Fortescue; the miner building a bank

Fortescue Metals Group, Australia's third biggest iron ore miner, has taken its first steps towards creating an investment banking business.The unusual move continues a process which has seen FMG invest in the future possible production of hydrogen and other forms of renewable energy.The investment bank, to be called Fortescue Capital, will sell equity in a range of energy projects assembled over the past few years by its founder and chairman, Andrew Forrest.Dubbed a "green energy accelerator platform" Fortescue Capital will be based in New York and offer equity positions of between 25% and 50% in projects currently owned by Fortescue Energy, a wholly-owned subsidiary of FMG.More confusionThe energy business has been a constant source of confusion for investors struggling to value a company operating highly profitable iron ore mines with an offshoot exposed to high-risk renewable energy.That confusion is reflected in how traditional investment banks value Fortescue with most not recommending it as a stock to buy, preferring to wait for evidence that FFI can trade profitably.Rapid turnover in Fortescue's senior executive ranks also points to internal uncertainty about the relationship between the core iron ore business and the fledgling energy development unit.The cautious investment view of Fortescue could change as it sells down exposure to some of its energy assets, potentially resolving uncertainty about future risk.The new business will be headed by Robert Tichio who previously worked with a private equity firm, Riverstone Holdings. He will report to the head of Fortescue Energy, Mark Hutchinson.Bank will deliver green energy projectsFortescue said in a midweek statement that the new business was part of its commitment to deliver "green energy projects and decarbonisation investments."But the creation of Fortescue Capital is an acknowledgment that shifting a green energy project from concept to development, and ultimately into production, is complex and capital intensive.Fortescue has previously said that it plans to make five final investment decisions (FIDs) on five green energy developments by the end of 2023 but is yet to name potential winners in its internal energy race.The process of conceiving green energy ideas and then seeking outside capital to build the projects is a classic investment bank approach which spreads the risk and minimises the capital exposure of the parent company.It is also in step with Forrest's original career as a stockbroker and investment banker where he learned how to avoid risks associated with excess exposure to a single project.Hutchinson said in a midweek statement that Fortescue was taking its global pipeline of green hydrogen and green ammonia projects to FID and: "in doing so has communicated our intentions and desire to bring additional equity investors aboard".Projects in view?A project which could connect the emerging green energy banking arm with Fortescue's iron ore business is a plan to decarbonise its mining, rail and port operations in the Pilbara region of Western Australia.Third party investors would rush to invest in a green energy business selling electricity to Fortescue's rock-solid iron ore operations.Hutchinson said Fortescue Capital was being developed as a fiduciary (trust) for third party capital which would complement the corporate finance teams that already exist in the energy and metals business of the parent company.Funding models would differ from project to project as they are approved by the Fortescue board."The company expects to hold equity stakes of between 25% and 50% in each project, with third party investors," Hutchinson said.The Australian newspaper equated the potential future operations of Fortescue Capital as similar to other business collecting management and investment fees, along the lines of the infrastructure business of Macquarie Bank and the big Canadian infrastructure specialist Brookfield.Staff recruited to work with Tichio in the New York office have previous experience with the renewable energy business of big fund manager BlackRock, and the leading US bank, J.P. Morgan.One of the projects seen as possibly being first cab off the green energy rank of Fortescue Capital is the Phoenix Hydrogen Hub (PHH) in the US State of Arizona. It is scheduled for FID before the end of the year.The PHH has been designed to produce 12,000t of green hydrogen a year from an 800 mega-watt electrolyser and liquefaction facility.Hutchinson expects the green energy projects being offered by Fortescue Capital to appeal to sovereign wealth funds, pension funds, insurance companies and the family offices of rich people.

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