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

Thank you for standing by, and welcome to the Fortescue Metals Group June 2022 Quarterly Production Report Analyst Call. [Operator Instructions] There will be a presentation followed by a question-and-answer session. [Operator Instructions] I would now like to hand the conference over to Elizabeth Gaines, CEO. Please go ahead.

Thank you, Harmony, and good morning or afternoon, everybody, and welcome to Fortescue's June 2022 quarterly production report. Joining me today in Perth is Ian Wells, Chief Financial Officer. And I'm delighted to welcome Yuluwirri McGrady, who joins us as CEO for a day. As a proud Gamilaraay man, Yulu joined Fortescue in 2014 where he worked at Christmas Creek in the Aboriginal Development and VTEC space. And now in his role as Manager of Aboriginal Business Development, Yulu is a very important interface between aboriginal businesses and our Billion Opportunities program. Yulu is committed to encouraging and empowering the next generation of aboriginal leaders to take advantage of the vast career opportunities within the resources sector. And it's great to have you with us, Yulu.

Thanks, Elizabeth. Great to be here.

So that brings me to our fourth quarter results. And as you can see from today's report, Fortescue's operating excellence continues to drive strong results across our key metrics of safety, production and cost with another outstanding quarter for Fortescue. Our operational excellence is underpinned by our absolute focus on the health, safety and well-being of the entire Fortescue family. And I want to commend the entire team for continuing to look out for their makes on our journey to zero harm. Our total recordable injury frequency rate continues to improve with a TRIFR for the 12 months to 30 June of 1.8, and that's 10% lower than at 30 June 2021, and this reflects our core value of safety, and it was a particularly pleasing performance while managing the ongoing challenges resulting from COVID-19. Fortescue is not immune from the latest wave of community transmission of COVID across Western Australia and each of our sites continues to be impacted. I would like to acknowledge our team members who have contracted COVID, including those of either isolated or are isolating on site. And I'd also like to take this opportunity to acknowledge the Enough is Enough report, which was released during the quarter following the WA parliamentary inquiry into sexual harassment against women in the FIFO mining industry. Having participated fully in the inquiry process, Fortescue supports this important work undertaken by the committee. Ensuring the safety and well-being of our Fortescue family is our highest priority and there is no place for harassment of any kind at Fortescue or in any workplace, and we continue to take decisive action to ensure our workplaces are safe for everyone. So moving to our operational performance, and the Fortescue team has delivered excellent results for the June quarter with record iron ore shipments of 49.5 million tonnes. This outstanding operating performance has resulted in record FY '22 shipments of 189 million tonnes, which exceeded the top end of guidance. In FY '19, Fortescue shipped 168 million tonnes, and that's approximately 20 million tonnes below the shipments we just reported for FY '22 and clearly demonstrates the value that has been created year-on-year. And this is the result of the team's commitment to operational excellence and production efficiency, which together with the successful integration of Eliwana has delivered strong growth in Fortescue's production and shipments. This year's results were achieved in a challenging operating environment due to the impact of COVID-19 as well as severe inflationary pressures, including soaring diesel costs resulting from the conflict in Ukraine. We continue to operate in an environment of elevated cost inflation. And as Ian will discuss shortly, these inflationary pressures have further increased during the quarter. Despite these industry-wide and global headwinds, Fortescue's unique culture and values have delivered these exceptional results, and I'm immensely proud of the performance of the entire Fortescue team. So turning to the market, and we continue to see strong demand for Fortescue's products during what remains a dynamic and volatile period in the iron ore market. Ongoing COVID-19 related lockdowns in China and weakening global economic outlook have added to the market uncertainty. Iron ore prices trended lower during the quarter, impacted by COVID-19 restrictions, which disrupted China's downstream steel demand and weighed on steel mill margins. Looking ahead, there are clear headwinds to global economic growth, including the continuing conflict in Ukraine, the energy crisis in Europe and tighter monetary policy. In China, we expect both infrastructure investment and the further relaxation of COVID restrictions to support underlying steel demand. Fortescue's average revenue was $108 a tonne in the June quarter, and that's an increase of 8% over the previous quarter as our realization increased from 70% to 78% of the Platts 62 Index. Our sales and marketing strategy remains very centered on the current and future needs of our customers and the optimization of our supply chain. And Fortescue continues to maintain strong relationships with all of our Chinese stakeholders and that's underpinned by our multifaceted approach spanning supply, procurement, financing, investment and social engagement. Portside sales by our wholly-owned China sale entity, FMG Trading Shanghai increased to 5 million tonnes in the June quarter with sales of 18.5 million tonnes in FY '22. And Fortescue trade in Shanghai is now a very well-established part of our broader sales and marketing function and complements our other sales channels. And as always, we remain very focused on working closely with our customers in China and elsewhere to ensure that we're responsive to market conditions. So turning to [Audio Gap] significant progress with key milestones achieved during the quarter, including 6 module ships unloaded at Port Hedland, which takes the total at 30 June to 20 of 21 module ships that have been versed and unloaded. And all critical path items have now been delivered to site, and I'm pleased to advise that the last module ship was unloaded this week. We've seen the installation of primary crusher A, and we've commenced commissioning of dry circuit A from the primary crushers to the coarse ore stockpile. The team have made continued progress on the installation of the concentrate and return water pipelines across excavation, welding and laying. And construction of the Concentrate Handling Facility at Port Hedland has advanced with civil, structural and electrical works progressing. The Iron Bridge project demonstrates Fortescue's commitment to our strategic pillars of investing in the long-term sustainability of our iron ore business and investing in growth. Iron Bridge will deliver 22 million tonnes per annum of high-grade 67% Fe magnetite concentrate, enabling Fortescue to regard an enhanced product range and increased production and shipping capacity. The capital estimate for the project is unchanged at a range of $3.6 billion to $3.8 billion with first production scheduled for the March 2023 quarter. So turning to exploration and consistent with our strategic focus to invest in the future of our core iron ore business and diversify commodities that support decarbonization. Total exploration and studies capital expenditure for the June quarter was $63 million. And for FY '22, the total expenditure was $194 million. Iron ore exploration in the Pilbara included resource definition drilling in the Eastern Hamersley with a focus on the program at Nyidinghu and Mindy South, along with regional exploration programs across our tenement holdings in the Pilbara. Exploration activity on the Australian copper-gold portfolio included target generation utilizing geophysical data sets gathered through the first half of the financial year with a focus over the Paterson projects in Western Australia as well as drilling at the Vulcan South project in South Australia. And our international activities included drilling programs in Argentina and Kazakhstan, and exploration activities across several project areas in Peru, Chile, Brazil and Ecuador. And on that note, I'll hand over to Ian for the financial update, please.

