The Fortescue Metals Group Limited (ASX: FMG) share price could come under growing scrutiny as the ASX mining share becomes increasingly focused on its green energy efforts with Fortescue Future Industries (FFI).
Fortescue has been an ASX iron ore share from the start, but the founder and leader Dr Andrew Forrest has got the business focused on becoming a major player in a decarbonised world.
There are a few key areas of focus with these green energy endeavours – green hydrogen, green ammonia and high-performance electric batteries.
Of course, funding these growth areas needs cash. A few years ago, Fortescue committed to allocating 10% of its net profit after tax (NPAT) towards FFI. So, as an example, Fortescue generated $2.37 billion of NPAT in the first half of FY23 so it could allocate $237 million towards FFI.
FFI is expected to spend between $730 million to $830 million in FY23. In its half-year presentation, Fortescue revealed that $1 billion of allocated money hadn't been spent.
But, eventually, FFI may need to spend more than its allocation so that it can progress with the green hydrogen projects it's planning to build.
Where will FFI's funding come from?
In an Australian Financial Review article, FFI boss Mark Hutchinson said that the green business is looking to invest in at least five green energy projects.
The article stated that Hutchinson expects funding support from selling project equity stakes to third parties, such as sovereign wealth funds. But, FFI could also ask for more than the 10% profit allocation from the board. This spending could benefit Fortescue shares if it unlocks a large new earnings stream.
He pointed to two potential projects in the US which have been "fast-tracked" – one in Phoenix and one in Texas. On those projects, Hutchinson said:
We have off-takers, we have power, we have water, we have land, so they're ready to go. Again, it's really important to show the world we can do this. What we have realised is that no one is really doing this at the scale we are thinking about.
There's a potential project in Norway for a 300MW green hydrogen/green ammonia plant thanks to its relatively cheap hydropower.
The green ammonia export project in Queensland on Gibson Island involving the existing Incitec Pivot Ltd (ASX: IPL) ammonia plant is also expected to go ahead, however, there are "high energy costs" with this one.
Another option that could go ahead in the future is "in Kenya and involved using geothermal power to make green ammonia for use in agriculture in a country that relies on Russia for fertiliser imports and food security."
Discussing the potential involvement of sovereign funds, Hutchinson said:
They are going to absolutely require that we stay in the equity and have a big chunk. Most of the investors we think will be in here will be like the sovereign funds.
The sovereigns love the idea of a pipeline [of projects] and they have enormous capital to deploy in this space. They're waiting for someone to kind of show them that it's not just one project or two projects. The unique thing about us is we can go in and say, 'Here's your 10, you pick'.
Will this help the Fortescue share price?
If Fortescue can execute these planned projects well, then spending $1 could unlock a lot more value than $1 for the business. Once FFI starts generating green hydrogen and green ammonia, seeing the cash flow coming in could help investors' thoughts about the situation.
At the moment, some investors are only focusing on the cost of the green initiatives, rather than the potential benefits.
In the future, FFI could be one of the biggest green energy players in the world, which could make it a very valuable business in the future. FFI may already be worth US$20 billion, according to Dr Forrest's meetings with investment banks.
