Thank you for standing by, and welcome to the Fortescue Metals Group June 2022 quarterly production report analyst call. All participants are in a listen-only mode. There will be a presentation followed by a question and answer session. If you wish to ask a question, you will need to press the star key followed by the number one on your telephone keypad. Please note there is a limit of two questions per participant. If you wish to ask more questions, please rejoin the queue. I would now like to hand the conference over to Elizabeth Gaines, CEO. Please go ahead.
Thank you, Harmony, and good morning or afternoon, everybody, and welcome to Fortescue's June 2022 quarterly production report. Joining me today in Perth is Ian Wells, Chief Financial Officer. I'm delighted to welcome Yuluwirri McGrady, who joins us as CEO for a day. As a proud Gamilaraay man, Yulu joined Fortescue in 2014, where he worked at Christmas Creek in the Aboriginal development and VTEC space. Now in his role as manager of Aboriginal Business Development, Yulu is a very important interface between Aboriginal businesses and our Billion Opportunities program. Yulu is committed to encouraging and empowering the next generation of Aboriginal leaders to take advantage of the vast career opportunities within the resources sector. It's great to have you with us, Yulu.
Thanks, Elizabeth. Great to be here.
That brings me to our fourth quarter results, and as you can see from today's report, Fortescue's operating excellence continues to drive strong results across our key metrics of safety, production, and cost with another outstanding quarter for Fortescue. Our operational excellence is underpinned by our absolute focus on the health, safety, and well-being of the entire Fortescue family. I want to commend the entire team for continuing to look out for their mates on our journey to zero harm. Our total recordable injury frequency rate continues to improve with a TRIR for the twelve months to 30 June of 1.8, and that's 10% lower than at 30 June 2021. This reflects our core value of safety, and it was a particularly pleasing performance while managing the ongoing challenges resulting from COVID-19.
Fortescue is not immune from the latest wave of community transmission of COVID across Western Australia, and each of our sites continues to be impacted. I would like to acknowledge our team members who have contracted COVID, including those that either isolated or are isolating on-site. I'd also like to take this opportunity to acknowledge the Enough is Enough report, which was released during the quarter following the WA Parliamentary inquiry into sexual harassment against women in the FIFO mining industry. Having participated fully in the inquiry process, Fortescue supports this important work undertaken by the committee. Ensuring the safety and well-being of our Fortescue family is our highest priority, and there is no place for harassment of any kind at Fortescue or in any workplace. We continue to take decisive action to ensure our workplaces are safe for everyone.
Moving to our operational performance, the Fortescue team has delivered excellent results for the June quarter, with record iron ore shipments of 49.5 million tons. This outstanding operating performance has resulted in record FY 2022 shipments of 189 million tons, which exceeded the top end of guidance. In FY 2019, Fortescue shipped 168 million tons, and that's approximately 20 million tons below the shipments we just reported for FY 2022, and clearly demonstrates the value that has been created year-on-year. This is a result of the team's commitment to operational excellence and production efficiency, which, together with the successful integration of Eliwana, has delivered strong growth in Fortescue's production and shipments.
This year's results were achieved in a challenging operating environment due to the impact of COVID-19, as well as severe inflationary pressures, including soaring diesel costs resulting from the conflict in Ukraine. We continue to operate in an environment of elevated cost inflation, and as Ian will discuss shortly, these inflationary pressures have further increased during the quarter. Despite these industry-wide and global headwinds, Fortescue's unique culture and values have delivered these exceptional results, and I'm immensely proud of the performance of the entire Fortescue team. Turning to the market, and we continue to see strong demand for Fortescue's products during what remains a dynamic and volatile period in the iron ore market. Ongoing COVID-19 related lockdowns in China and weakening global economic outlook have added to the market uncertainty.
Iron ore prices trended lower during the quarter, impacted by COVID-19 restrictions, which disrupted China's downstream steel demand and weighed on steel mill margins. Looking ahead, there are clear headwinds to global economic growth, including the continuing conflict in Ukraine, the energy crisis in Europe, and tighter monetary policy. In China, we expect both infrastructure investment and the further relaxation of COVID restrictions to support underlying steel demand. Fortescue's average revenue was $108 a ton in the June quarter, and that's an increase of 8% over the previous quarter as our realization increased from 70% to 78% of the Platts 62% index. Our sales and marketing strategy remains very centered on the current and future needs of our customers and the optimization of our supply chain.
