The Fortescue Metals Group Limited (ASX: FMG) share price is trading slightly higher on Tuesday after the iron ore miner finally revealed how much it expects to spend to decarbonise its Pilbara operations.
In early trade, the Fortescue share price is up 0.8% to $17.57.
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Fortescue share price higher on 'industry-leading decarbonisation strategy'
This morning Fortescue unveiled its heavy industry decarbonisation strategy which is aiming to eliminate fossil fuel use and achieve real zero terrestrial emissions (Scope 1 and 2) across its iron ore operations by 2030.
Management notes that this investment will eliminate Fortescue's fossil fuel risk profile and enable it to supply its customers with a carbon free product.
According to the release, although it will come at the significant cost of US$6.2 billion (A$9.2 billion), the company expects to generate attractive economic returns from operating cost savings due to the elimination of diesel, natural gas, and carbon offset purchases from its supply chain.
Management also believes that Fortescue is well positioned to capitalise on first-mover advantage and the ability to commercialise decarbonisation technologies.
Cost savings
It will take some time before the company's savings are realised. This could explain the lukewarm response to the announcement from the Fortescue share price in early trade.
Fortescue expects net operating cost savings of US$818 million per annum from 2030 with a payback of capital by 2034. This is based on prevailing market prices of diesel, gas and Australian carbon credit units.
The capital estimate is US$6.2 billion, with the investment largely planned between FY 2024 and FY 2028.
This investment includes the deployment of an additional 2-3 GW of renewable energy generation and battery storage and the estimated incremental costs associated with a green mining fleet and locomotives.
Furthermore, the capital expenditure to purchase the fleet will be aligned with the scheduled asset replacement life cycle and included in Fortescue's sustaining capital expenditure. Studies are underway to optimise the localised wind and solar resources.
Fortescue's executive chairman, Dr Andrew Forrest AO, commented:
There's no doubt that the energy landscape has changed dramatically over the past two years and this change has accelerated since Russia invaded Ukraine. We are already seeing direct benefits of the transition away from fossil fuels – we avoided 78m litres of diesel usage at our Chichester Hub in FY22 – but we must accelerate our transition to the post fossil fuel era, driving global scale industrial change as climate change continues to worsen. It will also protect our cost base, enhance our margins and set an example that a post fossil fuel era is good commercial, common sense.
No comments were made regarding Fortescue's dividend policy. However, it appears inevitable that its payout ratio will need to be lowered in the coming years in order to compensate for this increased investment each year.
