Fortescue Metals : Investor and Analyst Call Transcript (2020 Investor and Media Day)

Investor and Media Day

December 2020

Transcript

provided by Open Briefing

9 December 2020

Company:	Fortescue Metals Group Ltd
Title:	Investor & Media Day
Date:	9 December 2020
Time:	8:30 AM AWST
Start of Transcript

Elizabeth Gaines: Good morning ladies and gentlemen and welcome to Fortescue's 2020 Investor and Media Day briefing. My name is Elizabeth Gaines and I'm the Chief Executive Officer of Fortescue Metals Group. I'm very pleased to be taking you through our program today. I would like to acknowledge traditional custodians of this land on which we are meeting, the Whadjuk people of the Nyoongar nation, and pay our respects to elders past, present and emerging. I'd also like to extend this respect to other Aboriginal people and Torres Strait Islanders who may be joining us today.

Our Investor and Media Day is an important part of Fortescue's corporate calendar and we are pleased to be able to provide this briefing virtually, given current travel restrictions across Australia and the globe. Today's program is split into two sessions. In the first session, I will be providing an overview of Fortescue's vision and strategy and our approach to sustainability, followed by our Chief Operating Officer, Greg Lilleyman and Director of Sales and Marketing, Danny Goeman, who will speak to our integrated operations and marketing strategies.

There will be a short break before we proceed with the second session. We will have a presentation from Director of Projects, Don Hyma on our key growth projects and we'll end with our Chief Financial Officer, Ian Wells, to discuss capital allocations and returns. There will be an opportunity for you to participate in a Q&A session at the conclusion of the presentation. For our media representatives who are joining us today, there will also be an opportunity to ask questions after the investor's Q&A session.

As many of you familiar with Fortescue would be aware, we are a values-based business with an unwavering focus on safety, family, empowerment and stretch targets which underpins everything we do. Our values are integral to our success and continue to be as fresh and relevant today as they were when Fortescue was established in 2003. Fortescue's unique culture has really shone through in 2020 as we banded together in the face of an unprecedented global health and economic crisis.

By having our values of safety and family at the heart of every decision we made, we helped ensure the Fortescue family and our broader communities stayed safe and well. We're pleased to confirm that we had no positive cases at any of our operational sites to date.

Despite this COVID-19 pandemic, Fortescue has delivered record performance through the year and this all culminated yesterday when we celebrated the commissioning of the Eliwana mine site with first ore being processed through our innovative new ore processing facility. It's a remarkable effort when we reflect back to March when construction ramped up at Eliwana just as the COVID-19 pandemic was sweeping across the globe and restrictions in Western Australia were ramping up. We are incredibly proud of the entire team at Fortescue who have safely achieved this stretch target in true Fortescue fashion. Our Director of Projects, Don Hyma will provide an update on operations at Eliwana a little later.

Eliwana forms a critical component of our strategic focus of optimising growth and returns through our core iron ore business, underpinned by our operational excellence and balance sheet strength. As we look to the future, this vision will evolve through diversification with a focus on commodities that support decarbonisation and assessing renewable energy and green industry opportunities through our wholly owned subsidiary Fortescue Future Industries.

DISCLAIMER: This transcript has been prepared by a third party for Orient Capital Pty Ltd. It may not be accurate or complete and should be verified directly with the issuer. Orient Capital Pty Ltd is not responsible for any consequences of the use you make of the information contained in this transcript, including any loss or damage you or a third party might suffer as a result of that use.

It's on the back of this growth and development that we will continue to ensure all communities and stakeholders benefit from Fortescue's success. Our ongoing focus on product, operations, and marketing as well as growth and balance sheet management is driving strong results in our business and delivering significant benefits for our shareholders. Our business has generated an average EBITDA margin of 50% over the last decade and an average return on capital employed of 23%, demonstrating outstanding profitability and capital efficiency.

Fortescue has delivered a strong start to FY21 across all key measures of safety, production, and cost, and that's underpinned by the hard work and dedication of the entire Fortescue team. In terms of our operating performance, our first quarter was another quarter of records. Iron ore shipments of 44.3 million tonnes were 5% higher than Q1 FY20 and C1 costs of $12.74 per wet metric tonne were 2% lower than the same quarter last year, and that includes costs associated with managing COVID-19.

We achieved average revenue of $106 per dry metric tonne in the first quarter and that's a realisation of 89% of the average Platts 62% CFR Index. Cash on hand was $5.1 billion at 30 September and our strong free cashflow generation in the quarter contributed to a net cash position of $1 billion. Fortescue was privileged to continue to operate during the COVID-19 restrictions and there was no impact to our shipping schedule. Notably, the iron price has held up strongly through this period due to the remarkable recovery in China's economy as well as ongoing supply constraints, particularly in South America.