Fortescue continues to maintain strong relationships with all of our Chinese stakeholders, and that's underpinned by our multifaceted approach spanning supply, procurement, financing, investment, and social engagement. Portside sales by our wholly owned China sales entity, FMG Trading Shanghai, increased to 5 million tons in the June quarter with sales of 18.5 million tons in FY 2022. Fortescue Trading Shanghai is now a very well-established part of our broader sales and marketing function and complements our other sales channels. As always, we remain very focused on working closely with our customers in China and elsewhere to ensure that we're responsive to market conditions. Significant progress with key milestones achieved during the quarter, including six module ships unloaded at Port Hedland, which takes the total at 30 June to 20 of 21 module ships that have been berthed and unloaded.
All critical path items have now been delivered to site, and I'm pleased to advise that the last module ship was unloaded this week. We've seen the installation of primary crusher A, and we've commenced commissioning of dry circuit A from the primary crushers to the coarse ore stockpile. The team have made continued progress on the installation of the concentrate and return water pipelines across excavation, welding, and laying. Construction of the concentrate handling facility at Port Hedland has advanced with civil, structural, and electrical works progressing. The Iron Bridge project demonstrates Fortescue's commitment to our strategic pillars of investing in the long-term sustainability of our iron ore business and investing in growth. Iron Bridge will deliver 22 million tons per annum of high-grade 67% FE magnetite concentrate, enabling Fortescue to provide an enhanced product range and increase production and shipping capacity.
The capital estimate for the project is unchanged at a range of AUD 3.6 billion-AUD 3.8 billion, with first production scheduled for the March 2023 quarter. Turning to exploration, and consistent with our strategic focus to invest in the future of our core iron ore business and diversify commodities that support decarbonization, total exploration and studies capital expenditure for the June quarter was AUD 63 million. For FY 2022, the total expenditure was AUD 194 million. Iron ore exploration in the Pilbara included resource definition drilling in the Eastern Hamersley, with a focus on the program at Nimingarra and Mindy South, along with regional exploration programs across our tenement holding in the Pilbara.
Exploration activity on the Australian copper-gold portfolio included target generation utilizing geophysical data sets gathered through the first half of the financial year, with a focus over the Paterson projects in Western Australia, as well as drilling at the Vulcan South project in South Australia. Our international activities included drilling programs in Argentina and Kazakhstan and exploration activities across several project areas in Peru, Chile, Brazil, and Ecuador. On that note, I'll hand over to Ian for the finance update. Ian?
Thanks, Elizabeth, and hi, everyone. The June quarter in FY 2022 marks another period of consistent and predictable performance, which has enabled the business to take advantage of market conditions and deliver another year of strong free cash flow generation. As always, it's a real privilege to highlight the financial results disclosed in the quarterly report that we released earlier this morning. Starting with revenue, our average revenue in Q4 of $108 a ton represented a realization of 78% of the Platts 62% index. That was up $8 a ton quarter-on-quarter, and compares to a realization of 70% in the March quarter. That means full year average revenue was an even $100 a ton at a realization of 72% of the index.
The realizations have been in sharp focus through the year, impacted by Chinese steel production curtailments during the December half, and more recently as COVID-19 restrictions disrupted steel demand and impacted steel margins. You can see revenue realizations improved in the quarter, and we've been consistent in our message that realizations are cyclical and a result of the market supply-demand dynamics. Fortescue's average realization of 78% in the June quarter is clearly trending back towards the historical average, which is a little over 80%. It also shows the consistent product quality and low variability of Fortescue's ores continue to be recognized in the market and valued by our customers. Moving to costs, and as discussed last quarter, the lag effect of inflationary pressures continue to impact operating and capital costs.
