Another Hick-up

RESULTS ANALYSIS

Need To Know

• Another key executive departure – Fiona Hick leaves after just 5 months.
• Fortescue Energy projects will compete for capital on merit. Five projects targeted for FID by end CY23. Energy division opex US$800m in FY24.
• Real Zero target means no offsets. Decarbonisation cost FY24 US$400-500m.
• Iron Bridge impairment US$1bn pre-tax, project capex increased to US$4bn (FMG US$3.1bn share).

Investment Implications

FY23 results overview:

Underlying EBITDA US$9,963m

Underlying net profit US$5,522m

DPS 175cps (full year) fully franked

The FY23 result, in-line with consensus, has been overshadowed by the departure of Fortescue Metals CEO Fiona Hick after just five months in the role.

The company has been reorganised into two divisions, Metals and Energy, with the latter absorbing the FFI business. FMG will no longer allocate 10% of net profit to FFI following the creation of the two divisions. Instead, all group projects will compete for capital based on merit, although this was not defined.

The Iron Bridge business has been impaired by US$1bn pre-tax after the carrying value was reviewed. Iron Bridge project capex was nudged up to US$4bn (FMG share US$3.1bn) just as the project shipped its first cargo of magnetite iron ore to Vietnam. The life of mine C1 costs were adjusted upwards to US$45/wmt.

Outlook. Production guidance reaffirmed at 192-197mt for FY24 at C1 cost US$18-19/wmt. Group capex US$3.2-3.6bn in FY24 includes US$400m for Energy division.

Investment View

Yet another senior executive departure, after just five months, raises more questions on FMG’s culture. Ms Hick resigned on the day of Fortescue’s celebration of 20 years in business and walked away from A$3.7m in shares.

Paradoxically, the new CEO of Fortescue Metals, Dino Otranto, described FMG as having been  “built on a culture unlike any I have ever seen”. There was no explanation of the process to replace her other than a decision by the Board to expedite Mr Otranto’s appointment. FMG’s track record on executive turnover is atrocious and a key risk factor, in our view.

Of equal concern is the new divisional structure which has cast aside the previous directive of allocating 10% of FMG net profit to FFI. The new Fortescue Energy division comprises FFI, WAE (UK engineering business) and Fortescue Hydrogen Systems. The company said that all group projects, metals and  energy, will compete for capital based on merit. Each division will make proposals to the Board which will decide on capital allocation.

Fortescue Energy is peddling five major projects for FID (final investment decision) by the end of CY23 while Fortescue Metals is championing its potentially very large iron ore project in Gabon.

FMG gave no clear indication of the parameters that will determine which projects gain approval other than a wishy-washy statement that both CEOs will be “working closely together” to develop all proposals. This is, in our opinion, wholly unsatisfactory and creates uncertainty on the capital allocation process.

The whole group remains heavily committed to decarbonisation with a strategy of achieving ‘Real Zero’, not just net zero, by 2030. This means the company will only use carbon offsets as a temporary means before moving towards the complete elimination of fossil fuels from its business. The FY24 cost of decarbonisation in FMG will be around US$300-500m (FY23 US$169m). The company’s emissions will temporarily rise due to the Iron Bridge project before falling from FY26 onwards.

With the operational expenditure and capital investments rising significantly and quickly, there is a risk the dividend could be reduced. The FY23 dividend payout of 65% was within the policy range of 50-80%.

With so much unquantified potential capital spending on the agenda, it is difficult to know how it will impact the balance sheet. In addition, the Energy projects are likely to be very high risk and although FMG will put a double digit rate of return on them, we cannot be confident this will be achieved.

FMG has rebranded itself to be an ‘integrated green technology, energy and metals company’. We note the relegation of metals to the end of this statement. Although the iron ore business is still producing very good earnings, we have concerns much of the future earnings will be consumed by the green energy aspirations.

We have retained our Hold recommendation.

Figure 1: FMG net profit vs Iron Ore price