Commodities | Feb 24 2025
A long-time source of income for investors, Fortescue's challenges are leading to warnings from brokers the miner's dividend yield is on the decline.
-Fortescue's earnings result weaker than feared
-Policy uncertainty leads to a rethink on green investment
-Higher spending on iron ore; Iron Bridge delayed
-Dividend miss, with ongoing declines forecast
By Greg Peel
Australia's number three iron ore producer and green energy aspirant Fortescue ((FMG)) reported first half FY25 revenue down -20% year on year, earnings down -39% and profit down -54%. An interim dividend of 50c was declared, while net gearing increased to 10% from 2% over the period.
Analysts were expecting weak numbers, but key metrics were still on the disappointing side. The 50c dividend fell short of a 57c consensus forecast. The implied earnings payout ratio of 65% was in line with expectation, but earnings were lower than forecast.
Earnings were impacted by higher shipping costs, royalties and D&A cost, on top of adverse forex movements. The earnings margin of 47% is the lowest reported by Fortescue since FY18.
Bridge too Far?
The good news is no major damage across Fortescue's Pilbara iron ore assets despite a very active cyclone season. The miner shipped a record 97.1mt of iron ore in the half, up 3% year on year. It was a solid operational performance, Bell Potter declares, but H1 also reflected a tougher environment of higher costs and a lower iron ore price.
FY25 shipping guidance is unchanged at 190-200mt, including 5-9mt from problem child Iron Bridge (near Port Hedland). The Iron Bridge ramp-up has been for some time a matter of frustration.
Iron Bridge continued to ramp up in the half and is on track to achieve FY25 shipment guidance and cash operating expenditure excluding shipping and royalites of approximately US$500m.
However, the schedule for operating at nameplate capacity of 22mt per annum is under review, with an assessment underway to optimise the performance of the air classification circuit and downstream aerobelt conveyor. This assessment is anticipated to be completed in the June quarter.
The history of bringing Iron Bridge into production amounts to a long list of delays. Initially, this project was expected to ramp up full production by late 2023-mid-2024. UBS, for one, now assumes the June quarter FY26.
Management assured that in its opinion the ramp-up of Iron Bridge to nameplate was not a matter of "if" but "when". Heavy rainfall was flagged as an impediment at the site but the ramp-up is flagged to be according to management's expectation.
It's Not Easy Being Green
Donald Trump's return to the White House and his dismantling of green programs means Fortescue will review the projects under development in its nascent clean energy division. The Trump administration has paused grant payments under the former Biden administration's Inflation Reduction Act, and is unashamedly pro-fossil, anti-green.
The upcoming Australian election is another source of policy uncertainty. A Dutton government will (presumably) focus on nuclear at the expense of renewables/green energy.
Fortescue will subsequently review its previous timelines for its green hydrogen facilities in Arizona and Gladstone (Queensland) and no further investment will be made at this time.
The company's decarbonisation push nevertheless continues, with planning and approvals for solar/wind and battery storage projects ongoing, but will be "rephased", leading to a reduction in capex to -US$500m from a prior -US$700-900m.
To date, Fortescue has introduced battery EV/fuel cell haul trucks, four electric excavators, and 6MW of charging points.
Andrew Forrest's green aspirations have long been lauded by the climate-conscious but questioned by analysts on a pragmatic, stock valuation basis. Investment in unproven future-facing projects can only drag on Fortescue iron ore cash machine and subsequent returns to shareholders.
For some time, Macquarie has been sceptical of the company's hydrogen and green-ammonia plans given the energy losses in conversion. Hence, management's language supporting discipline is welcomed by the broker. Fortescue will trim its FY25 green capex guidance to -US$400m from -US$500m.
In terms of Jarden's broader thesis - and whether the pursuit of Real Zero might need moderating to manage the balance sheet under base case assumptions, the broker views the decision to reduce capex guidance for the Energy division as potentially more telling than the -US$100m reduction itself.
At least in terms of the Energy division, Jarden was quietly left to consider that the overall pursuit of green energy solutions has not tempered, but the timelines may stretch.
Guidance Juggle
Fortescue's FY25 capex guidance is unchanged, other than a tightening in range to US$3.9-4.2bn from a prior US$3.7-4.3bn. This despite an implied -US$300-500m reduction in green hydrogen/decarbonisation spending.
The gains are offset by increasing spending for Fortescue Metals (iron ore).
There remains the balance of HME fleet (heavy mobile equipment Tonka trucks) replacement, power generation, typical stay-in-business (sustaining) capex, and new mine development (Mindy South).
Spending also covers the inclusion of the recent Red Hawk Mining (WA) acquisition (-US$160m).
Jarden argues Fortescue's otherwise arguably pristine balance sheet in recent times will be the subject of increasing interrogation as the capex calls ramp up over the remainder of the decade.
Which leads us to...
Capital Management
Fortescue has for many years been an attractive source of yield for investors seeking income. Can that last?
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