Fortescue Ltd (FMG.AX) Earnings Call Transcript & Summary

My pleasure to introduce Elizabeth Gaines, Fortescue Metals' Chief Executive Officer. Elizabeth is a highly experienced business leader and was elected to FMG's Board of Directors in 2013, becoming the company's first female director. In 2017, Elizabeth became FMG's Chief Financial Officer, and in February '18 was appointed the company's third CEO. A strong advocate for an inclusive and diverse workplace, in 2020, Elizabeth was recognized as the Women in Resources Champion at the Chamber of Minerals and Energy of Western Australia Resources Award. So we look forward to hearing an update on Fortescue. And welcome, Elizabeth.

Thank you, Digby, and good morning, ladies and gentlemen. It's certainly great to be here with you today. Before I begin, I would like to acknowledge the traditional custodians of the land on which we're gathering, the Wongutha people of North-Eastern Gold Fields, and pay my respects to the elders past, present and emerging. And I'd also like to extend that respect to other aboriginal and Torres Strait Islander people who are joining us today. And while Diggers hasn't been immune to the challenges of COVID-19, it is reassuring that such a renowned event was still able to go ahead in 2020. COVID has challenged all of us. But as West Australians, we can all be proud of how we have worked together and responded to the global pandemic. So I'm going to talk today about Fortescue's response to COVID-19, and how despite these unprecedented times, we achieved operational and financial records, which underpinned our returns to shareholders and our contribution to our communities. And it's from this position of strength and resilience that the mining industry is able to significantly contribute to the state and national economies. And today, I'll also take the -- talk about the opportunities being delivered by the mining industry across innovation, investment, our regions and new energy technologies. But before I go on, let me take you on a short tour of the Pilbara. [Presentation]

We're a values-based business. And our unwavering focus on safety, family, empowerment and setting stretch targets underpins everything we do. And our values are integral to our success, and they continue to be as fresh and relevant today as they were when Fortescue was established in 2003. And Fortescue's unique culture has really shown through in 2020. And having our values of safety and family at the heart of every decision we made helped ensure the Fortescue family. And our broader community stayed safe and well. And from the outset of COVID-19, the government recognized the mining industry as an essential service, and we took that responsibility very seriously. And we've worked closely with the state government and with industry to ensure the safety of our people and communities. In fact, we began dealing with the impact of COVID-19 long before the first case was identified in Australia, given the impact we saw on our China-based colleagues earlier in the year. And then as the pandemic hit our shores, we temporarily extended our operational rosters. And we introduced other measures such as working from home, additional charter flights, changes to our village facilities and temperature and health screening to keep our people and the broader community safe. And I actually personally think that all West Australians should be proud of our industry response to COVID-19. And when I say industry, I mean that in the broadest possible sense, and that includes our contractors and suppliers, local businesses and communities. And with an absolute focus on health and safety, we banded together to manage the industry-wide issues as a collective. We shared best practice, we cared for our most vulnerable, and we were a united front against the pandemic. And I think significantly, we demonstrated that Australia is a reliable supplier of commodities to global markets, and we sustained our contribution to the West Australian and the national economies. The health, safety and well-being of the entire Fortescue family is our #1 priority, and we are committed to continuously improving as we strive to become global leaders in safety. And despite a huge disruption associated with the management of COVID-19, the team stayed very focused on the task at hand, and we achieved an overall improvement in safety performance with our TRIFR reducing by 14% to 2.4 at 30 June. And this year, 96% of our employees and our contractors participated in our annual safety excellence and culture survey. And I think it's fair to say that, that's a participation rate that would be the envy of many. And this survey provides very valuable feedback on how we can continue to build on the culture that makes Fortescue a great and safe place to work. And our strong safety culture has seen our TRIFR reduced by 44% over the past 5 years. And that safety performance underpinned our very strong operational performance in FY '20, which included record full year shipments of 178.2 million tonnes, which was 6% higher than FY '19. Our C1 costs were $12.94 a wet metric tonne, and that included $0.22 of COVID-related costs. And this excellent operating performance drove those record financial results, including revenue of $12.8 billion, which was 29% higher than the previous year. And that's due to ongoing strong demand for our products as well as the market with the average iron ore index price up 16% year-on-year. But in fact, our average revenue per tonne increased 21% compared to the prior year, and that