The appointment of FMG’s next CEO will be a crucial decision as the job description will require the leader to straddle two incongruous businesses. One is a mature, single commodity business with Chinese customers. The other is an unproven punt on a future commodity that will take years of heavy capex and losses before shareholders may see any benefits. Importantly, FMG is now being used to fund the operational status of FFI (Fortescue Future Industries), but the funding of FFI’s extensive project list is a mystery.
Ms. Gaines did a good job keeping the wheels turning smoothly enough at FMG to catch the giant wave of heightened iron ore prices over the last two years. Every iron producer benefited from the same theme, but it was still important that each tonne produced was done efficiently and safely.
Mr. Forrest has arbitrarily assigned 10% of FMG’s iron ore profits to fund the venture capital-like business of FFI. To date, what we have seen is a viral growth rate in people at FFI, now numbering more than 700, and a shotgun approach to the projects it has found ‘worthy’ of pursuit.
Investors are rightly asking questions of the business plans of FFI but are getting no answers. That is probably because, in our view, there are none at this stage. So frenzied is the attack on finding new projects on which to sign conceptual agreements that Mr. Forrest is denying internal friction amongst staff over project selection.
The current output of FFI projects reads like a United Nations of trouble spots – Democratic Republic of Congo, Kenya, Ethiopia, Cameroon, and Jordan. Other projects are spread far and wide across Russia, Argentina, Brazil, India, Indonesia, Japan, PNG, Canada, Iceland, Netherlands, UK, USA, Namibia, New Zealand and Australia.
The list of projects so far also seems haphazard. Green hydrogen is the goal of FFI, but that entails using renewable energy which is dominating the project list. Hydrogen and ammonia projects are scattered globally and there are multiple projects that are merely scoping studies.
The aggregate cost of the few projects that have vague numbers attached is staggering, reaching well past US$650 billion so far. Set against the A$55 billion market capitalisation of FMG, and the 10% of its profits dedicated to FFI, it is obvious that the project list will require some world class financial gymnastics. We expect many of the projects will not get to the starting line.
Investment view
FFI already has a CEO (Julie Shuttleworth) who works closely with FMG Chairman Andrew Forrest. FMG appears to need a CEO of just the iron ore business rather than the dual role held by Ms. Gaines. The key risk for FMG shareholders is the extent to which FMG profits are plundered by FFI to underwrite FFI’s business and projects. Mr. Forrest has created FFI with such evangelistic fervour that it will take a courageous CEO to stand up for the iron ore business.
FMG remains highly profitable, but shareholders now carry the risk that FFI may sequester even more of the iron ore profits that took years to build.
