PLUG - Fortescue Metals Group Not 'PLUGed' In But Still Has Green Ambitions

Summary

• Plug Power cancels green hydrogen JV with Fortescue Metals Group as not economic.
• Fortescue adamant about the future for green hydrogen: Is there a better technology solution than PLUG’s electrolysers?
• Fortescue Future Industries (100% owned by FSUGY) has lots of enthusiasm and proposed collaboration agreements (MOUs) on green hydrogen, but substance is missing.
• Battle for control of Sun Cable, Australia’s biggest solar plus battery project clarified: Twiggy Forrest wants the electricity for his green hydrogen, Mike Cannon-Brookes wants to supply 15% of Singapore’s electricity needs.
• Fortescue Metals Group is a significant player in the global green hydrogen push - it's worth watching.

I’ve been following the evolving story of Fortescue Metals Group ( OTCQX:FSUGY ), the world’s third biggest iron ore miner, recently from two directions. Firstly, FSUGY plans to exit use of fossil fuel in its mining operations with cost savings of 20%-25%. This is surely a big deal. Secondly, I’ve been tracking a lot of activity as FSUGY seeks to become a dominant player in possible emergence of a significant green hydrogen industry. Here I update on the decarbonization of FSUGY’s mining operations and also detail a series of new steps in the hydrogen story, including parting of ways with hydrogen electrolyser supplier Plug Power ( PLUG ). I conclude that FSUGY is worth watching on both decarbonization and hydrogen fronts, but perhaps investors might stay on the side for the moment.

Fortescue diesel substitution for its iron ore rail transport system

Recently I reported that Fortescue is evaluating huge mining vehicle electrification and in that story mention was also made of battery powered iron ore rail freight. To muddy the waters there has been a recent announcement from Fortescue of a green ammonia-powered prototype train as a diesel substitute. So what is the likely solution for decarbonized freight trains, green ammonia or batteries?

Like much of Andrew Forrest’s positioning as a hydrogen enthusiast, other than being clear that he wants to exit use of fossil fuel in his mining operations, the details as to how he plans to do it remain cloudy at this stage. The oil and gas industry might take him seriously about the scale of the savings he expects to achieve by stopping using diesel, which accounts for 27.4% of each barrel of oil used.

PLUG no longer a partner in major planned hydrogen project in Australia

In late January it was reported that Plug Power had walked away from building an electrolyser manufacturing plant in Queensland Australia with FSUGY in a 50/50 JV. Plug’s CEO Andrew Marsh was quoted as saying that the economics did not work. The Plug partnership was announced in October 2021 as a key plank in Fortescue Future Industry’s ambitious plans to produce 15 million tons of hydrogen annually by 2030. The Plug partnership was due to produce its first electrolyser this year. Plug claims it saw better opportunities and this could relate to the hydrogen incentives being provided in both Europe (through REPowerEU) and the US (through the Inflation Reduction Act).

Whether this is just putting on a good show or it is the reality, Fortescue Executive Chairman Andrew Forrest claimed that FFI wants to use its own hydrogen manufacturing technology although it will buy some PLUG electrolysers for some projects. Whether Forrest was referring to FFI’s JV with Sparc Technologies (ASX:SPN) and the University of Adelaide, or another project, remains to be seen. The Sparc JV involves early stage direct solar catalysis rather than electrolysis.

Like much of the hype around the state of development of green hydrogen, this raises questions about how real the talk of scale up and near term commercialisation is, notwithstanding that recently FFI CEO Mark Hutchinson reported that in Europe 5 FFI green energy projects will reach final investment decisions in 2023 with first production in 2024.

Fortescue still has big ambitions in green hydrogen

While mystery surrounds Fortescue’s (through wholly owned subsidiary FFI) plans for a major new green hydrogen initiative in Queensland Australia, the announcements are coming thick and fast from FFI regarding new hydrogen partnerships. However, it is hard to find substance in recent announcements.