Thanks, Elizabeth, and hi, everyone. The June quarter in FY '22 marks another period of consistent and predictable performance which has enabled the business to take advantage of market conditions and deliver another year of strong free cash flow generation. And as always, it's a real privilege to highlight the financial results disclosed in the quarterly report that we released earlier this morning. Starting with revenue. Our average revenue in Q4 of $108 a tonne represented a realization of 78% of the Platts 62 Index that was up $8 a tonne quarter-on-quarter and compares to a realization of 70% in the March quarter. That means full year average revenue was an even $100 a tonne at a realization of 72% of the index. The realizations have been in sharp focus through the impacted by Chinese steel production curtailments during the December half and more recently as COVID-19 restrictions disrupted steel demand and impacted steel margins. And you can see revenue realizations improved in the quarter, and we've been consistent in our message that realizations are cyclical and a result of the market supply-demand dynamics, Fortescue's average realization of 78% in the June quarter, is clearly trending back towards the historical average, which is a little over 80%. And it also shows the consistent product quality and low variability of Fortescue's ores continue to be recognized in the market and valued by our customers. So moving to costs. And as discussed last quarter, the lag effect of inflationary pressures continue to impact operating and capital costs, our C1 cost of $17.19 in the June quarter was 9% or about $1.40 per tonne higher than the previous quarter, and that reflects the increase in diesel costs, labor rates and other consumables like ammonium nitrate. C1 cost for the full year was $15.91 and that was in line with our updated guidance, and we remain focused on cost management and leveraging technology and innovation to deliver productivity gains. Our FY '23 cost guidance takes into account that lag effect of ongoing inflationary pressure into FY '23. So relative to the June quarter C1 of '17/'19, FY '23 C1 cost guidance of $18 to $18.75 a tonne anticipates a further increase in diesel prices, labor rates and other consumables as well as mine plan driven impacts. And just a reminder on our cost sensitivity guidance for fuel and energy, which is largely diesel, that has increased to represent around 20% of total C1 costs, and we guided that a $10 movement in the barrel price of crude oil translates to a $0.30 to $0.35 per tonne impact on C1. And on the exchange rate, the majority of our cost base is incurred in Aussie dollars, so every $0.01 movement in Aussie-U.S. exchange rate impact C1 by about $0.15 a tonne. Moving to cash flow and balance sheet. Closing cash at 30 June 2022 was $5.2 billion, and that compares to $2.2 billion at 31 March and reflects both strong free cash flow generation during the quarter as well as the proceeds of our $1.5 billion bond issue. That cash balance is also after capital expenditure of $766 million in the quarter, bringing total CapEx for FY '22 to $3.1 billion that was also in line with guidance. The investment included about $1 billion on major projects, that's Iron Bridge and PEC as well as $220 million for the acquisition of Williams Advanced Engineering. Gross debt increased to $6.1 billion at the 30th of June. That was after the completion of the bond issue, which included Fortescue's inaugural green bond of $800 million. And the notes issued further optimizes Fortescue's capital structure and is aligned with our capital allocation framework, which includes a commitment to a strong balance sheet with targeted investment-grade credit metrics. And as we've done in the past, we'll continue to proactively manage our debt maturity profile. This balance sheet strength and our disciplined capital allocation framework positions us well moving into FY '23 to continue to reinvest back into the business to support safe, reliable and productive operations and we're clearly seeing the benefits of that with our production performance. We're also focused on delivering returns to shareholders and also investing in growth. And on that investment, there are a few parts to highlight in our FY '23 CapEx guidance, which is a range of $2.7 billion to $3.1 billion, excluding FFI. Firstly, on sustaining capital, that's a range of $1.4 billion to $1.6 billion. This is capital investment, which supports asset performance and production increases and as a result, an attractive return on investment. This category is showing an increase relative to FY '22 of $1.3 billion. And just to call out a few items. In FY '23, we'll see the completion of the operational development projects that started in FY '22. We've got scheduled maintenance on our oil processing facilities. We also have maintenance and upgrades of camp infrastructure, and that's aligned with the initiatives that were identified through our workplace integrity review. We've got some mine plan led dewatering increases. And of course, there will be some sustaining capital incurred for Iron Bridge as it transitions into operations. We're also guiding hub development CapEx of $300 million with work on the Flying Fish mining area. Exploration and studies of $200 million, and that's in line with FY '22, major projects in a range of $700 million to $800 million, and that's reflecting the completion of the Iron Bridge project and ongoing work on PEC. And also then the final category is $100 million to $200 million of capital investment in decarbonization and that largely relates to early-stage renewable energy infrastructure and green fleet development, and they both aligned their decarbonization commitments. On Fortescue Future Industries, FFI's total expenditure in FY '22 was $534 million. That's inclusive of $386 million of operating expenditure, and that was also consistent with our guidance. In accordance with Fortescue's capital allocation framework, the capital commitment unutilized by FFI as at 30 June 2022 is $728 million and FFI's FY '23 anticipated expenditure is a range of $600 million to $700 million, inclusive of $100 million of CapEx and the balance of $500 million to $600 million will be recognized as an operating expense. So in closing, delivering consistent performance and being transparent in doing what we say we're going to do is an important part of Fortescue's track record of delivery. And as always, by focusing on the things that we can control, we continue to create value for all of our stakeholders. So we look forward to disclosing the full set of financial results at the end of the next month, end of August. And on that note, Elizabeth, I'll pass it back to you.

