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

Thank you, Darcy, and good morning or afternoon, everyone, and welcome to Fortescue's FY '22 Half Year Results Presentation. And joining me today in Perth is Ian Wells, Chief Financial Officer. And as always, I'll start with safety and the health and safety of all of our team members is our highest priority. And I thank the entire Fortescue family for continuing to look out for their mates on our journey to zero harm. Pleasingly, our total recordable injury frequency rate or TRIFR reduced to 1.8% at 31 December, and that was 14% lower than 31 December the prior year, and that was achieved while still managing the ongoing challenges resulting from COVID-19 restrictions. Fortescue maintains our robust COVID-19 management plan, which is designed to safeguard team members and communities, and this is regularly reviewed in light of changes to Commonwealth and State Health requirements and the ongoing COVID-19 situation. And in response to the recent increase in COVID-19 community transmission in Western Australia, we have introduced enhanced screening and testing in addition to our mandatory pre-flight screening, and this includes daily testing of our team members working at our integrated operations center, the Fortescue Hive, as well as expanding our rapid antigen test program to include an additional test within 72 hours of arrival at a Fortescue site. And we're also investing in business continuity planning measures, including ensuring we have adequate resourcing to help manage any potential increase in workforce absenteeism. During the half year, we conducted a Workplace Integrity Review together with an independent assessment of site security and safety measures. And as a result, we've introduced a number of initiatives to enhance the safety, culture and experience of working at Fortescue, and we strongly encourage all of our team members to speak up in line with Fortescue's values and our zero-tolerance approach to harassment, bullying and intimidation. So turning to the half year results and Fortescue's performance for the first half of FY '22 has been outstanding, and we are very proud of the entire team who have delivered record half year shipments and contributed to net profit after tax of $2.8 billion, the third highest half year profit in Fortescue's history. Ian will talk to the financials shortly, but I would like to highlight that the strength of our operating performance and our integrated marketing strategy resulted in revenue of $8.1 billion and underlying EBITDA of $4.8 billion with an EBITDA margin of 59%. And on the strength of this performance, the Board has declared a fully franked interim dividend of AUD 0.86 per share, and that represents a 70% payout of first half net profit after tax. And this dividend continues our track record of delivering enhanced returns to shareholders and is consistent with our stated intent to target the top end of the dividend policy, which is to pay out 50% to 80% of full year net profit after tax. And I will discuss a number of other significant developments shortly. But for now, I'll hand over to Ian to take us through the financials. Ian?

