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Morgans’ warning: Not everybody is sold on Twiggy’s hydrogen shift

Morgans Stockbroking has raised key concerns about Andrew “Twiggy’’ Forrest’s dramatic pivot into hydrogen following the resignation of Fortescue’s chief executive Elizabeth Gaines.

Dec 14, 2021, updated Dec 14, 2021
Queensland Premier Annastacia Palaszczuk (left), Andrew 'Twiggy' Forrest (centre) from Fortescue Future Industries and Deputy Premier Steven Miles (right) are seen during a hydrogen announcement at Incitec Pivot on Gibson Island . (AAP Image/Darren England)

Queensland Premier Annastacia Palaszczuk (left), Andrew 'Twiggy' Forrest (centre) from Fortescue Future Industries and Deputy Premier Steven Miles (right) are seen during a hydrogen announcement at Incitec Pivot on Gibson Island . (AAP Image/Darren England)

Her decision followed Fortescue’s plans to transition to a new CEO who could complement its planned shift to becoming a global diversified energy and resources player.

Morgans said it had lost conviction in Fortescue’s strategy.

Forrest has made headlines for months about projects involving potential investments in a catalyser factory in Gladstone and shifting Incitec’s Gibson Island plant to a hydrogen project. 

And while he has received applause for his ambition, Morgans said that given the lack of similarities between iron ore and renewables “we expect FMG will struggle to find a new CEO with experience in both’’.

“Questions are emerging over how much focus FMG is placing on renewables versus its core iron ore business,’’ senior analyst Adrian Prendergast said in a note to clients.

“The next five years in iron ore are likely to be more difficult than the last five years, warranting more focus or even possibly diversification into other mature markets.

“We maintain our Hold rating on FMG, but have lost conviction in the overarching strategy and capital framework.’’

He said there was “some concern’’ that Fortesecue appeared to be prioritising getting a new CEO with experience outside iron ore.

“The concern here is that we see FMG as likely to remain entirely dependent on iron ore earnings for at least the next decade, while the landscape in the seaborne iron ore market is likely to change materially.

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“While arguably no one has benefited more from the upcycle over the last 5 years than FMG, we see the next 5 years as almost certain to be difficult in iron ore.

“Given the iron ore dynamics, we had expected FMG to diversify actively but had thought a safer option might have been to enter other mature markets (i.e. base metals) where cycles and economics are already well established and understood, allowing for a faster transition.

“Instead FMG has prioritised diversification through combating climate change in various markets, the projects for which are typically capital hungry with less certain (and often lower) return profiles. 

“We have further increased assumed discounts on FMG product during FY22-24 (from 20% to 25-30% including grade differential).

“While having lost conviction in its overarching strategy, we still see strength in FMG’s core iron ore business and see the recent selloff as having pushed FMG into fair value territory.”

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