was due to the successful execution of our integrated operations and marketing strategy, including the further enhancements to our product mix. And our very disciplined cost controls and cost management is reflected in EBITDA of $8.4 billion at a margin of 65%, with full year net profit after tax of $4.7 billion. In August, we announced a final dividend of AUD 1 per share, and this, along with our interim dividend of $0.76, represents a payout ratio of 77% of full year NPAT. And that's consistent with our policy to pay out a range of 50% to 80% of net profit after tax. Delivering enhanced returns to our shareholders remains a key priority. And to provide some further perspective, since the company's inception, Fortescue has now generated $19.4 billion in NPAT. We've made $9 billion in voluntary debt repayments, and we've paid total dividends worth USD 9.5 billion, or AUD 4.23 per share. And as I mentioned earlier, Fortescue was very privileged to continue to operate during the COVID-19 restrictions, and there was no impact on our shipping schedule. Notably, the iron ore price has held up strongly through this period, and that's due to that remarkable recovery we saw in China's economy as they came out of their COVID restrictions. And we've also seen the impact of ongoing supply constraints, particularly in South America. We remain a core supplier of iron ore to China, and we've seen strong ongoing demand for all of our products. And pleasingly, we've seen this continue into the new financial year, which has underpinned a very strong start to FY '21. China's crude steel production continues to grow, reaching a record 689 million tonnes in the 8 months to the end of August, and that's an increase of 3.7% year-on-year. China has largely absorbed the iron ore that's been diverted from weaker steel markets. And both iron ore stocks at Chinese ports and stocks held by steel mills remain at low levels, and that's a reflection of the strong ongoing demand environment. So the strength of our operations and balance sheet means that we can continue to reinvest in the business, and importantly, we're investing for growth. There's a significant pipeline of mining and resources projects in West Australia, and Fortescue is very proud to be part of this as we invest in Eliwana, Iron Bridge and our energy projects. And these world-leading projects will be delivered in the next 2 years, creating up to 5,000 jobs during construction and 1,500 full-time site positions once operational. And that will continue to support countless West Australian businesses. So turning first to Eliwana. And Eliwana will see us maintain Fortescue's low-cost status and will provide greater flexibility to capitalize our market dynamics. The project remains on schedule with the team working towards a tight deadline of first ore on train in December. The first rail bridge, including the rail track, has now been completed, while the major construction of Eliwana's processing facility is finished, with the transition to commissioning due to commence this month. On Iron Bridge, bulk earthworks are close to 90% complete, and major concrete pours have commenced in preparation for the construction of the dry process plant. And Iron Bridge is on track for first ore on ship in mid-'22, and that will be a 22 million tonne facility, innovatively designed to ensure it's a low capital intensity, low operating cost, and it's a highly energy-efficient processing plant, which will lower emissions compared to comparable facilities. To account for the increase in tonnes, we've been granted approvals to increase our material handling capacity at our Herb Elliott Port facility from 175 million tonnes per annum to 210 million tonnes on a stage basis. And significantly, the increased capacity at our port, together with our integrated infrastructure and our blending capability, means we can respond to market conditions. And if we choose to, we can blend our premium Iron Bridge product across the breadth of our product range. And that gives us greater flexibility and positions us to meet all market segments so that we can maximize value. So against the backdrop of strong market demand as well as our continued investment in major projects, our guidance for FY '21 is iron ore shipments in the range of 175 million to 180 million tonnes, C1 cost in the range of $13 to $13.50 a wet metric tonne, and that's an assumed average Aussie dollar exchange rate of $0.70, and capital expenditure in the range of $3 billion to $3.4 billion. Our clear strategic focus on operational excellence, delivering on our product strategy and marketing as well as growth and balance sheet management is driving very strong results, and it's delivering significant benefits for our shareholders. And it's from this position of operational excellence and financial strength that we can positively contribute to thriving communities. Fortescue's continued commitment to empowering communities was demonstrated by our total global economic contribution of AUD 17.2 billion during FY '20, and that included $4.3 billion in taxes and royalties. Proudly, we are one of Australia's largest employers of aboriginal people, representing 14% of our Pilbara workforce and 10% of our Australian workforce. And our female employment rate reached 19%, with 26% of senior leadership roles held by women. And on topic of diversity, we believe our diverse workforce is very integral to our success. We're proud to be the #1 ranking stock in the S&P/ASX 100 Index, with total shareholder returns of 266% over the 3 years to June. And