Thanks, Elizabeth, and hi, everyone. It's always a privilege to present a summary of our financial performance, and the results that you can see today have been driven by market factors. And as you've heard, the first half wasn't without its challenges, and those included managing the impacts of COVID-19 and increasingly tight labor market supply chain disruptions, material increase in diesel costs as well as iron ore shipping and general market volatility. So in that context, it was pleasing to deliver another clean set of numbers that are pretty much in line with market expectations. So turning to the results. We generated strong earnings and cash flow by focusing on what we can control in that also includes the planning cycle. We continue to invest and improve in that planning cycle through long-term investments in data analytics, digital systems and processes improvements that support our integrated planning processes, which means we continue to deliver the best outcomes across the business. First half revenue of $8.1 billion was 13% lower than the same period last year as average revenue per tonne declined by 16% to $96 a tonne. That was 70% realization of the 62 Platts index. We're obviously in an environment of industry-wide cost inflation, and we've been really transparent on our cost profile and the drivers of these costs. At the quarterly, we reported that unit costs increased 20% year-on-year. And that's a result of price escalation on key input costs, particularly diesel, also other consumables and labor and importantly, the integration of the Eliwana operation as well as general mine plan driven cost escalation. We also noted that our first half C1 cost of $15. 28 included the direct costs of managing COVID-19 of $0.15 to $0.20 per tonne. And just reflecting on the cost base of Eliwana, that relates to optimizing our existing operations and infrastructure, which has enabled an increase in systems capacity for both processing and rail. And that's what positions us really well to deliver on this year's guidance of shipments of 180 million to 185 million tonnes per annum. EBITDA was $4.8 billion in the half, and that's at a margin of 59%. Drilling down on the slide for those following the webcast, you can see our track record of delivering and generating strong margins through the cycle. So the EBITDA margin in H1 FY '22 was $58 a tonne, and that compares with an average of around $50 a tonne achieved over the past 5 years. EBITDA flows through to NPAT, which was $2.8 billion in the half. That translates into USD $0.90 a share, and in Aussie dollar terms, $1.24. The next slide shows the EBITDA to NPAT waterfall relative to the same period last year. And you can see, again, all the moving parts, including the impacts of volume, price and cost. Another point to note is the FFI operating expenditure of $174 million compared with $22 million this time last year. And you'll see when you get a chance to look at the financial statements, we've got updated segment disclosures, and we're showing now iron ore and FFI as separate segments and also showing the net funding available for FFI expenditure. Moving to cash flow. And as a reminder, the half year net operating cash flow included the FY '21 prior period final tax installment, and that was just over $900 million as well as a working capital outflow, all of which reported in our quarterly result. So first half CapEx of $1.5 billion. That was pretty much in line with plan, a touch under the halfway point of our full year guidance and drilling down on that $1.5 billion, just under half, so $740 million combined expenditure in our sustaining development and minor hub development capital, $590 million in growth and decarbonization. So that's Iron Bridge and Pilbara Energy Connect. In terms of that full year capital expenditure guidance, that's unchanged from the quarterly at a range of $3 billion to $3.4 billion, and that reflects the announced acquisition of Williams Advanced Engineering. And in terms of the split of the $3 million to $3.4 billion, that includes $1.1 billion to $1.4 billion on growth CapEx. So that's a combination of Iron Bridge and Pilbara Energy Connect projects. On free cash flow, historically matches net profit after tax when CapEx and depreciation align and as we continue to invest in growth CapEx, just calling out the key variances between NPAT and free cash flow for the half were the working capital outflow, which we spoke to earlier, the $1 billion prior period tax payment. And also, CapEx was about double depreciation with the variance being $750 million, which is clearly the growth CapEx that I spoke to earlier. So if we move now to the balance sheet. Cash on hand pre-reported at 31 December was $2.9 billion, and gross debt increased to $4.6 billion after we drew the $400 million term loan facility. That term loan facility of USD 1 billion is now fully drawn. We also retained additional liquidity through the $1 billion revolving credit facility, and that is undrawn. Also if you're on the webcast, we've got balance sheet -- investment grade -- sorry, our credit metrics, and what those credit metrics show is that we have balance sheet capacity within our targeted investment-grade credit metrics, which are gross debt to EBITDA of 1 to 2x and gross gearing, which is the book value of debt plus equity of 30% to 40% through the cycle, and so what this simply means is we have balance sheet capacity to fund future growth. We also flagged in the quarterly that we've established our sustainability financing framework, and that will enable future issuance of green and social debt instruments to fund eligible projects and the framework leverages of Fortescue's commitment to ESG leadership and our market-leading commissions targets for Scope 1, 2 and 3 and also recognizes the growth in sustainable and green sources of capital in the marketplace. You heard from Elizabeth the fully franked interim dividend declared by the Board represents a payout ratio of 70% of half year net profit. So then looking at the last 12 months, including the final dividend from last year of $2.11, that's $2.97 over the last 12 months, which implies a trailing fully franked dividend yield of 13.5% on a share price of $22. Moving to capital allocation, and just a reminder on our capital allocation framework, it incorporates the 4 pillars of reinvesting in the business: maintaining a strong balance sheet, capital returns to shareholders and investing in growth. And our disciplined capital allocation is really important to us. And for us, that simply comes back to doing what we say we're going to do, and that's evident in the capital allocation slide in the pack. And just a summary, since FY '14, so over the past 8.5 years, Fortescue generated over $40 billion of net operating cash flow. We have reinvested $12 billion of that back into the business and into growth. We've repaid $9 billion worth of debt, and we've declared now $19 billion of dividends or that's about [ AUD 8 per share ] and that equates to a payout of almost 70% of net profit since 2014. So in closing, we've achieved strong financial results in the first half and really well positioned heading into the second half. And central to our consistent and predictable performance is our values, remaining focused on the things that we can control, safely maintaining operating and capital discipline, which optimizes margins and delivers returns to shareholders. On that note, Elizabeth, back to you.

Thanks, Ian. And touching on sustainability. As societal expectations change, sustainability has never been more important to our investors, our stakeholders and our employees. And as a business, we're very focused on meeting and exceeding these expectations. And our continued focus on sustainability generated strong recognition throughout the first half. And there were a number of highlights, including a Gold Card Sustainability Award in 2022 S&P Global Sustainability Yearbook; and the inclusion in the Australian, Asia-Pacific and World Dow Jones Sustainability Indices for a third consecutive year. In line with our commitment to working with our Native Title partners on protecting aboriginal heritage, during the half year, we announced the establishment of a co-management framework with members of the Wintawari Guruma Aboriginal Corporation. Fortescue supports the modernization of Western Australia's aboriginal heritage legislation, and the Aboriginal Cultural Heritage Bill 2021 was passed in the Western Australian Parliament and was proclaimed into law in December. And we are actively engaging and contributing to the co-design of the important regulations and guidance, which will shape the transition from the 1972 Act. So turning to climate change. And during the half year, the momentum of Fortescue transition to a vertically integrated green energy and resources company continued to accelerate. We're progressing a range of initiatives to decarbonize our operations by 2030 and to remove net emissions from our entire value chain by 2040. And Fortescue future industries will be a key enabler of delivering on these targets. FFI is taking a global leadership position in green energy and green technology, leading the effort to decarbonize hard to abate sectors. And it was this time last year that we updated Fortescue's capital allocation framework to include the allocation of 10% of net profit after tax to fund FFI. And as at 31 December, FFI's unutilized funding commitment is $651 million, and that's after taking into account first half operating and capital expenditure of $242 million. And it's been a busy period for FFI. In November, FFI received planning approval from the Queensland government for the Global Green Energy Manufacturing Center in Gladstone, Queensland, and the first stage development is an electrolyzed and manufacturing facility with initial capacity of 2 gigawatts per annum and an investment of up to $83 million. And FFI has also successfully completed the first phase of studies with Incitec Pivot to convert the Gibson Island ammonia production facility to be powered by green hydrogen. And of course, last month, Fortescue entered into an agreement to acquire U.K.-based Williams Advanced Engineering, and Williams will be vertically integrated into Fortescue and managed by FFI, and its critical technology and expertise in high-performance battery systems and technology are integral to developing battery electric solutions for our green fleet. FFI is investing to develop a global portfolio of green energy projects to supply 15 million tonnes per year of green hydrogen by 2030 and is rapidly establishing the building blocks, which will allow us to fully integrate technologies, manufacturing capabilities and green energy generation and distribution to deliver across the entire value chain. So in closing, the team has delivered an outstanding operating and financial performance for the first half of the financial year. The iron ore market outlook has improved compared to late last year. And while we anticipate further price volatility, global market conditions remain supportive with an expectation of an increase in activity in China in coming months and constrained global iron ore supply growth. And we've had a strong start to the second half, and we are well positioned to deliver on our guidance for the full year, which is for iron ore shipments in the range of 180 million to 185 million tonnes, our C1 cost guidance in the range of $15 to $15.50 a tonne, which retains our industry-leading cost position; and capital expenditure, excluding FFI is a range of $3 billion to $3.4 billion. Regarded by our unique culture and values, Fortescue is strongly positioned to transition to a global green energy and resources company, and we will continue to deliver on our strategic priorities of optimizing returns from our mining operations and investing in growth in green energy, supported by our strong balance sheet and disciplined capital allocation framework. And as always, I'd like to thank our team members, contractors and suppliers for their contribution to an outstanding first half operating and financial performance. And so on that note, I'll hand back to Darcy to facilitate Q&A. Thank you.

