What Australia’s best funded start-up means to FortescueIt makes...

What Australia’s best funded start-up means to Fortescue

It makes sense for iron ore billionaire Andrew Forrest to fund his green hydrogen ambitions through FMG because of the risk mitigation from China sourcing its iron ore elsewhere.

AFR Feb 16, 2022 – 7.59pm

During its short life, Fortescue Future Industries has attracted more than its fair share of critics, including those who claim it should not be funded by Fortescue Metals Group.The purist iron ore investors, who bought FMG for its strong cash flow generation and its capacity to pay market-leading dividends, object to 10 per cent of FMG’s profits going to FFI each year.FMG chief executive Elizabeth Gaines says the company’s hydrogen strategy will have no shortage of funding. David RoweThe argument against FFI being inside FMG is framed as a governance problem for the FMG board because of the conflict of interest between Andrew Forrest’s green hydrogen ambitions and the interests of FMG shareholders.Safety netWhat this ignores is the scale of the green energy growth option being shared with FMG shareholders and the benefits that will flow to FMG’s iron ore business from FFI achieving its objectives.Forrest, who is chairman of FMG and FFI, could have funded the green hydrogen project through his private company by cranking up FMG’s dividend payout ratio.But by keeping FFI under the FMG umbrella, he protects the company against the threat of China finding alternative sources of iron ore over the next decade.FMG’s outgoing chief executive, Elizabeth Gaines, says the market fails to understand the financial upside for FMG shareholders from having a symbiotic relationship with FFI.“Our view is that the market is recognising that there is genuine value that’s being created by FFI and the ambitions that we have,” she says.“We’re seeing interest, certainly from our offshore investors, in the activities of FFI, the strategy that we will deliver on by 2030, and the efforts to decarbonise Fortescue.“A lot of analysts are putting in the capital for decarbonising iron ore operations. They’re doing that for us and our competitors. They’re putting in the costs, but they’re not actually modelling the benefits.“The benefits will be lower energy costs, better ESG outcomes and lower emissions. We won’t have to rely on expensive offsets. There are genuine benefits, and I think there is still a disconnect between the cost versus the value that’s created.”FMG’s half-year results included increased transparency of FFI’s funding and expenditure.FFI’s expenses rose by $US152 million ($212.4 million) to $US174 million in the six months to December 31, “due to the ramp-up in personnel supporting an increase in project assessments and feasibility studies for FFI initiatives”.Green credentialsThe company said FFI’s expenses were “associated with studies for key projects and expenditure on emerging technologies to develop green electricity, green hydrogen and green ammonia projects in both Australia and globally”.FFI, which aims to produce 15 million tonnes of green hydrogen by 2030, had $US651 million sitting in the bank as of December 31, after first-half operating and capital expenditure of $US242 million.For this fiscal year, FFI’s expenditure is expected to be between $US400 million and $US600 million, inclusive of $US100 million to $US200 million of capital expenditure and $US300 million to $US400 million of operating expenditure.It is pretty obvious that FFI is the best funded start-up in Australia and will remain so if FMG continues to tip 10 per cent of net profits into the company.The funding formula means FFI should receive another $US1.8 billion in funding over the next five years, based on the consensus earnings forecasts published by S&P Global Market Intelligence.Gaines is quick to point out that the bulk of the capital expenditure for green hydrogen projects undertaken by FFI will come from third parties or financial markets and not FMG shareholders.“FFI will need a source of funding for those projects ... that might be specific project financing, it could be green-related financing, a green and social investment, or it might be partnering with others – there’s a range of opportunities.“They’ll be assessed on a project-by-project basis. But we’re very disciplined in protecting Fortescue’s balance sheet and the investment-grade credit metrics.“At the same time, we’re committed to decarbonise because it’s the smart thing to do, and it will actually grow value for our stakeholders in our mining operations.”RELATEDFortescue’s dividend caution driven by iron ore, not clean energyRELATEDCSL reaffirms growth trajectoryGaines says green energy from FFI will help bring down FMG’s operating costs.Other iron ore miners will, she says, face higher operating costs because of the need to acquire carbon offset credits.“I think it’s difficult to predict what they might cost,” she says. “You can model a range of scenarios, but there’s no doubt that the supply will not keep up with demand.“If a company is relying on offsets to achieve their emission reduction targets – and I can’t think of a mining company that doesn’t have an emissions reduction target – without actually doing anything substantial to decarbonise, then they’re going to see a cost base increase significantly.”