Thanks, Ian. Fortescue is taking an industry-leading position on reducing emissions across our operations as we continue to transition to a global green energy and resources company. We've set clear priorities for our pathway to decarbonization, including investment in renewable energy through Pilbara Energy Connect as well as investing in green technologies to eliminate the use of diesel in our mobile fleet. And we're already seeing the benefits of our decarbonization initiatives with over 78 million liters of diesel consumption avoided in FY '22 at our Chichester operations as a result of the Chichester solar gas hybrid project, which included the first large-scale solar power generation from November last year. Development continues on the Pilbara Energy Connect project, which includes transmission infrastructure, hybrid solar gas generation and large-scale battery storage. PEC will integrate Fortescue's stationary energy facilities into an efficient network and enable the integration of additional renewable energy in the future. And recent milestones include the completion of the Stage 1 transmission line construction and energization which is now providing power to Iron Bridge as well as the completion of the installation of all major structures and mechanical equipment at the expanded Solomon power station. During the quarter, Fortescue entered into a strategic partnership with Tier 1 global heavy equipment manufacturer, Liebherr, for the development and supply of zero-emission green mining haul trucks. And this agreement is a major step to decarbonizing our mobile fleet, and it leverages the capabilities and the considerable value that's been created through Fortescue's acquisition of Williams Advanced Engineering earlier this year. Fortescue Future Industries is taking a global leadership position in green energy and technology and will be a key enabler in delivering on our decarbonization targets. Progress continues on the development of our Infinity Train project, which will use gravitational energy to recharge its battery electric systems without any additional charging requirements. Another milestones for FFI during the quarter included the appointment of Mark Hutchinson as CEO Elect, which follows the appointment of Dr. Guy Debelle as FFI CFO. And Mark was the former President and CEO of General Electric Group Europe and held a number of senior positions during his 24-year tenure at GE. Another activities for FFI during the quarter included the construction continuing on FFI's 2-gigawatt electrolyzer manufacturing facility at the Green Energy Manufacturing Center in Gladstone, Queensland. And FFI also participated in an Australian-German business coalition to release a green hydrogen roadmap for large-scale green hydrogen import into Germany. And this follows FFI's previously announced MOU with E.ON, one of Europe's largest operators of energy networks and energy infrastructure to deliver up to 5 million tonnes per annum of green hydrogen to Europe by 2030. So in closing, building on a third consecutive year of record operating performance, our FY '23 guidance reflects our ongoing commitment to optimizing returns from our integrated operations and marketing strategy with iron ore shipments in the range of 187 million to 192 million tonnes, including 1 million tonnes from Iron Bridge, a C1 cost for hematite in the range of $18 to $18.75 a ton and capital expenditure excluding FFI in the range of $2.7 billion to $3.1 billion. We remain focused on innovation and productivity to maintain our industry-leading cost position and deliver strong operational performance despite the inflationary environment that we're all facing. Together with our focus on investing in growth through the Iron Bridge Magnetite project and Fortescue Future Industries, we're well placed to ensure our stakeholders continue to benefit from Fortescue's success. And as always, I'd like to pass on my sincere thanks to all of our team members, contractors and suppliers for their hard work and commitment during this quarter and the financial year as we continue to deliver on our strategic priorities and achieve record operating performance. Thank you. I'll hand back to Harmony to facilitate Q&A.