[Operator Instructions] Your first question comes from Rahul Anand from Morgan Stanley.

My 2 questions. First one is on the Williams acquisition, if I may. So the USD 225 million that's outside the capital budget for FFI, but could you help me understand perhaps what's the current capital draw per annum in terms of salaries or whatever other costs are in the business or rather for the business? And where will those costs fit for Fortescue? Would that be part of the $400 million to $600 million budget that we have for FFI? That's the first one. I'll come back with the second.

We might want to comment, Rahul, for Williams. We made it clear the acquisition is actually by Fortescue because it's going to facilitate the decarbonization of our mining fleet, and so we updated our guidance on capital expenditure before us excluding FFI to that range of $3 billion to $3.4 billion at the quarterly, and that incorporates the capital for Williams as well.

Yes. So I will think that -- I think the publicly available information for Williams would indicate that they made a modest EBITDA profit off the back of the financials. So obviously, that's their operating costs. And we've purchased on the basis of that we're going to improve that. And obviously, the vertical integration into decarbonization is important. So if you're thinking about the capital expenditure that Fortescue iron ore will incur will be in relation to the development costs of the battery electric solutions, haul trucks and other vehicles as well, which will be a decarbonization cost for the iron ore business. So I think that's how you sort of look at Williams as a stand-alone, but ultimately, it's going to have a contract with Fortescue to develop those battery electric solutions and integrate it into FFI using -- as we said, it's going to be managed by FFI. So it's a reflection of our business becoming vertically integrated and also a little bit more complicated than it has been in the past.

Okay. Sure. And look, the second one is on the low-grade discounts. They are wider than what they've been, and I mean we can talk about perhaps the extra supply that's coming from Rio and also the port stocks if you can provide a bit of color if those port stocks are majority low grade or not. But I guess more importantly, if we look into the next 12 to 18 months, Elizabeth, is there any flex in the system at all, whereby perhaps by foregoing strip ratios and beneficiating a bit more perhaps that you can improve the grade at all and try to capture some of that margin uplift? Or do we have to continue with the mine plan as it sits? And I referred to a long time ago, Fortis Fortescue has gone the other way, i.e., low- graded operations to save on costs. So I'm just trying to understand if the opposite is perhaps possible in the current environment and if you can provide some color around the low-grade discount as well. That's it.

Yes, quite a lot in that question. Look, I think in terms of current discounts and the environment that we're obviously seeing some ongoing volatility, but importantly, underpinning all of that is strong demand for our products. And certainly, we're supplying products to our customers under our long-term contracts. We expect to see a pickup in steel production coming out of the Winter Olympics. Steel inventories are low. So we -- as I said, the -- I guess the fundamentals of the market in terms of demand and supply, there's no major new supplier of iron ore that it might be different in some of our competitors increasing supply of lower-grade products, but the overall fundamentals of supply and demand remain largely unchanged. In terms of low-grade volumes in port inventories, they have increased, and we referenced that at the quarterly. But our share of port inventories has actually come down a little bit, and we've been pretty consistent at around 10% or now down around 9% of port inventory. So that really underpins the fact that we see strong ongoing demand for our well-established suite of products. When it comes to beneficiation, we obviously already beneficiated our ores. We've added the WHIMS at Christmas Creek. The biggest change to our product mix will obviously be Iron Bridge, the addition of a 67 grade magnetite concentrate products. So we are obviously looking at -- and looking forward to the introduction of the Iron Bridge product into our overall suite of products, but we don't have any major plans to change in our beneficiation or product strategy. We've got a well-established suite of products. Importantly, as Ian said, a $58 EBITDA margin in the half, the average of the last 5 years has been $50. So throughout the cycle, we've demonstrated that we continue to generate strong margins, and we do remain focused on keeping our costs low. We have an industry-leading cost position. And by keeping our costs low, that means we can actually, I guess, still prosper through the various cycles of the market.

Your next question comes from Kaan Peker from Royal Bank of Canada.

Just, I suppose, following up on Rahul's question, maybe asking it a different way. But is there an update on Eliwana and when FMG can access that high-grade portion of the ore body? I believe you indicated that it won't occur through FY '22. But what about FY '23? And I'll circle back on the second question.

