount rate, this project is significantly NPV-negative (between minus $0.80bn and minus $1.59bn).
View attachment 6431784To conclude the exercise, the next logical step is to solve for the year in which the project becomes NPV-neutral (it's an easy exercise, involving a mere straightforward extension of the table above for as many years as is required).
Based on a generous 8% discount rate, it is shown that NPV-breakeven will occur only in 2039. If a more realistic 10% discount rate is applied, then we need to go all the way out to 2042 for NPV to turn positive.
So, while nominal figures might tell one story, unfortunately from a shareholder value creation that story is a somewhat embellished one.
The reality is clearly significantly different.
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(20min delay)