research from the Curtin University and the Women's Gender Equality Agency suggests that this is no accident, as their findings showed that diverse leadership teams result in an increased likelihood of better company performance. Unfortunately, though, this is not driving the step change in diversity that Australia needs. The recent Chief Executive Women Census shows a number of women reaching senior leadership positions in ASX 200 companies is actually flatlining. Some of you may recall that last year, I noted that there were more presenters with the name Peter speaking at Diggers than women. And it would appear that this has now become the annual Diggers diversity index. As I note that mining news have already done the count for 2020, with Kristie Batten pointing out that there are more Peters, Davids and Marks presenting than women. In fact, there's 3 of us, Katie Tovich, Meryl and myself, as 1 of only 3 women out of 56 speakers presenting at Diggers in 2020. So as we continue to see examples in large Australian companies of behavioral and cultural standards that are simply unacceptable, stakeholders are now strongly demanding change. And in our view, that change must be led by a renewed focus on diversity. FY '20 was a milestone year for our climate change and energy strategies as we announced an industry-leading emissions reduction goal to achieve net zero operational emissions by 2040, and that includes a 26% reduction in emissions from existing operations by 2030. So our proud history of setting stretch targets is strengthened by the introduction of practical initiatives that will help us deliver on our goals in an economically sustainable manner, and that includes the $800 million investment with our business partners in energy infrastructure. The Pilbara Energy Connect project includes transmission infrastructure as well as solar and gas generation and large battery storage. Pilbara Energy Connect will integrate with the Chichester Solar Gas Hybrid project. And once these 2 projects are fully operational, we estimate that 25% to 30% of our stationary energy across our mining operations will be powered by solar. And further to that investment in energy infrastructure, we are progressing with plans to develop hydrogen technologies. And we recently signed an MOU with Hyundai and the CSIRO to accelerate the development of renewable energy in hydrogen for domestic transport. Significantly, we also announced a $32 million investment in renewable hydrogen mobility. And in a first for an Australian mining company, we will deploy hydrogen-fueled passenger coaches to replace the existing diesel fleet at Christmas Creek from the middle of next year. And that will be supported by the installation of a refueling station, which will harness renewable energy to generate green hydrogen on site. We acknowledge the government's commitment to cut red tape for businesses investing in new technologies associated with clean energy. And in our view, it's very important that this work continues so that there's a clear and efficient approvals pathway that supports investment in major projects as well as emissions reduction. During this year, the mining sectors' work with aboriginal communities, particularly the industry's approach to protecting aboriginal heritage, has come into sharp focus. And can I just say from the outset that the destruction of Juukan Gorge should never have happened. And this tragic event has refocused our industry, the government and communities on ensuring an appropriate balance between protecting significant aboriginal heritage as well as facilitating local jobs and economic growth. And from Fortescue's point of view, our heritage management is guided by our values, and our primary objective is cultural heritage avoidance. We have 7 native title land access agreements and many dozens of aboriginal heritage agreements that established detailed processes for engagement and heritage management. Our agreements with native titleholders create formal and informal opportunities for engagement on aboriginal heritage processes and procedure. I think importantly, Fortescue's agreements do not include gag clauses, and our native title partners are free to publicly speak about the heritage process and can openly object to heritage approvals if they wish to. And this approach has seen us work closely and transparently with native title partners and with traditional knowledge holders to protect and avoid almost 6,000 heritage places since we began operations. We welcome the consultation process around the modernization of the West Australian Aboriginal Heritage Act, noting that it does have far-reaching implications beyond mining, and that includes agriculture, tourism and public infrastructure. We have called for an increased voice for aboriginal people in the process and equitable right of appeal for all parties. And we will continue to work collaboratively to ensure the axe strikes the appropriate balance between protecting heritage as well as supporting jobs, growth and investment. And as the country looks ahead and we begin our recovery from COVID-19, the focus for political and business leaders should be on how we can best recover from the economic recession. And our government's responsibility to balance the rights, needs and expectations of our community while supporting investment in growth will be crucial. Our recovery from COVID-19 is to be led by investment, and the mining sector will be in a very strong position to continue to invest for the future and to create jobs. And nationally, mining