Yes. Look, I think that -- those discussions and assessment are ongoing. We've got -- we've made -- our product mix for this year has been very stable In terms of accessing those areas, there's still heightened sensitivity. Access to resources to conduct surveys is pretty challenging for the whole industry at the moment, particularly with COVID as well. So we work closely with our Native Title partners to work with them and certainly getting access to the resources for heritage surveys, as I mentioned, is pretty challenging, but we're very focused on delivering on our existing product mix.

Sure. Okay. And I suppose the second one, I just wanted to ask about the Global Green Energy Manufacturing Center. I think previous indication of guidance was that construction for GGEM would commence in Feb 2022 followed by approvals and electrolyser scheduled off the production line in '23. How is this tracking? And I think previous guidance was for up to USD 650 million with the initial electrolyser investment of USD 83 million. What does the USD 650 million include? And does that USD 83 million mean that the electrolyser would be in production?

Okay. So in terms of the Global Green Energy Manufacturing Center in Gladstone, we're absolutely on track. We've got the approvals that we needed. We're turning ground. Construction is commencing, and our plan is still for first production of electrolysers in early 2023. So no change to our plans there. That initial phase was up to 2 gigawatts for $83 million investment. The broader phase is the expansion of the manufacturing capabilities, which may include wind turbines and other aspects of renewable energy. But the focus at the moment is on the development of the manufacturing facility. That's the CapEx we've guided to initially, but that's all on track as we had originally guided.

Your next question comes from Lyndon Fagan from JPMorgan.

My first question is on Uaroo renewable energy hub that's been put out to public comment. I can say it's 5.4 gigawatts. If I put $2 billion a gigawatt on that, I'm at the $10 billion. I'm just wondering if you can maybe talk a bit about that when it could start construction and whether that broad CapEx is about right.

Well, I'm not sure that just that straight extrapolation is correct, Lyndon. Look, at the moment, it is the 5 gigawatts, it's gone to a public consultation process and submission to the EPA. But it is in a study phase, and that timing of development and ultimate project investment will be determined by detailed studies. So not sure extrapolating $2 billion because, obviously, we're looking at lowering our capital intensity, emerging technologies. So that's a real focus for the team. We are currently targeting a final investment decision in calendar year 2023.

Okay. That's helpful. And then I guess while we're on capital intensities, the 15 million tonne hydrogen production target, would you point to a market capital intensity that we should refer to sort of come up with how much that would cost?

Not at this stage. As I said, technology is evolving. We're looking at -- and we're seeing costs come down significantly globally for electrolysers, and we're establishing and we see our own electrolyser manufacturing capabilities. So no, I wouldn't point to a number at this point in time.

Your next question comes from Hayden Bairstow from Macquarie.

Just the 2 for me. Just back on the Uaroo Hub. Is that just confirming, so that is the power requirements that you need just for the iron ore business? Or are you looking to have some sort of third-party revenue in there to help to justify whatever the final investment might actually be? And then the second one is just on Iron Bridge. I mean the project looks it's going okay. But given the cost pressures you're seeing at the moment, is it likely and obviously power costs and whatever costs you think are going to be associated with this energy hub? I mean is it likelihood that we'll see some sort of revision to the long-term cash cost guidance of that project at some point?

Well, maybe starting with Uaroo, I mean that's sort of 5.4 megawatts, that's more than we need for our operations. So obviously, we're looking at opportunities where there may be other demand in the Pilbara for renewable energy. So there is the opportunity. But as I said, that's the study phase where detailed feasibility studies, look at that demand profile and scale it accordingly. So that's part of the process that the team are working through. In the context of Iron Bridge, we are seeing inflation more broadly. And as costs like fuel costs, we've seen a substantial increase in fuel costs in this half versus the same period last year, and those are significant. So we've guided to a life of mine for C1 costs for Iron bridge. There are certain assumptions in there around fuel costs, for example. One of the benefits of Pilbara Energy Connect is we are providing -- we're adding additional capacity at Solomon for our gas-fired power station, and we're adding 150 megawatts of solar generation. So that's -- for stationary energy, the strategy is to provide low-cost energy for stationary energy and then obviously there's the mobile fleet. So that all goes into the mix, and we're obviously entering a cycle of inflation. As I said, it's a life of mine guidance. There's no change to the fundamentals of what we anticipate, but it will be subject to the actual costs of fuel currency, for example. The exchange rates will have a big impact. But we're comfortable where we currently are based on the assumptions that we made.

Yes, perhaps, add to that is that remembering that the FID was done back in 2019, so there's going to be a change to that. And we're coming into first production by the end of this year, so part of that guidance for next year is going to be capital and operating costs for Iron bridge. And as you'd expect, it's always going to start at the start, which is you don't put your whole fixed cost base on, but it's pretty close, and you've obviously got a ramp-up period as well. So we're going to be in a better position to provide additional detail, but also add that the revenue side of the equation in terms of an expectation of getting value for that high-grade magnetite, low impurities, it firms up every day as opposed to perhaps some of the more conservative assumptions that look in hindsight when that investment decision was made. So there's a few balancing items there as well just to consider.

Your next question comes from Paul Young from Goldman Sachs.

First question is on iron ore reinvestment and in particular sustaining CapEx and reinvestment in the mines. I mean sustaining CapEx is around $8 a tonne, sort of double what it was 5 years ago without major investment in new mines, and it's gone up a lot of participants in the Pilbara. But Ian, we roll into the new year, and I guess the question for you is around the 5-year mine plan and how you think about the timing on Nyidi versus a Flying Fish investment to replace Firetail.