[Operator Instructions] Your first question comes from James Redfern from Bank of America.

Elizabeth and Ian, hope you well. Just 2 questions, please, for me. The first one, this has been talked about before, but I just wanted to confirm the marketing strategy for the Iron Bridge Magnetite product, they will start being produced for the March quarter next year. I mean it's only 1 million tonnes next year, but thinking more for FY '24. Just wondering, will that be sold as a concentrate product directly to China or blended with SKUs other hematite products?

Thanks, James. Look, we've built the infrastructure so that we can blend. So I think that's an important part of this is that the infrastructure at the port will facilitate the blending of the concentrate with hematite funds as to whether we actually blend will depend on the best value that we can generate from the sale of the magnetite concentrate at the time. So we've got the flexibility to do that. At this stage, it's probably leaning towards sale as a stand-alone product. But I think importantly, we can also sell a virtual blend, which is magnetite concentrate and also acquiring [indiscernible]. So the team are working on the marketing strategy for magnetite, but we know there's going to be very strong demand for a high-grade magnetite concentrate in the market.

Okay. Excellent. Second question is around CapEx. So sustaining CapEx appears have increased to around $8,000 a tonne from $6,000 a pound previously, which is higher compared to your peers. And then also the amount -- the spend in FFI that is going to be expensed, so it's 85% in FY '23, up from 70% in FY '22. So I just want to understand, one, why is the sustaining CapEx so high? And two, why is the amount this being expensed in FFI up compared to FY '22?

Well, maybe we'll start with sustaining CapEx. I'll ask Ian to answer that one, and I'll...