investment is forecast to grow by 5.5% this financial year. And in September, the WA Department of Mines, Industry Regulation and Safety reported that almost $19 billion was invested in the WA's resource sector in FY '20. And there are currently more than $100 billion worth of resource projects in the pipeline here in our state. Significantly, the economic contribution of the resources industry is not based on hypothetical projects with delivery dates well into the future. On the contrary, the modeling from the CME suggests there'll be another 8,000 skilled production workers -- construction workers needed in the sector over the next 12 to 18 months. And of course, this investment in growth is built on the current market, with iron ore reaching an export record of $102 billion in the past financial year. So given this, now more than ever, we cannot lose sight of the fact that we are a trading nation. From the wool and wheat exports of the early 1900s through to the growth of the resources sector, Australia has always relied on and benefited from international trade. And our trading success is built on strong partnerships. So it's important that we maintain good relations with existing trade markets such as China, which accounted for 87% of all iron ore exported from Australia in FY '20. These strong trading relationships that underpin the Australian mining industry as a stable and reliable provider of jobs, taxes and royalties, which obviously fund our nation's health, education and public infrastructure. Total royalty revenue received by the WA government for FY '20 reached a high of $9.3 billion, which was a 42% increase on the previous financial year. And Fortescue's contribution to that record figure was $1.25 billion. It's not really surprising then that WA is the only state to deliver a budget surplus. But before I close, I just wanted to touch on the opportunities the mining industry is delivering. So we can't lose sight of the broader issues that we must address. On top of that list is climate change. The United Nations have said that this is a critical decade within which year-on-year emissions reductions are required. Our renewables will play an important part in any future energy mix. And we should capitalize on solar technology and explore hydrogen as an opportunity. Japan, Korea and China have been identified as key prospective markets for hydrogen exports. And by building on our existing supply chain capabilities and our market access, we believe Fortescue and West Australia can be at the forefront of the establishment of a bulk export market for Australian hydrogen. And hydrogen is just one example of how we can build partnerships and trading relationships that can open new opportunities and markets as our economy grows over the next 20 years. And as a daughter of teachers, I strongly believe that training and education are the building blocks to drive sustainable change in people's lives, their careers and communities. And there is a significant opportunity to train our people with the breadth and depth of skills that our future economy needs. And while technology and automation will be an important part of that future workforce, it shouldn't come at the risk of jobs. At Fortescue, we have successfully rolled out autonomous haulage across our entire operations. And this project has seen 3,000 people trained in autonomy, and that's from driving in autonomous zones through to managing our mine control systems. And we haven't made 1 person redundant. And further, as our operations expand, we're offering a range of opportunities to our local workforce, including a current recruitment drive for trainees, where the opportunities specifically targeted at West Australian communities. And pleasingly, 70% of our new traineeships have gone to women. And finally, as I find myself in Kalgoorlie, the largest city in the Australian outback, it would be remiss of me not to talk about the opportunity to build our regions. I think COVID-19 has brought home the benefits of working flexibly and remotely and the significant opportunity for people to have a city job while living in the country. And the benefits are considerable. You have decongested cities, increased population and vibrancy of our regions and improved work-life balance for families, to name just a few. And the mining industry has long contributed to our regional communities. But for our regions to thrive and attract individuals and families from our cities, we need to see a significant investment in our regional communities, such as public transport infrastructure. And a long talked about Perth to Bunbury fast train springs to mind. And of course, fast and reliable Internet, because no one has the patience for another year of buffering or yelling at the screen that you're on mute. So we can all be proud of how West Australia has responded to the COVID-19 global pandemic and the critical role the WA mining industry has played in supporting our state and our national economies. And moving forward, we should be excited about the opportunities the mining industry is spearheading. And from Fortescue's point of view, by keeping our values at the heart of everything we do, we will continue to ensure the safety of our people, their families and the broader community while continuing to invest in growth and deliver enhanced returns to our shareholders. Thank you, ladies and gentlemen.

Are there any questions for Elizabeth before we wrap up for morning tea? Okay. Thank you very much, Elizabeth. Much appreciated.

Thank you.

Thank you very much.