TEAM - Fortescue Metals Group: Electrification Renewables Hydrogen

Summary

• Electrification of Fortescue mining operations move a step forward with a huge battery (fast-charge 30 minutes) being trialled to power a 240-ton payload vehicle.
• Turmoil in one of Australia’s largest renewable energy projects, which planned to provide up to 15% of Singaporean power, in administration.
• One-year delay for Morocco-UK massive renewables project.
• Fortescue and private interests of Twiggy Forrest indicate major interest in renewables transition and hydrogen economy.
• Investors might pay attention to Fortescue as a leader in the energy transition with a big interest in hydrogen.

It's always interesting to reflect on the start of a new year. For me 2023 started with a story about progress by Fortescue Metals Group ( OTCQX:FSUGY ) in its plans to exit fossil fuel (primarily diesel) use in its mining operations. Fortescue is no mining minnow, being the world’s third-biggest iron ore miner. Its plans to exit diesel foreshadow huge savings and reducing the cost of iron ore production by as much as 20%-25%. I summarized Fortescue’s plans for electrification and green hydrogen only a month ago, but the pace is quickening and major shareholder and Chairman Andrew (Twiggy) Forrest is making other waves at the start of 2023. Here I update on progress with exit from reliance on diesel by FSUGY and also comment on a massive project that involves Forrest and another Australian billionaire, Mike Cannon-Brookes. Investors interested in unlikely players making big plays in renewables might find FSUGY, which pays a big dividend, interesting and they could find Twiggy Forrest worth watching.

Massive battery for mining operations

The first fruits of Fortescue Metals Group acquiring UK firm Williams Advanced Engineering arrived at Fortescue last week in the form a 15 ton, 1.4 MWh prototype battery to power a 240 ton iron ore mining vehicle. The plan is to implement the bespoke battery to power Swiss Liebherr ore haulage trucks. The 240 ton payload (gross vehicle weight 416 tons) Liebherr trucks are billed as fuel efficient Cummins diesel vehicles with powerful electric wheel motors. Innovations with the battery include a fast charge of 30 minutes and power regeneration downhill.

Fortescue is seeking to use batteries instead of the diesel engine. The logic behind this is that eliminating diesel from their mining operations can save Fortescue up to 20%-25% of their production costs. If other big miners aren’t paying attention they should be. Williams Advanced Engineering’s expertise is with high performance battery systems and electrification. Twiggy Forrest’s Fortescue Metals Group is known for its focus and performance, coming from nowhere to be a major global iron ore miner.

Sun Cable project dust up

Really big recent news was that Sun Cable, a massive project involving Northern Australia and 17-20 GW solar PV + 36-42 GWh batteries + 4,200 km HVDC cable to Singapore, has gone into administration. This project has achieved a lot and there seems to be skepticism that it will be allowed to fail. The issue seems to be an argument between two of Australia’s richest men (Twiggy Forrest and Mike Cannon-Brookes). It's either about management and strategy for the project, or an attempt by Twiggy Forrest to assume control and turn Sun Cable into a domestic green hydrogen superproject. Forrest seems skeptical about the 4,200 km HVDC cabling aspect of the project, and it's true that the project would be the longest HVDC cabling link ever built. Maybe Forrest, who has built Fortescue to be the world’s third-largest iron miner, has a point that Cannon-Brookes doesn’t have the experience of such a massive infrastructure project. However, it seems to me that Sun Cable has a great team who have successfully navigated a lot of obstacles in giving the project credibility.

Other Forrest renewables/hydrogen plans

Note that Forrest’s investment in Sun Cable is via his private group Squadron Energy, which is controlled by the Forrest family private company Tattarang. Tattarang also holds the Forrest family’s 36% stake in Fortescue Metals Group.

I have no insight into what the dispute between Forrest and Cannon-Brookes is, but Forrest seems to have a lot of other irons in the fire for both renewables and green hydrogen projects, although a significant number of the renewables investments are in Twiggy Forrest’s private vehicle (or controlled by) Tattarang. Maybe Forrest likes the work that has been done on the solar + battery aspects of the Sun Cable project and wants this to plug into his hydrogen dreams?

Squadron Energy has major renewables investments in Australia. For example, a 600 MW wind project in Queensland and the major acquisition of CWP Renewables. Squadron’s acquisition of CWP brings its operational portfolio to 2.4 GW of renewables and an Australian development pipeline of 20 GW renewables.

