The big questions from Fortescue's AGM

Fortescue's AGM on Tuesday 21 November brought questions from several prominent shareholders, including one of its former top 20 shareholders, Peter White, as reported by the Australian Financial Review yesterday. 

These questions came as Fortescue Metals Group (ASX: FMG) announced the board’s approval of two new green energy projects and one “green iron” project in Western Australia. These were cited in the latest note on Fortescue issued by Macquarie’s equity research division.

Many shareholders have also been scratching their heads about the firm’s expansion of such initiatives within its energy business. These are fuelling ongoing concerns around Fortescue’s governance.

September saw three senior executive exits within a single week, as mining chief executive Fiona Hick, CFO Christine Morris and FFI board member Guy Debelle all left Fortescue. Morris’s departure marked the firm’s 11th senior executive departure in three years.

What are the projects?

It was revealed yesterday that the FMG board has approved the Phoenix Hydrogen Hub and the Gladstone PEM50 Project, both part of the Fortescue Future Industries division inside the firm’s energy business.

The first of these is a green hydrogen project located near Phoenix, Arizona in the US. It’s unclear when the Phoenix Hydrogen Hub will produce its first fuel, but the firm’s marketing material indicates it is targeting “the middle of this decade”.

The PEM50 Project, as my colleague Kerry Sun explained this week, is a 50-megawatt green hydrogen project with an 8,000-tonne capacity. With a projected cost of US$150 million, it is expected to produce its first hydrogen in 2025.

Macquarie’s analysts note the two green hydrogen projects approved have “relatively smaller capacity which results in a small capital inclement.”

“We note Phoenix Hydrogen Hub has an implied capital intensity of US$6.9 million/MW, higher than US$3 million/MW at Gladstone.”

Reasons for this higher capital intensity include the Phoenix project’s production of liquid versus gas, which includes additional investment.

The analysts saw a slower projected roll-out of these projects as a positive, as Fortescue has pulled back from its original plan for a total of five green energy projects by the end of calendar 2023.

“The recent Board approval indicates a potential slowdown of projects, which is a positive in our view. We anticipate the remaining three projects to have a total capex of greater than US$6.2 billion, reflecting larger processing capacity and extended flowsheet to convert hydrogen to ammonia,” say the Macquarie analysts.

They expect the final investment decision for the green ammonia projects could be delayed until 2024 or later. “[This] would allow the project team to incorporate learnings from Gladstone PEM50 and Phoenix Hydrogen Hub. The deferral could also reduce the cash flow pressure in the near term, in our view,” the Macquarie report says.

FMG an iron ore proxy

Market Index’s Kerry Sun recently pointed out that FMG is arguably the best proxy for iron ore prices and, the company currently trading “within arm’s reach of all-time highs”.

On the back of the latest Citi assessment of iron ore prices, which are currently at decade highs, Market Index notes the material hasn’t been this overbought since:

• March 2023: Prices topped at US$130 and sold off back to US$100 by early May.
• May 2021: Prices topped around US$200.
• January 2021: Prices traded sideways around US$165 for two months and rallied to US$200 a tonne by May.

The Macquarie report notes that iron ore prices have continued to rise “in line with benchmark indices, trading above US$125/t since the start of November.”

It also refers to expectations that Chinese regulators will create a shortlist of 50 property developers eligible for government funding – the “whitelist” reported by the likes of Reuters – to shore up confidence among potential lenders "which presents tailwinds to near-term market sentiments, in our view,” says Macquarie.

On the back of the latest news, Macquarie left its UNDERWEIGHT rating in place and its $16.80 price target unchanged.

Morgan Stanley: “3 key risks”

Three potential risks of the green energy projects were called out in Morgan Stanley’s latest report on FMG, as authored by analysts Rahul Anand, CFA, Matthew Costa, and Gary Q Zhang. These are:

1. Demand, with off-takes yet to be obtained for any of the three projects,
2. Contingencies for capex, and
3. For the FMG metals business, the lag between cash flows and outlay.

“Our Base Case, which excludes [the latest] announced projects, currently forecasts FY24e free cash flow yield of around 6.7% deteriorating to -2.1% in FY26e, which will be further impacted by the upcoming capex spend,” said Morgan Stanley analysts.

Morgan Stanley retained its UNDERWEIGHT rating and $16.45 price target for Fortescue.

What other brokers think

The Market Index Broker Consensus tool indicates Fortescue is a STRONG SELL, with 14 sell ratings alongside 2 buys, and 4 holds.

Barrenjoey upgraded FMG to NEUTRAL from Underweight on 15 November, with analyst Glyn Lawcock increasing the price target to $23 from $20.50.

UBS downgraded Fortescue to SELL from Neutral on 27 October, with analyst Lachlan Shaw leaving his price target at $20.80.

Morgans upgraded FMG to HOLD from Reduce on 10 October, with analyst Adrian Prendergast lifting his price target to $19.40 from $16.20.

Fortescue shares traded at $25.39 at the market close on Wednesday, up more than 32% in the last 12 months.