Yes. I think over that 5-year month -- that 5--year period, Nyidi is probably at the back end of that or Nyidi or the equivalent of Nyidi major hub if we maybe just call it that is that we're going to have to be spending some money at the back end of that period to have that in production. But then we did call out the fleet cycle that we're going into. So obviously, decarbonization linking into the fleet replacement cycle, but also increased maintenance because coming into the maintenance cycle as well. So going into FY '23, there's a couple of things, which we called out for as a reminder on our sort of ex-hub development sustaining capital, we would expect to be in and around the same level. However, the fleet replacement cycle is changing. We're producing more tonnes, and also mine life costs and capital costs are increasing. And then you've got the hub development capital or the smaller satellite hubs continues, and Eliwana is a good example of access to mining areas means investment in other areas. So I think you need to take those into consideration as well. And when you add sustaining plus hub and ops development for the half, which is we put those altogether, you get $8 a tonne noting that there's some ops development capital, which will probably drop off for next year. But in the most part, that will just be replaced by reinvesting back in more than likely the fleet is sort of the major category that we called out, and there's probably water from a mine planning perspective. And also, we've been investing in resource definition drilling as well over and above what we have in the past for all of the reasons that we've been explaining for quite some time.

Okay. Great. And with that, maybe moving on to FFI. Just noting the slides in the presentation with the projects you've listed. A bit of ebb and flow, projects coming and going based on what FFI has announced on MOUs, and I presume that that's all the timing issues with respect to agreements with governments and levels and advancement of studies. But the question I have is that you've obviously got the 10% of NPAT number out there. But Ian, based on your projections on cash flow, iron ore price forecast and reinvestment in the iron ore business, what is the roughly the theoretical level of annual spend that FMG can actually handle in FFI?

Well, the allocation is -- the allocation impacts free cash flow aligns, as we've spoken about, depending on working capital and capital expenditure. So that's the funds that we're allocating to FFI at that point in time. So depending on your iron ore price assumptions, we'll give you 10%, you can work that out. Then it comes back to the capital expenditure, the reinvestment in the iron ore business through sustaining and decarbonization, which part of that is reinvestment back in the fleet that we're going to spend anyway, but the development costs and the associated energy infrastructure, clearly, we can -- we've got capacity in our balance sheet on the basis that we'll continue to be disciplined in it. But it's balancing sources and uses of funds. We've got the levers. And ultimately, the math works back to an assumption on the iron ore price, managing our costs, generating strong margins. The thing with Iron Bridge capital is that we're almost at the back end of the Iron Bridge capital, and we're very close to free cash flow. So that's also a consideration from our sources of funds where you got returns from Iron Bridge coming in as well, which is an important part of the equation.

Your next question comes from Peter O'Connor from Shaw and Partners.

Two short ones, Elizabeth, that should just nearly yes or no answer. Culture, ExCo - is the level of turnover at the ExCo in the past 12 months. Is that typical or normal? And if the answer is yes, should there be a cultural review of that area? And second question, in terms of average selling price or the discounts you receive, has that discount moved higher or lower this current period?

Well, look, I'll start with. It's not so much culture. I think it's people, and we've sort of talked about this at the quarterly. The majority of people and turnover, we've seen were people who have been with us for more than a decade, and I think that longevity we've had of people in executive team is actually quite unusual, and that's a testament to the strength of the culture at Fortescue. But clearly, we're seeing strong movement with strong demand for talent. What I'm really pleased with is that we've brought in a combination of external talent as well as seeing some really good succession in our people within Fortescue as a result of those movements. So obviously, Dino Otranto has joined us as Chief Operating Officer Iron Ore. Warren Fish recently joined as Director of Aboriginal Engagement, Community and Government. We have a new General Counsel, Paul Shillington, joining us. Adam Meyer was promoted to the Director Health, Safety and Environment role. And really pleasingly, we've seen some movement of our general managers with Katie Charuga-Andrijasevic, formerly Katie Day, who was a General Manager at Eliwana, has now transitioned to the larger operation of Solomon. And we've just had the appointment of our first original General Manager at Eliwana, Rosli Wheelock So we've seen some great talent. We've seen progression. We've seen succession, and I'm really pleased with the composition of executive and leadership teams. So we don't need to do a review. I think we're really pleased with the talent that we've attracted to the business. And we -- the people who have left, we wish them well, and we're happy to their contributions to Fortescue. In terms of average selling price, look, we've seen some volatility. We saw some improvements in pricing leading into February, but we are seeing ongoing volatility. For us, it's about making sure we're staying close to our customers, delivering under our long-term contracts and making sure that we're integrated across our operations and marketing to make sure we're meeting that demand. But we do see strong demand for our products, and we're very focused on keeping our costs low. As you know, Peter, that's a core focus, is making sure that we generate those very strong margins throughout the market cycles.

Your next question comes from Robert Stein from CLSA.

Just firstly, congratulations about the strong results really to cost control in this period. So thinking about FFI and hydrogen and the value chain, are you able to provide some indication of the energy losses across our value chain from generation to transportation right through the sort of customer consumption and of the green hydrogen, including any conversion losses from ammonia? The basis for the question is I'm just trying to get a handle on how to appropriately size renewable CapEx and renewable CapEx intensity for hydrogen project or a hydrogen business at 15 million tonnes, and it'd be great to sort of get an energy balance to see capital intensity. I have a second question as well.