Yes. So the sustaining CapEx, I think we've been pretty consistent all the way through in terms of, I suppose, the cycle that we're in. We spoke about heavy mining equipment and the maintenance cycle, we're heading into a fleet replacement cycle later in the year. We've also had mine plan-led investment and, I suppose, differentiating our sustaining capital to our peers. You can probably also look at our production performance relative to our peers. So we're getting a good return on reinvesting back into our assets. Elizabeth spoke about the FY '19, 168 million tonnes versus 198 million, that's at 20 million tonnes per annum. It doesn't take long to get that to add up. And if you look at our average EBITDA over the past 5 or so years, that's $50 a ton, very quick payback let alone $100 a tonne. So we're in that cycle, supporting operations. Looking forward, we expect our overall capital to reduce as Iron Bridge completes, obviously, PEC will wind off as well. And excluding the decarbonization investment, which is -- which will be further down the track. And looking forward, you should think about it from the perspective we've flagged our fleet replacement and associated investment as production increases, mine plan-led. we've also then got hub development, which the smaller hubs will feature until the next major hub, which we've spoken about is likely to be meeting new with FID on netting now probably around FY '25. So I think we're really well placed at the production performance consistency of our operations. And remembering that T155 was 155 million tonnes per annum. So we've had effectively a very low capital cost production creep and that's where we're seeing that we're getting an appropriate investment on that capital.

Maybe I'll pick up on the FFI and Ian might want to add to that. But in terms of the percentage of OpEx versus CapEx, I'm not sure we should look at it as a fixed percentage. It's just how the numbers have played out. In FY '22, there was investment across HyET Solar, it's another smaller acquisition. And the current split is a function of the CapEx is largely on the manufacturing initiatives. And the OpEx reflects the current activities across the business, largely centered on project identification and targeting specific assets and specific projects, but those costs can't be capitalized until we actually have a project. So there will be an operating expenditure until there is a project. Anything you want to add that, Ian.

Yes, start-up business and the operating expenditure treatments are a function of the accounting standards.

Next question comes from Hayden Bairstow from Macquarie.

Ian and Elizabeth. Just a couple for me. Just on the CapEx, I just wanted to touch back on sustaining. I mean, is that sort of level then a fair number to you, ignoring all of the other stuff, which clearly is going to roll off. Should we be thinking about sort of around that sort of $1.5 billion mark for the hematite assets going forward? And then there'll be, as you say, need new hubs and things like that, that come in that make it a bit more lumpy. Is that a good way to think about it?

Yes. I think I've been consistent in sort of talking about depreciation as a proxy for capital, noting that you do have some lumps and bumps and not that you'd be broad enough to go back and have a look at it. But if you look at our investment over the last 10 years, it's not surprisingly matches up pretty close to depreciation. So a couple of things, depreciation is increasing. We've been investing at higher than depreciation for over the last few years through our growth projects. and so forth. But going forward, that's a fair proxy. The key points of the lumpiness, I spoke to answering James' question, which is the fleet replacement, the smaller hub development, which is maintaining production and then a new being the major one. And then obviously, that's excluding decarbonization, which is something that we haven't provided to you yet. More broadly, we've got some capital guiding for this year, which is early-stage studies type and the research and development expenditure as opposed to the major investment required to support our broader decarbonization by 2030.

Okay. So it lifts the D&A to match the sustaining capital guidance, I guess, the message there. But then just confirm. And then also on Iron Bridge, you're not going to produce much this year or FY '23. Do I just assume it's all capitalized for this year? Or are we going to run it through the P&L in the early phases with an effective loss?

So the way the accounting work, Hayden, is that the first production as soon as you've got revenue, it's not about being necessarily profitable revenue, but it seems you've got revenue, you kick in from CapEx to OpEx. So your cost on a per tonne basis is kind of irrelevant to the production. It's kind of what the cost is. There is some inventory. But if you think about Eliwana and the ramp-up of the Eliwana, the first batch of production over a number of months is disproportionate on a cost basis on the long run cost versus the cost within that period. So short version is there will be operating costs for Iron Bridge that we recognized along with that 1 million tonnes and again, the cost will be disproportionate to the 1 million tonnes.

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

Two questions from me. Just wondering if you could give a little bit more guidance around the portion of [indiscernible] refiners for FY '23. I mean do we expect to stay sort of that single-digit percentage for the product mix?

Yes. It will be consistent with the sort of volumes we saw in FY '22.

Sure. And also maybe on Iron Bridge. When will we be able to get a unit cost update for that?

Yes. Well, I think that's probably for next financial year. We're currently in the midst of completing the development. We'll have some costs, as I mentioned, to Hayden, but I think guidance for Iron Bridge will be later in this year, if not this time next year.

