Where are Fortescue’s hydrogen ambitions at? This A$22m deal gives a big hint

Fortescue’s hydrogen ambitions have been well known, but what hasn’t been is how long it will take for the dreams to be realised. Fortescue, a company that makes all of its money from selling iron ore to China, is keen to diversify given iron ore prices have never reached 2021 highs again.

Fortescue wants a part of the hydrogen action

Hydrogen has significant potential to be a part of global decarbonisation efforts. Investors may not know but IEA data indicates there was a demand of 97Mt in CY23. By 2030, this is anticipated to reach 150Mt. Fortescue intends to produce 15Mt of this.

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 truth be told it, the journey has been difficult for Fortescue and it is a long way from its ambitions. Back in July, the company would shed 700 jobs and that the previously mentioned hydrogen production target was on the backburner. Also, did we mention that Fortescue’s partner in Queensland, Incitec Pivot, plans to sell the land it owned that was set to be the location for the plant?

The downfall was despite significant government subsidies promised – $6.7bn of production credits. An article on the ABC was headlined ‘Has Andrew Forrest’s green hydrogen dream evaporated?’ Business correspondant Ian Verrender all but confirmed it, at least until iron ore prices recovered which would only happen when China’s economy would speed up again. This would enable it to take on the debt to proceed.

To be fair, FMG is one of several companies with ambitions struggling to get a project off the ground – Woodside has a project in the US it has struggled to find customers for.

Fortescue’s hydrogen ambitions are on the backburner, but are not entirely discarded

But one move last week gives the hint that the company is not giving up (at least not just yet). Fortescue proceeded with a deal to buy a 39.66% stake in HyTerra (ASX:HYT) for A$21.9m.

It was first announced a few months ago, but the deal only proceeded last week after shareholders of Hyterra voted for the deal. The money will be used for a drilling campaign at a project in Kansas called Nemaha. HyTerra owns nearly 40,000 acres that is believed to be prospective for hydrogen.

This deal may not seem like a big deal, although over A$20m is still a lot to pay for an early-stage explorer. But it is money Fortescue would likely not have invested had it not believed that hydrogen had no future. It is clear it is happy to take low-risk bets for the time being – if it loses that sum completely, it’ll be penny change (in other words it won’t matter). But if this ends up being another micro-cap discovery story, the gains will be lucrative and Fortescue’s management will look like geniuses.

If you’re going to buy Fortescue, only do so for its iron ore right now

Iron ore will continue to be FMG’s money spinner. The company released a Q1 update last month that revealed C1 costs were up 9% from quarter to quarter, while its production retreated 3% and ore shipped retreated 12%. Its cash balance shrunk by $1.5bn.

If you’re going to invest in any mining stock right now, you should probably just stick to gold stocks for the foreseeable future. The only exception should be companies with projects immanently about to come on line – but only if they have done recent Feasibility Studies that account for the post-2021 pricing environment.

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