Fortescue talks a big talk about green hydrogen not only in Australia, but also internationally (eg recent framework agreement with the Ministry of Energy of the Republic of Azerbaijan, and with Puget Sound Energy for green hydrogen ecosystem in the Pacific Northwest). These are the most recent agreements involving wholly owned Fortescue subsidiary Fortescue Future Industries ( FFI ). FFI has a huge ambitions, but much of the green hydrogen story remains vague .

Green hydrogen projects are in the news with oil and gas majors embracing enormous green hydrogen projects that have billions of dollars attached to them. I remain skeptical about green hydrogen but note that a green hydrogen project starts out as a massive renewable energy project (solar PV, wind or a combination). So there's a fallback position on massive green hydrogen projects because if hydrogen doesn’t work out there is a still a massive renewable energy project.

Xlinks Morocco-UK project delayed 1 year

Huge projects take forever to get off the ground and the latest renewables energy projects are no exception, with a delay announced in December 2022 for the massive 10.5 GW Xlinks Morocco-UK solar and wind project to send power via 3,800 km of HVDC cabling to the UK to provide 8% of UK power needs. It seems that UK political turmoil (three prime ministers in six months!) is largely to blame for an expected one-year delay from the projected start of power generation in 2027. Just as has been the case for the Sun Cable project, the Xlinks project seems as if it will happen.

Conclusion

The energy industry is in transition and there are lots of polarized views about what is going on. There's a section of the fossil fuel industry that still thinks that fossil fuels are essential and at the core of human endeavors, hence there is no escaping use of fossil fuels. Mining is a good example of an industry that is heavily dependent on fossil fuel exploitation, especially through use of diesel to power heavy tools, big trucks and trains. It's probable that Fortescue’s plans to exit use of fossil fuel in their mining operations is not taken seriously by Exxon Mobil’s ( XOM ) senior management, but here I’ve documented that trucks, weighing 416 tons when fully laden with 240 tons of iron ore, are being tested out with a battery electric prototype in 2023. This makes Tesla’s 80-ton Semi seem pretty small ! Exxon Mobil is acknowledging that personal transport is becoming electrified, but management assumes that diesel trucks are not threatened and hence it sees a future for its oil products. Perhaps the Fortescue 416 ton truck might give a pause for thought?

In the energy sphere visionary billionaires have spearheaded a lot of the change that is happening now. It's clear that Twiggy Forrest is convinced that the fossil fuel era needs to be in the rear view mirror and he's actively making changes in his mining operations. The rise of solar PV and wind power (especially offshore) make clear that making electricity is becoming cheap, and managing intermittency of the power production is happening. The question remains whether the world can go fully electric or the world continues to need a gas based system (natural gas now, hydrogen in the future?) or whether like coal and oil, natural gas/LNG/hydrogen for power and transport will prove to be superfluous. The Sun Cable project mentioned in this article is a test case as it exists because Singapore is currently in an untenable situation, being 95% dependent on gas (natural and LNG) for its power. Sun Cable plans to make 24/7 power with the world’s biggest solar PV + battery project and ship the (electric) power via HVDC cabling. The two key billionaire funding sources have fallen out but it isn’t clear whether this a technological conflict (with Twiggy Forrest wanting to change the power into a green hydrogen project) or whether Forrest, with vast experience of major resources project management, believes that his co-investor Atlassian ( TEAM ) cofounder Mike Cannon-Brookes doesn’t have the experience to pull off such a large infrastructure project. Cannon-Brookes has been seen as a front runner on the Sun Cable project to date and he seems to have supporters who want to keep going. Noting that the scale of Sun Cable is similar to some of the huge oil and gas projects, it's worth paying attention to see how this plays out, because if Sun Cable succeeds as a project where power is captured at a distance and shipped via HVDC cables, then expect a lot more of these projects. The similar Morocco-UK project is another example that looks like it might come off, despite some delay at the moment. The issue I have with green hydrogen is that it's not clear if costs of storage and shipping are realistic currently. Indeed questions about hydrogen shipment have been raised by the CEO of major LNG shipping company Flex LNG ( FLNG ). The stakes are high not only for the future of the fossil fuel industry, but also for humankind as climate related events are rapidly getting out of control. Watch this space.

I'm not a financial advisor but I follow closely the science and technology surrounding the massive energy and transport transitions that are happening. I’m particularly focused on the investment opportunities arising at this time of great change. I hope that my perspective helps you and your financial advisor as you consider investment in this space.

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