Fortescue Metals (ASX:FMG): Decarbonisation and the green hydrogen movement
Dr. Andrew (Twiggy) Forrest is trying to decarbonise his iron ore business and transform it to a global leader in the supply of green hydrogen. The question is can he do it?
There is no arguing it, in the last couple of years people’s sentiment on action towards climate change has shifted and companies are taking notice.
Fortescue Metals (FMG) lead by Dr. Andrew (Twiggy) Forrest is one company aiming to take advantage of this shift by going all in on hydrogen. Bit of a weird one I know as FMG are one of the largest iron ore mining companies in the globe and are responsible for their fair share of emissions, but they are looking to change that.
Let’s talk about why this is such a big deal and how hydrogen plays a big part in decarbonising one of the most polluting industries in the world.
Hydrogen and decarbonisation
Along with solar and wind power, hydrogen is an important piece of the puzzle when it comes to decarbonising industries. Hydrogen is especially important for heavy industries such as iron ore mining and steel production as it fills a gap where wind and solar simply cannot.
An example would be the giant freight ships that carry good across the ocean. The technology to move away from traditional diesel motors which are bad emitters and to something like hydrogen powered ship engines is a possibility. Similar to the ships are the giant large haul mining trucks moving tonnes of ore around every year. There is plenty of research and development going on to reduce the amount of emissions these vehicles produce by replacing the old diesel engines.
There is also an opportunity to “sell” green energy to other countries. This works by using existing power generated using renewables (wind, solar) to create hydrogen via the process of electrolysis. The hydrogen can then be sold and transported across the globe to be used to generate power. The hydrogen acts as a transportation method which is pretty cool.
At the end of the day business need to be profitable and FMG believe they can both decarbonise their business and turn a profit by supplying green hydrogen across the globe.
Why hydrogen?
I think Fortescue Metals has a few reasons behind shifting into green hydrogen production, money obviously being one of them but we can get to that in a moment, the other reason is to help decarbonise their business.
They have outlined a pathway to decarbonisation and how hydrogen plays an important part in it1:
Developing and trialling electric battery and green hydrogen powered haul trucks to remove reliance on diesel fuel.
Developing and trialling hybrid locomotives that run on green ammonia (created using hydrogen) and battery storage to replace diesel fuels.
Replacing diesel engines in other heavy mining equipment (HME), such as excavators and diggers, with electric motors and trialling hydrogen fuel cells as their power source.
Pursuing options to reduce emissions from other sources, which include dewatering, ammonia nitrate and port operations.
They have plenty of applications in their own business for hydrogen which they can then sell onto other companies facing similar problems.
FMG have clear intentions to decarbonise their heavy machinery by investing in developing zero carbon powered machines as made clear by recently acquiring Williams Advanced Engineering.
Today’s announcement builds on our commitment to remove fossil fuel powered machinery from our operations and to replace it with zero carbon emission technology, powered by FFI green electricity, green hydrogen and green ammonia.
Dr. Andrew Forrest2
They will have an opportunity to share this technology with other heavy industries.
Can it be profitable?
FMG is putting a lot of funding into its Fortescue Futures Industries (FFI) arm which is handling all the research and development for all things renewables. It was stated in March 2022 they have committed an estimated $1 billion US for FY22 to the renewable arm of the business3. This is no small amount and shows how serious they are, but how are they going to recoup these costs.
Earlier this year FFI signed an MoU (Memorandum of Understanding) with E.ON, one of Europe’s largest operators of energy networks and energy infrastructure. This MoU was to partner on a journey to deliver up to five million tonnes per annum of green, renewable hydrogen (GH2) to Europe by 2030! Huge news for FFI.
FFI have been doing deals all over the place (JCB, Liebherr, Egypt) and this is just one that shows that people are willing to come to the table and commit to buying green hydrogen from FFI in the near future. The demand is there.
Fortescue Future Industries is aiming to supply 15 million tonnes per year of renewable green hydrogen by 2030. From there, the plan is to accelerate production to 50 million tonnes per year over the following decade.
It will still be some time before FFI will start generating revenue but their first green hydrogen project is going to be running in 2023 and I’ll be watching closely4.
While this is all going on FMG is still the 4th largest producer of iron ore in the world which is why they have lots of capital to invest into green hydrogen. With that, let’s move onto iron ore.
The reliance on iron ore prices
FMG is and always will be, foremost, an iron ore producer and I don’t believe that will change, at least not for another 25 years. Even though FMG is constantly pushing out announcements and MoUs for its Fortescue Future Industries branch the share price is still tightly coupled to the price of iron ore. I think until FFI has some revenue producing projects, the FMG share price will still be reliant on the price of iron ore. Who knows, maybe FFI will eventually become its own entity.
It’s been a rocky 6 months in terms of the price of iron ore with the recent collapse of the Chinese giant property development company Evergrande Group. Iron ore prices have taken a bit of a tumble and with that so did the FMG share price5, although there has been a little bit of a rebound in the last month or so. There has also been recent news around China's intention to create a state owned centralised mining hub which will handle all purchases of the red ore6 in an attempt to keep a lid on the iron ore price.
My go to place for watching the price of iron ore is IG Iron ore, just remember that the price is in CNY.
There is definitely some correlation to the change in FMG share price and the price of iron ore…
Predictions
BHP the second largest Iron ore producer in Australia recently release their FY22 reports and had an unexpected increase in revenue for the year which forbids well for FMG7. FMG results are usually out towards the end of August and I'm expecting a decent FY22 with a dividend of around $1.33 per share.
Iron price is a bit everywhere at the moment after China announced they wanted to centralise all iron ore purchases through a single body to try and keep a lid on the price8. I think if Iron ore stays around the $100 USD mark and is FMG have a decent FY22 report I don't see why the share price couldn't get back up to around $22.50 by year end (it's currently at $19.30 at time of writing).
Closing
I’ve been holding FMG for some time and for me its a long term play (5+ years). I love that they are really leading the way in transitioning a very emissions heavy industry into something better for the environment. It’s unique in that there aren’t many other companies investing as much into the transition as they are. I fully believe in what Dr. Andrew Forrest is trying to achieve.
https://www.fmgl.com.au/workingresponsibly/climate-change-and-energy
https://www.fmgl.com.au/docs/default-source/announcements/acquisition-of-ek-based-williams-advance-engineering.pdf?sfvrsn=88f4bec1_4
https://www.fmgl.com.au/docs/default-source/announcements/2361891.pdf?sfvrsn=d18eb613_6
https://www.reuters.com/business/australias-fortescue-targets-2023-go-ahead-first-green-hydrogen-project-2022-05-04/
https://www.marketwatch.com/story/chinas-real-estate-crisis-will-cause-a-more-severe-downturn-in-iron-ore-prices-goldman-sachs-11658940204
https://www.mining.com/web/how-and-why-china-is-centralizing-its-billion-ton-iron-ore-trade/
https://www.bhp.com/investors/financial-results-operational-reviews/2022-financial-results-and-operational-reviews
https://www.bloomberg.com/news/articles/2022-07-25/china-wants-to-rewire-its-billlion-ton-iron-ore-trade-quicktake