Yes. That's a good question, Rob. I think that's one for a deeper dive with the FFI specialist folks. And certainly, we'll work with Andy to make sure we can address those questions. But I think that's a subject for a bigger discussion.

Okay. Yes, the reason why I ask is it's pretty fundamental to, I guess, the capital intensity of the projects that we're trying to model and put in valuations to justify the, I guess, the gap from the iron ore business to the share price, and so any further disclosure would absolutely help on that.

Yes. Look, I think sorry, just I would add, we understand that, look, technology is evolving, and we're investing in technology. So this is fast moving. We're seeing that huge increase in fuel prices. We're going to continue to see volatility in fuel prices. The fact is where we're actually doing what we thought of what will be a super cycle of a transition to green energy. So Fortescue is very well positioned throughout that entire value chain. It's not just about decarbonization, decarbonizing stationary energy. Understand that we want those level of details and to prepare those models, and we can certainly get some of the subject matter experts to give some further guidance on that. But it is evolving, and that's why we're investing in technology. The acquisition of Williams Advanced Engineering will also contribute to that evolution, and we'll be in the manufacturing electrolysers, and it's part of how we're looking to reduce our capital intensity. So -- but certainly, we can ride some further detail on that in this separate discussion.

Perfect. The second question I had is more related to the iron ore business. So if the thesis on hydrogen and green carbons and the green premium is correct and we start to see that flow through the hydrogen and making it profitable and getting economic return, what does that mean for the 58 business for iron ore because you see similarly that, that business would have a -- would struggle to have a future in that world? And so therefore, if it does move quickly, how should we think about capital intensity of sustaining production at, say, 180 million tonnes to 200 million tonnes for the iron ore business? If we shift up to a 65, 68 magnetite style sustaining profile, then that's going to be significantly more capital-intensive than the $4 to $5 a tonne in the hub replacements that we've probably all got in the models going forward? Are you able to just provide a little bit of an indication to how you can see -- how we should think through that capital intensity?

Well, I think that relies on the basic premise that there will be that preference for the high-grade magnetite and really is the work that we're doing around the future of green iron is testing of our existing design through that process, and there is a lot of emerging technologies. We do a lot of work internally as well as working with specialists in the field and others to -- and looking at the opportunity for DRI. So there's a lot of work that's underway that doesn't necessarily mean we will -- the focus will only be on magnetite. The view is there will be strong demand, ongoing demand for our hematite bones. And so that doesn't signal any shift in terms of our focus on sustaining our current levels of activity across the entire business.

Robert, a couple of other points for me to add in terms of your considerations, With our 2030 targets, Fortescue will be producing iron ore that is emissions-free. So it's going to be 10 to 20 years in advance of our competitors. So logically, would that be valuable to our customers? It may very well. And when you start to work through the economics of that, producing at 200 million tonnes per annum adds up quite quickly. A $5 to $10 number is large. The other point is low-cost renewable energy, which clearly will have been done by that point in time, does change the economics associated with iron ore production. And we've -- we're already doing that right now. It's -- we're doing that at Iron Bridge. And so we would expect as we continue to add renewable energy to our network, and Uaroo is something that clearly can do that, other areas can do that as well as lowering our cost of energy opens up -- it doesn't only provide an economic benefit, but it opens up different opportunities. So Iron Bridge monetizing that ore body really has boiled down to a lower LNG intensity and a lower cost of energy. So that's -- they are the other parts of the equation that, I guess, we are certainly thinking about and would encourage you to have to think about that as well.

Your next question comes from Lachlan Shawn from UBS.

First question is on the Uaroo Renewable Energy Hub. Just interested in your thoughts around funding and the funding model. Is this something that you would look to do in-house on the balance sheet or perhaps signed a long-term PPA and contracted out for someone else to build and run for you? Second question is just on the dividend payout ratio. Obviously, it's come back a little bit to 70%, just above the midpoint of the guidance range. Is this sort of how we should be thinking about the payout ratio going forward given that you are set to face into a period in the medium term where there was a bit more CapEx coming through?

Well, maybe I'll start with the dividend question and Ian might want to talk about Uaroo. Look, in terms of the dividend, it's actually the payout is pretty consistent with our FY '19 and '20, where our interim was the sort of middle -- exact middle of the range of 65%, recognizing that we're in that sort of from a seasonal perspective around that period as there can be some volatility. And then for both of those years, we ended up at 77%, 78%. So it's sort of based on the full year net profit after tax. So we're weighting towards the final dividend, but the full year was at that 77% to 78%. And that's our target, which is to at the upper end of the range of full year net profit after tax. So 70%, the Board take into consideration capital investment and we have been funding Eliwana and Iron Bridge from operating cash flows. We've got obviously peak construction workforce on Iron Bridge. So all of those are taken into account. But certainly, 70% is consistent with sort of towards the upper end of that range, and then we look at the full year net profit after tax as we have done every other year.

And I think in terms of funding we went through a couple of options, which I suppose there's 2 parts. One part is the decarbonization of Fortescue's iron ore division, which would be on the balance sheet, I suppose. So funding that capital, whether it's through a third-party PPA or directly kind of comes back on to balance sheet. If you're talking third-party hydrogen export into the FFI side of things and hydrogen production for export, that's a separate funding solution that we've been clear on non-recourse specific to project financing, which obviously takes it to a different level and has its own opportunities and challenges associated with that. So the sort of -- the project is interesting as it reaches over both. But if we get back to the clear and presenting of Fortescue decarbonization, then that's Fortescue capital one way or the other and will be funded part of our existing capital allocation framework, which we've talked about. And obviously, having balance sheet capacity is important, certainly in the development phase.