To give a few examples :

i) FFI plans for collaboration with Nikola on co-development of large-scale US green hydrogen

A joint announcement two weeks ago from FFI and Nikola ( NKLA ) indicated ambitious plans in a MOU, with Nikola to “ evaluate green hydrogen offtake from any other green hydrogen projects being pursued by FFI." The announcement goes on to say that the parties will evaluate potential co-development of new green hydrogen production and associated infrastructure. The Phoenix Hydrogen Hub led by Nikola is cited as a model. Phoenix Hydrogen announced a $2 million pre-seed funding round, which hardly inspires confidence that this is a big deal. The concept sounds like another hydrogen “dating site” set to get hydrogen projects talking together. Phoenix Hydrogen talks about building one of the largest underground hydrogen storage facilities but with no details on its website. Recent commentary about Nikola is less than flattering.

ii) Baker Hughes and FFI to collaborate on green hydrogen projects

Last week Baker Hughes ( BKR ) and FFI announced a MOU concerning collaboration on green hydrogen and geothermal projects. The announcement was all about exploring potential opportunities for scale up and novel technologies involving green hydrogen and green ammonia, rather than concrete plans. There's a lot of sentiment about bringing early-stage technologies to commercialisation faster than would otherwise be possible.

iii) FFI promotes enthusiasm by West Australian residents to support a big wind farm

Last week FFI announced enthusiasm about a big wind project in Western Australia, but this was phrased as a green hydrogen project, with no indication about how a major renewables project will interface with a green hydrogen capacity.

The above announcements give a flavor of huge enthusiasm from FFI about green hydrogen, but based entirely on exploring opportunities, rather than actually doing stuff with green hydrogen.

Mike Cannon-Brookes puts up million to keep Sun Cable on track

In the fight between two Australian billionaires over who controls the fate and direction of Sun Cable, Australia’s biggest solar PV + battery + HVDC cable project to supply Singapore with electricity, the administrators have accepted a million loan from Mike Cannon Brookes to keep the project on track while ownership and direction gets sorted out. The administrators hope to get binding bids by end of April and complete the sale by June.

Mike Cannon Brookes is seeking to see the Singaporean project through and he seems to have attracted interest from other sophisticated parties. Andrew Forrest sees the dispute as an opportunity to acquire the project, abandon the Singapore ambition, and use the power to expand on his Australian green hydrogen ambitions. Time will tell where this ends up, but I suspect that Forrest may find that he will have to pay a lot to get control of the project. A huge amount of work has been done to get approvals sorted to build the HVDC links and this involves substantial interest from the Indonesian Government.

Conclusion

I’ve been following the hydrogen story for some time now and I see little reason to change the sceptical view that I came to in the middle of last year. Since then the hype around hydrogen has taken off significantly, partly I suspect as a result of lots of lobbying around where to spend the cash being made available under huge European (REPowerEU) and US (Inflation Reduction Act 2022) renewables spending. The European funding for example is talking about " nine hydrogen valleys to repower Europe ." There are plans for $3 billion annual hydrogen spend by 2030 in the US from the Inflation Reduction Act. I find it all a bit frothy and a long way from reality. It is what Governments do when they become captured by vested interests looking to support their schemes.

In the real world Australian billionaire Andrew (Twiggy) Forrest, Executive Chairman of Fortescue Metals Group, is on a campaign to be at the front of the hydrogen revolution. Fortescue is talking a good talk, but reality seems far behind the hype. Forrest is impressive as he has brought Fortescue from startup to the world’s No. 3 iron ore miner. So one writes him off cautiously. His efforts to decarbonize Fortescue’s mining businesses (especially exit diesel) are remarkable but are hard to discount. If he succeeds in reducing Fortescue’s mining costs by 20%-25% it will be remarkable and this is grounds for mining industry investors paying attention. I’m less clear that green hydrogen is as far advanced as Forrest indicates and this makes me cautious about the hydrogen side of FSUGY (FFI, which is big and getting bigger). So I’m cautious, but FSUGY seems a “must watch” company for investors interested in whether or not the hydrogen revolution is going to happen.

I'm not a financial advisor but I follow closely the technologies spearheading the end of the fossil fuel industry. I hope that my comments about hydrogen and FSUGY’s potential role in it are of interest to you and your financial advisor.

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