We remain a core supplier of iron ore to China and our relationships with our key stakeholders in China are underpinned by a multifaceted approach, spanning our key business pillars of iron ore supply, procurement, investment, and social engagement. Our second-largest shareholder is a Chinese state-owned steelmaker, and we have two Chinese directors on our Board. Chinese steel industry continues to outperform expectations with crude steel production reaching 874 million tonnes in the 10 months to the end of October and that's an increase of 5.5% compared to the same period in 2019. China accounts for 58% of global crude steel production this year to date.

Our trading success is built on strong partnerships and it's important that we maintain good relationships with existing trade markets such as China which accounted for 87% of all iron ore exported from Australia in financial year 2020. It's strong trading relationships with established and new partners that underpin the Australian mining industry as a stable and reliable provider of jobs, taxes and royalties as our economy grows over the next 20 years.

Fortescue began as an exploration company and today our iron ore tenements remain key to maintaining mine life and sustaining product quality in our core iron ore business. Exploration also forms a core component of our diversification strategy, which is focused on delivering opportunities in copper and other commodities that support decarbonisation and the electrification of the transport sector.

Despite some impact as a result of COVID-19, we continue to assess domestic and global copper and gold opportunities. In Ecuador and Argentina, there's ongoing assessment of previous drilling results and various geological studies are continuing, and we expect seasonal drilling activities in the San Juan region of Argentina will commence this quarter.

Building on our established presence in South America, the team are assessing a range of opportunities in Colombia, Chile, and Peru. Earlier this year, we acquired a 20% stake in TSX listed Candente Copper Corporation with a focus on advancing the Cañariaco project in Peru.

In 2020, Fortescue signalled our intention to be an industry leader in addressing the global climate change challenge. The impacts of climate change are changing the way we live, our communities and how we operate our business. The United Nations has said that this is a critical decade within which year-on-year emissions reductions are required and building on our proud history of setting stretch targets, we announced our boldest and most important target yet: to achieve net zero operational emissions by 2040. So, I'd like to play a short video of our plan to meet this ambitious industry-leading target.

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[Silence whilst video plays]

Elizabeth Gaines: Our net zero target is supported by a pathway to decarbonisation, including a 26% reduction of scope 1 and 2 emissions from existing operations by 2030. Mining is among the most innovative industries in the world and we're harnessing this advantage to work towards carbon neutrality with a sense of urgency. Promoting a culture of ongoing collaboration will be critical and we're pleased to join with businesses across our sector and indeed Australia to support the transition to zero emissions through initiatives like the Australian Industry Emissions Transition Initiative and the Climate Leaders Coalition.

Our net zero ambition is strengthened by the introduction of practical initiatives that will help us deliver our goals in an economically sustainable manner. Together with our partners, we're investing $800 million in energy transmission infrastructure and solar gas hybrid generation in the Pilbara. This kicked off last year with the Chichester Solar Gas Hybrid Project, a low-emission energy solution that incorporates large-scale solar.

This project, owned and operated by Alinta Energy, is well-progressed with all the solar panels, transmission towers and transmission line installed, progressing to commissioning in the new year. Further to this project, we've announced the $700 million investment in the Pilbara Energy Connect Project, which includes transmission infrastructure as well as solar and gas generations and large battery storage.

Pilbara Energy Connect will integrate with the Chichester Solar Gas Hybrid Project and once these two projects are fully operational, it's estimated that 25% to 30% of stationary energy across our mining operations will be powered by solar. Further to our investment in energy infrastructure, we're investing A$32 million in hydrogen fuel cell passenger coaches and a refuelling station at our Chichester Hub mining operations.

Pilbara Energy Connect is a key contributor to our pathway to achieve our emissions reduction target and the project's major benefit lies in its ability to support the incorporation of additional large-scale renewable energy at any point in the integrated network in the future. The lack of an integrated transmission network in the Pilbara has long been identified by industry as the key barrier for large-scale renewables. We're well-positioned to support our clean energy transition while lowering the overall cost of electricity with the potential to include the addition of wind and solar generation as well as further extension of the transmission infrastructure.

We're committed to supporting the world's transition to a clean energy future which presents a major growth opportunity. Through our wholly owned subsidiary Fortescue Future Industries, we're assessing a portfolio of renewable energy and green industry opportunities. We have recently entered into a number of agreements both in Australia and overseas to identify a portfolio of potential projects. These are early-stage opportunities similar to mineral explorations that we will progress through studies.

The intention is that individual projects will be developed by Fortescue Future Industries with ownership and project finance sources to be separately secured without recourse to Fortescue. This will complement our existing investment into new hydrogen technology, positioning Fortescue to meet the future demand for green hydrogen and ammonia. This includes our landmark partnership with the CSIRO to develop the Metal Membrane Technology - a critical link in the value chain for ammonia to become a carrier for hydrogen exports.

We have a Memorandum of Understanding with Hyundai and the CSIRO to assess the potential to accelerate the renewable hydrogen production technology in South Korea, and we have a partnership with ATCO Australia to build and operate the first combined green hydrogen production and refuelling facility in Western Australia.

Since the company was founded in 2003, Fortescue has established a successful track record of identifying, assessing, and developing large-scale resource and infrastructure opportunities. The financial rigour, project execution discipline and

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