Sure. And just quickly, still on Iron Bridge. Just wondering how we sort of know that 1 million tonne guidance with March 2023 first production. It seems like a slow initial startup. That's fair to assume?

Well, we indicated a 12- to 18-month ramp-up. I think for FY '24, it's relatively linear. We'd probably see in FY '24, depending on where we are in that range between 7 million and 11 million tonnes. I think that will give you an indication. We're not -- that would be the indication in terms of FY '24 volumes based on that ramp-up profile. But we've had a lot of success at ramping up in Eliwana. We know how to ramp it up, and that's where the focus will be once we get the project completed and commissioned.

Your next question comes from Robert Stein from CLSA.

Congratulations on a record GR. Just a couple of questions on -- couple of questions on the hydrogen side of the business. So, one, just on the electrolyzer facility, how flexible are you in changing technology between different types of electrolyzers as they either compete or get that up versus, say, their competition, so the PEM electrolyzers, for example?

Well, I think the team is doing right across development. There is some flexibility in that we're looking at a sort of automated assembly facilities. So as things change and flex, there is some flexibility there to change with that new and emerging technology as well.

So you're not locked into a technology at the start, you can adapt and move as different cost competitor, so different technologies change?

It's a combination of the stack and then you get the sort of balance plant and the technologies. So this is an initial stage. And -- but there is -- importantly, there is this automated -- the capacity to automate the assembly. And you can -- as we know, with many manufacturing facilities, things can change. And then you have that flexibility with an automated assembly functions. So we're at the initial stages now. We -- the team is staying right across that emerging technology, and there will be the opportunity to flex as that opportunity emerges. And we've talked about this being Stage 1. There could be other stages of that facility.

Yes. No problem. Thanks for that. And the second part of that question is relating to the green iron technology that we've heard a little bit about it in the past. We haven't heard on it much recently. Can you just give us an update on how those pilots are going with the conversion of low-grade iron ore in the Pilbara to that green iron at low temperature.

Yes. Look, that work is progressing. So we're obviously -- we think we're in a unique position to scale green iron and potentially green steel production in a decarbonizing economy. And through Fortescue Future Industries, we are evaluating a range of pathways. This includes that electrochemically converting iron ore to green iron at low temperatures. We have -- we've had a pilot plant, and we're now establishing a separate facility here in Perth to really advance that work and get to lab-scale testing in that work. And that's -- there's a lot of work underway, particularly in the LTE, which is that low-temperature electrochemical conversion. So we've established this dedicated facility to advance that work. And we're also looking at DRI studies as well.

Next question comes from Lyndon Fagan from JPMorgan.

So the first one is just on the $600 million to $700 million spend on FFI, which I can see broadly equates to 10% of NPAT this year. However, when I think about that going out a few years and I look at consensus a few years out, which is $3.8 billion NPAT, which implies sub-$400 million going into FFI. I'm just wondering whether that 10% of NPAT guidance is up for debate or whether, I guess, the company moves away from it because it's very hard to envisage that the spend goes down given all the projects that need to be built. Now I'm guessing whether ultimately that spend fluctuates with the iron ore cycle.

Well, look, there's a funding commitment unutilized at the end of June, as Ian called out of $728 million. FFI has been off to a very strong start from that 10% NPAT allocation. The -- as we mentioned earlier, as the team are assessing the portfolio of projects going through that asset identification and the feasibility and operating expenditure. But when a project is actually approved, that will be capital expenditure, and that project will need to have its own funding source. So it's heavy on operating expenditure at the moment as we go through that target identification and the way the accounting standards work. That needs to be an operating expense, but as we actually go through and identify those projects and improve those projects, that will be through capital expenditure, as I said, with its own funding source. And I think we talk a lot about the cost and the investment, but then there's the demand side of it. And what we're seeing is strong demand for renewable energy. I think that's evidenced by the MOU with E.ON in Germany. In fact, we've had the Chief Operating Officer of E.ON, Patrick Lammers here in Perth recently visiting our operations. And their view is, can you do it quicker because there is very strong demand for green renewable energy. And we're seeing that strong demand -- and the revenue that comes from that will also be an important part of that overall equation. So the team is doing a lot of work, the 10%, we've been very clear and very disciplined in our asset allocation and we remain focused on that overall capital allocation, the strength of our balance sheet. And with FFI, as I said, as those projects develop and that flips to capital expenditure and then having that source of funding to support those projects will be part of that development.

