Investors in Fortescue Metals Group Limited (ASX: FMG) shares may increasingly be looking at what's going on with Fortescue Future Industries (FFI). It does have some big aspirations. But, there's a major factor that could impact how much FFI can pursue its goals.
When a business has major plans, it comes with a sizeable price tag. Money doesn't just appear out of nowhere.
So, how can Fortescue run its normal business and grow FFI?
The strategy that management has employed is that its capital allocation framework includes an allocation of 10% of net profit after tax (NPAT) to fund FFI.
For example, in FY21, Fortescue generated net profit of US$10.3 billion. That allowed Fortescue to allocate US$1 billion to FFI, with an expenditure of US$122 million in FY21.
In FY22, FFI's total expenditure was US$534 million, including US$148 million in capital expenditure and US$386 million in operating expenditure.
The miner is expecting FY23's anticipated expenditure as between US$600 million to US$700 million, including US$100 million of capital expenditure and US$500 million to US$600 million of operating expenditure.
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What will impact the Fortescue Future Industries dream?
Fortescue has committed to putting a specific percentage of its net profit each year into FFI.
But, there's no specific dollar amount because Fortescue's profit can be significantly variable.
Fortescue is one of the world's largest iron ore miners. Its profit is heavily influenced by the iron ore price.
A commodity business generates revenue from how much of the commodity it produces and the price of that commodity.
It costs Fortescue roughly the same amount to mine a tonne of iron whether the iron ore price is US$10 higher per tonne or US$10 lower per tonne. Of course, it does have to pay a bit more to the government if the iron ore price is higher.
Fortescue's net profit in FY21 was US$10 billion for the full year. So far, in FY22, investors have heard that the first six months to 31 December 2021 generated US$2.8 billion of net profit. We'll soon hear about how the business performed in the second half and for the full year of the 2022 financial year. Of course, this will then influence how much Fortescue will allocate to FFI.
FFI has been spending less money than what it has been allocated.
With China being a key buyer of iron ore, it will have a major influence on Fortescue's profit and therefore how it can progress with FFI.
What is it spending the money on?
It is doing a number of different things – it's taking a global leadership position in green energy and technology and wants to get to the point where it can produce millions of tonnes of green hydrogen annually.
One of the first steps is that Fortescue Future Industries has advanced the construction of the 2GW capacity electrolyser manufacturing facility at the green energy manufacturing centre in Gladstone, Queensland.
It's also advancing plans in a number of countries to produce and supply green hydrogen. For example, it recently entered into a memorandum of understanding (MoU) with Firstgas Group to identify opportunities to produce and distribute green hydrogen in New Zealand.
Fortescue share price snapshot
Over the past month, Fortescue shares have risen by around 14%
