Fortescue Metals Group: Forrest for the trees
About the author:
- Author name:
- By Adrian Prendergast
- Job title:
- Senior Analyst
- Date posted:
- 31 August 2021, 8:00 AM
- Sectors Covered:
- Mining, Energy
- A result that focused on the ambitions of FMG, led by chairman Andrew Forrest, to emerge as a global technology leader in renewables and green products.
- FMG is investing aggressively towards the goal of becoming the first green iron ore producer, which it expects will attract a material premium for its products.
- A worthy objective that may eventually prove inevitable, but we question whether being an early adopter would be a more efficient approach rather than innovator.
- Countries being considered by FFI for investment (including Afghanistan and Indonesia) raise questions around how FMG’s risk profile might change.
- The FY21 result itself was strong, and in line with expectations.
A question of strategy
A result that focused mostly on FMG’s ambition of becoming the first green iron ore producer, with a peer-leading target of carbon neutrality by 2030. A worthy objective but we are cautious on the strategy FMG is using to get there.
The planned investments in Fortescue Future Industries (FFI) remain difficult to analyse at this stage. Our early attempts at modelling green hydrogen or green ammonia projects suggest high capital intensity that blunts valuations, indicating a long-dated investment profile reliant on future cost structures transforming.
Within FMG’s thinking is a core belief that customers will pay premium prices to get access to zero carbon products, which we think is a reasonable assumption but impossible to quantify at this stage.
Our main concern on FFI is around how well FMG is positioned to pursue these objectives. Besides simply having capital it can throw at it, FMG is moving into a space far outside its established core competencies, while the global energy supermajors it will compete against have an immediate knowledge and experience advantage, as well as deeper pockets.
The first likely FFI project is a green ammonia project in Tasmania, while FMG’s chairman also acknowledged two other potential FFI projects being considered in Afghanistan and Indonesia during the result call. Representing further risk profile implications could be on the way.
Ultimately we view the priority to decarbonise its business as impressive, but also think that FMG is perhaps attacking the issue too aggressively. Something it may come to regret if/when iron ore prices revisit more typical levels before green iron ore can be achieved.
FY21 result analysis
A very in line result. EBITDA US$16,375m (vs consensus US$16,501m vs MorgansF US$16,507m). FY21 NPAT US$10,349m (vs consensus US$10,392m vs MorgansF US$10,419m).
This allowed FMG to announce a record final dividend of A$2.11ps (vs consensus A$2.17ps vs MorgansF A$2.16ps), at an 80% payout ratio.
FY22 guidance for shipments, C1 and capex had already been released at 4Q21.
Forecast and valuation update
Only minor adjustments for the FY21 result. PT revised to (login to view).
Our overall view on FMG is much more positive than our view on FFI. FMG has built a formidable iron ore business in the Pilbara and maximised returns.
Although in the short term we see further downside risk once FMG trades ex-dividend, as recent iron ore volatility may increase selling pressure once investors receive their record dividend. We maintain our Reduce rating.
1Q21 operational result. Spot iron ore price and lower grade discounts. Sanctioning of FFI projects. Progress on Iron Bridge construction.
Potential iron ore price volatility.
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