So just to clarify, if, for instance, we end up with a $2 billion budget for FFI in a few years, if $1.5 billion of that was from project funding, that wouldn't be included as part of the 10% of Fortescue NPAT, just to try and use a worked example. Is that how I should think about it?

Yes. We've been clear on that from the start, Lyndon, that any project will require its own source of funding that wasn't intended to be funded from the 10% NPAT allocation. And actual project is intended to have its own source of funding.

Okay. Great. And then first cab off the rank, is it possible to just update us on what that might be? I guess I'm still struggling to try and value FFI and just thinking about what might be coming up?

Look, I think we've been -- we've communicated there's been a number of releases in terms of the areas of focus for FFI. This work is advancing on the feasibility studies for Gibson Island in Brisbane. So that's certainly getting a lot of attention and focus from the team. There's work underway and other domestic opportunities, including Esperance here in Western Australia, the Pilbara region of Western Australia as well as some international opportunities in Brazil, New Zealand and in Africa. So a range of project initiatives that the team are focused on. I think domestically, those would be and Bell Bay in Tasmania. Those have been the areas of more near-term focus.

Your next question comes from Paul Young from Goldman Sachs.

A few questions on the hematite business. The first one is just an observation about the record quarter, doing a fantastic job really, probably leading the way for the industry on how to debottleneck operations, particularly at the port. Just an observation around the hematite ops are doing, 190 of shipments for the next 12 months? And if Iron Bridge, assuming it gets to 20-odd million tonnes, 22 million, I should say, in FY '24, that does put you at the cap of 210, which is a good problem to have Elizabeth, but any sort of discussion internally about, if you do get there, that potentially you might look to change the license to go beyond that?

Well, we were comfortable with the -- 210 million tonnes, which was notionally 22 million tonnes of magnesite and 188 million tonnes of hematite. As you said, we've seen fantastic performance across the hematite operations. We have got a ramp-up profile. So we've got some time with magnetite, but to consider on our future port requirements might be. And there's always an opportunity for us to look to increase that capacity at the appropriate time. But we're comfortable that we've got the infrastructure in place at the port with the concentrate handling facility. Just completed Canyon G, which gives us that flexibility from a blending perspective, we've got the capacity that we need for that 210 million tonnes. We work well with the Pilbara authority. They keep abreast of their plans for the port but we're comfortable where we are at the moment. And that given we have that ramp-up profile but we're always staying very focused on future plans and future developments.

Yes. Great. And then on just FY '23 guidance and looking at costs and what's embedded in that? Obviously, the less waste you move, in theory, the better. Your strip ratio is only 1.1 in the June quarter. Traditionally, you've said or historically, I should say that we should be using 1.5. What will the strip ratio be in FY '23 and understanding that you don't have a huge amount of flex?

Yes. Look, it will be around that 1.5 or so -- and that's what we've guided for 1.5 thereabouts. So yes, a bit more in that June quarter, but we expect to be around about that level. I'm going to drive it to that over the 25-year mine plan.

Just a reminder that full year was 1.4 as well.

Yes, the full year for FY '22.

That's not a linear quite...

The costs are a function of all the other inflationary factors that we're seeing, diesel, labor, other consumables.

The good news is the plan is we've got it right because you start and that natural mine life inflation, which we've been talking about for a while is -- that's a reality that you need to deal with and mitigate.

Yes, I understand. And Ian, just while you there, did I hear correctly on Flying Fish that this is spent on Flying Fish in FY '23 on mine in place? I might missed that.

Hub development.

That's hub development.

Yes. Just on that end, is that coming early because I thought of Flying Fish was more a 2030 sort of time frame?

Well, these things change. I don't know about where the 2030 has come from, but that's what the schedule has popped out and we've been working on Flying Fish for a couple of years. I think at least -- I reckon, you've got -- you've perhaps misconstrued the 2030...

Your next question comes from Glyn Lawcock from Barrenjoey.

Elizabeth, could you just clarify your comments to Paul just before about the limit at Port Hedland? When you said 188 in '22, are they firm limits or is it you can ship whatever you like in the 210?

