New backer would fuel Aussie hydrogen hype machine

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3 minute read

Andrew Forrest, Australian billionaire and Chief Executive Officer of Fortescue Metals Group, in London, Britain, October 25, 2021. REUTERS/Ben Makori//File Photo

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MELBOURNE, Jan 25 (Reuters Breakingviews) - Andrew Forrest can look to Detroit for his next big idea. The chair of $45 billion Australian iron-ore miner Fortescue Metals (FMG.AX) has spent much of the past 18 months touting ambitious plans to use hydrogen for renewable energy, the latest with German chemicals maker Covestro(1COV.DE). The lack of detail, however, raises concerns. They could be eased by selling a stake in Fortescue Future Industries, the green division, as General Motors (GM.N) and Ford Motor (F.N) did with their self-driving outfits.

The Fortescue enterprise trades at around 6.6 times 2023 EBITDA, per estimates gathered by Refinitiv. BHP (BHP.AX), (BHPB.L) commands a multiple of some 5.8 times and Rio Tinto (RIO.AX), (RIO.L) 5.5 times. The discrepancy is only partly explained by FFI’s myriad hydrogen investigations and studies. BHP is grappling with fossil-fuel assets as Rio recovers from its Juukan Gorge scandal and deals with troubles in Mongolia and Serbia read more . On BHP’s multiple, Fortescue would be worth around 11%, or $5 billion, less. Adjusting for different iron-ore prices, Citi analysts recently put the gap to peers as high as $11 billion.

Yet FFI has no discernible revenue or earnings. That may be changing. A 164 million-pound ($221 million) deal to buy Williams Advanced Engineering and its battery technology could add about 60 million pounds annually to the top line. For now, the Fortescue division is entirely financed by 10% of its parent’s net profit. And there’s no sense of when, or even whether, hydrogen will be a major commercial success.

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Autonomous passenger vehicles provide an apt corollary. The timing of their mass deployment is also a mystery. And there’s little revenue to speak of: GM Cruise generated just $81 million in the first nine months of 2021 while posting an $847 million EBIT loss.

GM first sold a chunk of its Cruise division to the SoftBank Vision Fund in 2018, since when Honda Motor (7267.T), Microsoft (MSFT.O), Walmart (WMT.N) and others have jumped onboard. Volkswagen (VOWG_p.DE) bought a piece of Ford’s Argo. The deals enabled both automakers to turbocharge their businesses and to crystallise valuations. After its latest fundraising last year, GM Cruise is worth north of $30 billion, making it easier for investors to assess. For Forrest and Fortescue, an outside backer would tune up the hydrogen hype machine.

(The author is a Reuters Breakingviews columnist. The opinions expressed are his own.)

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CONTEXT NEWS

- Fortescue Metals on Jan. 25 reported record iron-ore shipments of 93.1 metric tonnes in the six months to the end of December, a half-year record for the company.

- A day earlier, Fortescue said it had agreed to buy Williams Advanced Engineering for 134 million pounds ($222 million) to help it develop electric batteries for freight trains, haulage trucks and industrial heavy mobile equipment.

- Both Fortescue and Anglo American started working with WAE, once part of the Williams Formula One racing team, in 2021 to develop fossil fuel-free haulage trucks. WAE will become part of the miner’s green energy subsidiary, Fortescue Future Industries.

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Editing by Jeffrey Goldfarb and Katrina Hamlin

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