Your next question comes from David Coates from Bell Potter Securities.

Thanks so much for the call. Look, you've just answered my dividend question. So look, I just got a quick one on Iron Bridge. Now first products now less than 12 months away. Should we be thinking about whether replacing or displacing current production and the narrowing grading quality discount? Or should we be thinking about it over and above the plant production rate?

Yes, David, thanks for the question. Look, we've always said from the outset of the growth projects, so it's over and above current production. In fact, we've had the licensed capacity to the Port Headland increased from the 175 million tonnes to 210 million tonnes to accommodate Iron Bridge, so this is incremental volume.

Your next question comes from Glyn Lawcock from Barrenjoey.

Elizabeth, just 2 quick ones from me. Just I note in the half, you had SG&A at $125 million, and you made a comment about you've included cost of incentives. Just wondering if you could give me some thoughts around what I should think about going forward. That's quite a big number at $125 million. And is that incentive? Is that, to the question earlier, I guess, around staff turnover? Just trying to keep some of the staff in place. And then the second question is I think Ian talked a lot about this already, but I just wanted to clarify. You had your capital management framework, 10% FFI, 10% growth, 50 to 80 dividends. Just can you elaborate a little bit? Does the FFI 10% spend have to compete on a returns basis? Or is that 10% fixed such that if you grow the iron ore business, the only bit that gives is the dividend? I'm just trying to make sure I understand. Is it just FFI that 10% stays? And so growth versus returns is the other 90%? Because I just -- clearly, if you're going to keep spending $400 million to $600 million on FFI with people's projected profits, you won't -- you'll need more than 10%.

Yes. Thanks, Glyn. I'll start with SG&A. I mean, certainly, our cost of SG&A have been at around sort of $100 million but we did have a cost of an incentive. That's an all of staff incentives, every single person who works at Fortescue. That's not part of the executive team, received. We had a record year, $10.3 billion. And on top of their existing incentives, we actually had a one-off incentive for everybody across the business. As we did the previous year, it was a record year. So that's just to recognize and reward the fantastic contribution to what was a record year. So nothing to do with executive departures or anything else. It was for every single person who works as a full-time employee of Fortescue. Ian, did you want to touch on...

Yes, I'd just add, Glyn, the $125 million is the total SG&A, and it's sort of disproportionate because the bonus is a material portion of the total in the half, and it's called out in the accounts because the variance is largely the increased dividend. In terms of FFI, I think it's an important question that you asked that is that capital immediately allocated or does it compete, I can guarantee is -- it continues to be competed for. And clearly, the carried forward amount is a function of what hasn't been spent. So we're just saying that's the amount that's available, not 100% locked in, and it's subject for competition at a group level, but I can also guarantee it's a subject for competition within the FFI group as well and the various managers competing for scarce resources and putting that money to work on various areas of studies, technology development, manufacturing and so forth. So I guess it flexes with free cash flow or net profit after tax in and of itself, but also the point of FFI and the capitalization of FFI is to get into free cash flow as soon as possible and become self-funding and become a business unit, our profit center in its own right is the longer-term objectives, clearly.

And can I just clarify, will it be $100 million per half then for SG&A? Is that sort of a ballpark number? Because that's even higher than the last few halves, I would imagine.

No, no. It's more like $150 million.

$150 million per annum, you mean?

Yes, per annum. And I guess just -- sorry, just to clarify for everyone else's benefit as well. That's why taken FFI out separately to separately identify because FFI's costs whilst they will have a future economic benefit in the future, they get expensed to the P&L until we get a project that can be capitalized against.

Your next question comes from Saul Kavonic from Credit Suisse.

A quick question. Just again on funding for FFI. I'm just trying to understand, I guess, the 50 million tonne green hydrogen production by 2030, that's going to involve multiple projects. Presumably, you don't want else sequence them at the end, so you want at least 1 or 2 projects relatively soon. Just clarify exactly, what stage are we at regarding funding discussions and offtake negotiations for the near-term hydrogen projects?

Yes. Look, we have announced a couple of MOUs for offtake, so one with JCB and Ryze in the U.K. and Covestro recently in Germany. So there has been discussions around offtake, the MOU stage. A number of projects have been assessed at various stages of studies. You're right, it won't all be all invested at one point in time, but we've made it clear from the outset that these projects and the major projects will need to -- will need a source of funding, and those discussions are ongoing as well. And there's a range of opportunities for funding, and that could be partnering with others as well as looking at project, direct project finance without recourse to Fortescue. So range of funding opportunity is being assessed offtake arrangements being discussed and progressed. So you're absolutely right. It's about pulling all those pieces together as we assess each project and advance those discussions.

Logically, the projects are in their early stage consideration, so the funding conversations as a consequence are very early stage as well. Noting clearly, we're all seeing sources of capital for those sorts of investments, but you still need to get the investment right, investments right with the right economics to be able to access the various funding sources in the market.

