Fortescue is buying Red Hawk Mining (ASX:RHK) for A$254m: Are its green energy ambitions dead?

Yesterday, Fortescue (ASX:FMG) announced it was buying a neighbouring iron ore player – Red Hawk Mining (ASX:RHK).

All about Red Hawk Mining

Red Hawk owns an undeveloped iron ore project that is 30km west of FMG’s Solomon operations. The project, named Blacksmith, has a resource of 243Mt at 59.3% iron grade – 96% of which is Measured and Indicated. FMG has offered at least $1.05 per share which is 29% of the Volume Weighted Average Price, a figure increasing to $1.20 per share if it can acquire an interest in 75% or more of shares within 7 days of the deal being unveiled.

Red Hawk’s bard has unanimously backed the bid, noting that it obtained an Independent Expert’s Report (from accounting firm BDO) which has concluded the offer is fair or reasonable. ‘The offer represents a significant and attractive premium to the market value of Red Hawk,’ yesterday’s announcement read. ‘The cash consideration under the offer delivers immediate value to Red Hawk shareholders and provides certainty, noting the significant risks to the development of Greenfield iron ore projects.

Only a couple of months ago, CEO Steven Michael stood before shareholders and told them his company owned the largest direct shipping iron ore project outside the five major producers. He had plenty of achievements to boast of including four resource upgrades in the preceding 18 months, and a PFS that showed an NPV of US$365m, based on iron ore prices of  US$90 per tonne and life of mine cash costs of US$51 per tonne. The company had been planning a DFS, but planned to optimise the project prior to the commencement. Specifically, Red Hawk was looking towards an expansion beyond the 5mt constraint initially. Obviously, this will be FMG’s responsibility once the deal is done.

Is Fortescue still committed to iron ore? And are its green energy ambitions gone?

Clearly yes to the first part of the question. But this may not seem an unreasonable question to ask in light of FMG’s green energy ambitions, or (for that matter) iron ore prices. As a ‘one trick pony’, Fortescue is overly vulnerable to iron ore prices. It rode the waves of the 2021 iron ore boom, but has not reached the peaks since then. Analysts have varying views but most are bearish and the most ‘bullish’ could be described as ‘neutral’ at best or as ‘less bearish’ quite frankly. It all has to do with uncertainty about stimulus in China, whether it will work to reinvogorate the market at all, as well as huge supply that’ll come onto the market as a result of Rio Tinto’s latest projects.

It is for this reason that FMG has tried to expand into green energy, particularly hydrogen.

The company’s US$4.9bn cash balance means it can plough some money in without needing an immediate return and also establish a foothold in the market. And it has been ploughing money already into the industry, spending US$550m to set up a hub in Phoenix, US$150m on a project in Queensland and a trial plant at Christmas Creek for a further US$50m. But it made headlines last year by scaling back its previous target of producing 15Mt of the anticipated 150Mt hydrogen demand by 2030, plus shedding 700 jobs in its green energy division. The news of FMG buying Red Hawk might be seen as a further move to put green energy on the backburner. All we can do is wait and see what FMG does for the rest of the year, but we are not anticipating any significant developments (i.e. FMG buying a company like GreenHy2 (ASX:H2G)).

Conclusion

Red Hawk Mining shareholders will be happy they’ll be getting cold, hard cash for their investments. Fortescue investors would be forgiven for not even noticing – $254m is just penny change for a company of its size. But it says a lot about where FMG’s priorities in the short to medium term lie…not in the green energy space, but in its traditional bread and butter business of iron ore.

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