The Fortescue Metals Group Limited (ASX: FMG) share price has done exceptionally well – it's up 22% in six months and 50% in the last three months.
After such a strong run, it could be worth asking whether it reached a peak and if there's a risk that the green spending will bite into its financial resources.
The business recently reported its quarterly production update for the three months to December 2022. Fortescue revealed its highest shipments for the quarter of 49.4 million tonnes (mt), contributing to 96.9 mt of shipments in the first half of FY23, up 4% year over year.
Image source: Getty Images
Could FFI funding hurt the Fortescue share price?
Running a large mining company comes with significant costs. Running a mining company and creating a large green energy business is a sizeable task.
At 31 December 2022, the business had US$4 billion of cash and the overall balance sheet position was a net debt position of US$2.1 billion.
Total capital expenditure for the quarter was US$728 million and in the first half of FY23, it was US$1.4 billion.
In the first half of FY23, Fortescue Future Industries' (FFI) operating expenditure was US$226 million, excluding US$57 million of expenditure incurred on behalf of Fortescue Metals for decarbonisation.
But the business has plenty more green energy spending planned if many of its plans turn into projects. For example, in the last quarter, there were three key developments that Fortescue highlighted.
It established a framework agreement with the government of Kenya to develop green ammonia and green fertiliser facilities to help eliminate fossil fuels from Kenya's fertiliser supply chain.
FFI and the Egyptian government entered into an agreement to work together to study and develop green hydrogen projects and renewable energy projects in Egypt.
Fortescue has also commenced work with Siemens Energy, using FFI technology developed with the CSIRO, on an ammonia cracker prototype. That will form part of the green hydrogen supply chain, with a focus on mobility and off-grid power applications.
Each of these developments, if completed, could help the Fortescue share price.
What's the worry?
Credit Suisse analyst Saul Kavonic recently said that iron could have a positive year, and FFI could be helped by government funding and that the green division "theoretically has upside potential", particularly if divested to become its own entity, according to reporting by The Australian. Kavonic also said:
Any softening of dividend payout, ongoing management churn, questionable FFI funding sustainability and future execution risks, plus macro iron ore risks, may present a downward risk skew over the next 12 months.
Liberum Capital is also concerned about the recent lift of iron ore share prices. While the iron ore price has increased, things in China aren't suggesting that boom times will continue. The investment outfit said, according to the Australian Financial Review:
The sharp market bounce in January would suggest that a strong fundamental lift is coming. Problem is, China's steel mills haven't seen it yet.
Domestic demand has slightly improved, typical for this time of year, but inventories are rising at their fastest rate since February 2020. Possible timing issue for the Restocking Indicator, given the earlier Chinese New Year, but the signals move from hold to sell anyway. So, we tell investors to be cautious chasing this rally.
[It} gives us the confidence to stick with our bearish call on BHP Group Ltd (ASX: BHP) and Rio Tinto Limited (ASX: RIO), but we prefer to see February data before proceeding with any other downgrades.
My view on the Fortescue share price
I think that Fortescue has probably run ahead of what the conditions are telling us, for now. With some of the negatives that are building, such as China's new iron ore central buying business, China Mineral Resources Group (CMRG), and the Chinese desire to unlock iron production in Africa, I think it could make sense to take some profit off the table, at this high price.
However, if the Fortescue share price were a bit lower, the valuation risk would be lower.
I still think it has an attractive long-term future, but it could be wise to lock in some gains here.