And just a second quick question, again, just highlighting the distinction on WAE sitting within Fortescue rather than the FFI division when you acquired WAE, you mentioned that there's obviously opportunity for that divisional business to make money beyond d Fortescue’s internal operations. So to the extent that it's going to make money from third parties is the benefit on the revenue and the profit from that value wave part of the business is going to go into FFI? Or is that going into Fortescue's kind of base business? I'm just trying to understand, is there scope for more capital or M&A to be spent by Fortescue's base business, which is going to be giving kind of freebies to FFI? Or is it very distinct kind of lay.

Let me answer that question.

Fortescue is acquiring Williams Advanced Engineering, and it will be consolidated, obviously, into the group results. There's a subsidiary within Fortescue. The cost associated with it and revenue it generates will be -- will form part of the iron ore business, and that's where that entity will sit.

Your next question comes from Adrian Prendergast from Morgans Financial.

Just a follow-up on a question earlier from Glyn. I just didn't understand the explanation that was given just in terms of how iron ore FFI and dividends compete in the framework for capital. I thought I could have misunderstood but I thought the explanation was that while FFI does compete for capital, any amount of the 10% of NPAT not spent is carried forward. So does that mean it's not competing and really it's just a fixed amount that remains within that subsidiary?

No, I think about it that you still would have come up with a business case to spend the money like any allocation of capital, whether it's operating costs or capital expenditures. So all that we're doing is we're identifying what the 10% was, how much is spent, and therefore, in theory, how much is available. I can guarantee that every dollar is precious and needs to have its own return metrics on what are we getting for that money. So in terms of a forward-looking estimation, some folks have taken the 10% of NPAT and assume that it's funded, which obviously has an impact on the future NPV of the company, but that's obviously ignoring any return on investment. So it's budgeting 101. When the iron ore division, the guys come up and we're looking at the operating or capital expenditure for the business, it goes through a rigorous process, whether it's operating or capital costs. I think that's the conclusion you should take from that.

That's really clear. And just, I guess, one follow-on question. I mean the different parts of your business are very interesting but very different from each other. Just to get some idea, I bet it's not just straightforward sort of return profile, but just how you sort of compare FFI versus iron ore growth? And just to get an idea on how you think about these different opportunities that you have in different spaces.

Yes. Well, I think it's a bit like Elizabeth was talking about the question regarding magnetite production versus hematite production or mining area A versus mining area B. It's our job as the management is to work out where we get the best return on investment from the group, and we've got a number of different levers to do that delivering on our customers' requirements and maximizing margins on the iron ore division and balancing that off with Iron Bridge and balancing that off with FFI. They're different businesses, but the same fundamentals of return on capital employed and so forth for the group is really important for us and capital allocation, capital discipline, operating disciplines. It comes -- always comes back to the same things, and maximizing returns to shareholders is holistic rather than one-dimensional.

I think it's pretty clear in terms of that capital allocation framework. The dividend allocation in the 10% to FFI, the benefit of 10% of NPAT, which is variable, and it will flex with final price -- cost production, so inextricably linked to the results and performance of Fortescue's iron ore business. There's a 10% allocation of NPAT. If that's unutilized, as we've pointed out in the half year results that the carry out goes to the same scrutiny process it, and any capital investment will again need to fix within the allocation of that impact or if it's a significant project have an identifiable source of funding. So we've been clear on that from the outset, and I think that's the benefit of that discipline we've shown in our capital allocation framework. And certainly, the benefit of a 10% of NPAT that is variable in nature means everyone is very focused on the cost base and capital of FFI as well as the iron ore business.

Your next question comes from Kaan Peker from Royal Bank of Canada.

Just 2 quick follow-ups. Just an accounting one. I think on your balance sheet, there's a noncurrent inventory entry of around $400 million. What does this relate to? And second one is more of a hypothetical. Just assuming FFI was capital constrained, what would be your top 3 projects?

Do you want to answer the other one?

Yes, the noncurrent inventory can is a function of the, I guess, the age of our business now. So what it reflects is run of mine inventory that's sitting down in the business, so out on the sites, which is not scheduled to run through the plant for longer than 12 months noncurrent. So it's a scheduling. It's a more accurate representation of the inventories that we've sort of progressively built over time, and that run of mine inventory will be run through the plant in due course and monetized. And so therefore, it's, I guess, an improvement in our systems and processes and tracking of our iron ore units in the system, and that just reflects the timing of monetizing those assets.

Does that relate to Eliwana?

No, it's more than just Eliwana. Previously, the reason why there's nothing in the previous half because we've updated our accounting procedures, and it's recognition of the same inventory. It's just splitting up between current and noncurrent.

Look, just on FFI and then capital constrained or not, its priorities are decarbonizing Fortescue's iron ore business is an absolute priority and progressing a domestic project and opportunity and one of the international portfolio projects, those would be -- and then there's a rafter of opportunities to choose from, and it's selecting those that get the best time frame in terms of speed to market, return profile, capital intensity, operating costs. That will be the usual discipline around what gives us the better returns. So rather than just saying 1 or 2 particular projects in that category, I think there's a strong domestic project and international project and decarbonizing Fortescue is the objective of FFI.

So no specifics?

Those are the specifics.

Thank you. There are no further questions at this time. I'll now hand back to Ms. Gaines for closing remarks.

Thanks, Darcy, and thanks, everyone, for your participation today. Appreciate the questions, the interest in Fortescue. And obviously, we're very pleased with an outstanding set of results including third highest half year profits, and we're very well positioned for the second half in delivering on our guidance this year. So I look forward to touching base with you again with the next quarterly. In the meantime, stay safe. Thank you.