No. We announced at the time when we received the 210 million tonne increase that, that was 188 of hematite and 22 million tonnes of magnetite. Having said that, Glyn, we're actually actively in discussions with the regulator around increasing that to having greater flexibility given the ramp-up profile of Iron Bridge and the -- contribution from magnetite. So it's 210 million tonnes total. There were limits in terms of the split, but we're actively in new discussions. And that's been reported on in the past in discussions about the flexibility within that split.

Could that see some extra spend at the port then to manage us if you get a larger split for DSO? Or is there any risk of more spend?

No, no, nothing material at all. I mean -- that's what we're working through. But no, there wouldn't be anything material.

Okay. And that's a calendar year limit. So you've got to get a solution done before year-end?

It's a calendar year limit. So on the current run rate by the end of this calendar year, we want to have clarity on that, but we're well advanced on that.

Okay. And then just the second question, just on the electrolyzer facility in Gladstone, you said projects will be funded by nonrecourse funding. Where does the electrolyzer facility sit then? Is that not an FFI project that should be funded nonrecourse to Fortescue shareholders?

No, that is an FFI project, but we announced the capital spend on that with a relatively modest -- about a $80 million investment. And we had support from the Queensland government as well. So that project sort of fitted within that allocation of NPAT in July.

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

I just wanted to ask you, maybe -- Just wondering if the capital spend starting 2024, is that part of the capital spend currently being guided [ June '22 ].

The studies expenditure in FY '23. So we're advancing our studies expenditure for [indiscernible], but that's very small. I mean it's not a significant spend in FY '23, if you didn't you know, at this point in time.

Sure. And just on the last couple of quarters, process volumes are larger than ship volumes for the second quarter in a row. Should we expect this to reverse over the first half of next year? We just sort of ask more around the cost profile.

Sorry, I didn't quite catch the beginning of the question. Could you repeat that?

Our process volumes were larger than ship volumes for the last 2 quarters. Just wondering, should we expect that to reverse in the first half of the year?

No. No [indiscernible] stock levels -- managing stock levels.

Your next question comes from Lachlan Shaw from UBS.

So just a couple of ones for me. So firstly, on Pilbara Energy Connect, $462 million spent so far. Over what time frame should we think about the remaining spend there occurring.

Lachlan, I'd say most of it in this year, but it could go into next year as well. So in terms of the original range, we said it was kind of close to $700 million. So there's $250 million to spend. Some of that -- it's going to be this year, and it could go into next year, probably more weighted to this year than next year, but that's -- that we'll have to wait and see.

Got it. That's helpful. And then just a second question. So just back to FFI and funding -- financing the projects. How are you thinking about target final equity hold from FFI's point of view?

Well, I think perhaps back on the 10%, if you think about the 10% as being the equity capitalization of the business right now. And so the previous question about the split of debt and equity and projects having debt funding, but also naturally, the size of the projects will require some level of partnering. For example, we use the example of the success we've had with Formosa, for example, from a joint venture perspective. That's not to say that all of the FFI projects will be joint ventures, but you can foresee arrangements where offtakers become equity partners as well because an important part of this whole process is -- well, there's asset identification and technology development, but there's also access to capital. So I guess it's difficult to say precisely other than maximizing returns to Fortescue shareholders would be our overriding objective, which is an obvious statement. But nonetheless, it's hard to say at this point in time.

Got it. Okay. Understood. I might just sneak one more in, if I can. Just on the China buying platform centralization. Do you have any thoughts or observations on that?

Lachlan, I think we're obviously monitoring that very closely. We continue to stay very close to our customers. We continue to see it's really a market-based approach. That means that the prices will ultimately be determined by supply and demand for iron ore. We haven't had any formal guidance yet on how that may operate and we're obviously, as I said, monitoring that closely. But we've been selling iron ore into China under our current approach for over 14 years, and it's been industry standard for most of the time, it works well. But having said that, we're always open to engaging with our customers to better understand their needs and demand for products. And ultimately, that will determine price. But we will engage -- actively engage and monitor the situation as it develops.

There are no further questions at this time. I'll now hand back to Elizabeth Gains for closing remarks.

Thanks, Harmony. Thanks, everybody, for attending today's call. I really appreciate your interest in Fortescue as you can no doubt tell, we're very pleased with the continued operating performance right across Fortescue, and we look forward to sharing the full year results with you at the end of August. Stay safe and we'll speak to you then. Bye.

That does conclude our conference for today. Thank you for participating. You may now disconnect.