Our C1 cost of AUD 17.19 in the June quarter was 9% or about AUD 1.40 per ton higher than the previous quarter, and that reflects the increase in diesel costs, labor rates, and other consumables like ammonium nitrate. C1 cost for the full year was AUD 15.91, and that was in line with our updated guidance. We remain focused on cost management and leveraging technology and innovation to deliver productivity gains. Our FY 2023 cost guidance takes into account that lag effect of ongoing inflationary pressure into FY 2023. Relative to the June quarter C1 of 17.19, our FY 2023 C1 cost guidance of AUD 18-AUD 18.75 a ton anticipates a further increase in diesel prices, labor rates, and other consumables, as well as mine plan-driven impacts. Just a reminder on our cost sensitivity guidance.
For fuel and energy, which is largely diesel, that has increased to represent around 20% of total C1 costs, and we guide that a $10 movement in the barrel price of crude oil translates to a 30-35 cent per ton impact on C1. On the exchange rate, the majority of our cost base is incurred in Aussie dollars, so every 1 cent movement in the Aussie/U.S. exchange rate impacts C1 by about 15 cents a ton. Moving to cash flow and balance sheet, closing cash at 30 June 2022 was AUD 5.2 billion, and that compares to AUD 2.2 billion at 31 March and reflects both strong free cash flow generation during the quarter, as well as the proceeds of our AUD 1.5 billion dollar bond issue.
That cash balance is also after capital expenditure of AUD 766 million in the quarter, bringing total CapEx for FY 2022 to AUD 3.1 billion. That was also in line with guidance. The investment included about AUD 1 billion on major projects, that's Iron Bridge and PEC, as well as AUD 220 million for the acquisition of Williams Advanced Engineering. Gross debt increased to AUD 6.1 billion at the 30th June. That was after the completion of the bond issue, which included Fortescue's inaugural green bond of AUD 800 million. The notes issue further optimizes Fortescue's capital structure and is aligned with our capital allocation framework, which includes a commitment to a strong balance sheet with targeted investment-grade credit metrics. As we've done in the past, we'll continue to proactively manage our debt maturity profile.
This balance sheet strength and our disciplined capital allocation framework positions us well moving into FY 2023 to continue to reinvest back into the business to support safe, reliable, and productive operations. We're clearly seeing the benefits of that with our production performance. We're also focused on delivering returns to shareholders and also investing in growth. On that investment, there are a few parts to highlight in our FY 2023 CapEx guidance, which is a range of AUD 2.7 billion-AUD 3.1 billion excluding FFI. Firstly, on sustaining capital, that's a range of AUD 1.4 billion-AUD 1.6 billion, and this is capital investment which supports asset performance and production increases and as a result, an attractive return on investment. This category is showing an increase relative to FY 2022 of AUD 1.3 billion.
Just to call out a few items. In FY 2023, we'll see the completion of the operational development projects that started in FY 2022. We've got scheduled maintenance on our ore processing facilities. We also have maintenance and upgrades of camp infrastructure, and that's aligned with the initiatives that were identified through our workplace integrity review. We've got some mine plan-led dewatering increases, and of course, there'll be some sustaining capital incurred for Iron Bridge as it transitions into operations. We're also guiding hub development CapEx of AUD 300 million with work on the Flying Fish mining area. Exploration and studies of AUD 200 million, and that's in line with FY 2022. Major projects in a range of AUD 700 million-AUD 800 million, and that's reflecting the completion of the Iron Bridge project and ongoing work on PEC.
The final category is AUD 100-AUD 200 million of capital investment in decarbonization, and that largely relates to early-stage renewable energy infrastructure and green fleet development, and they're both aligned with our decarbonization commitments. On Fortescue Future Industries, FFI's total expenditure in FY 2022 was AUD 534 million. That's inclusive of AUD 386 million of operating expenditure, and that was also consistent with our guidance. In accordance with Fortescue's capital allocation framework, the capital commitment unutilized by FFI as at 30 June 2022 is AUD 728 million, and FFI's FY 2023 anticipated expenditure is a range of AUD 600-AUD 700 million, inclusive of AUD 100 million of CapEx, and the balance of AUD 500-AUD 600 million will be recognized as an operating expense.
In closing, delivering consistent performance and being transparent in doing what we say we're going to do is an important part of Fortescue's track record of delivery. As always, by focusing on the things that we can control, we continue to create value for all of our stakeholders. We look forward to disclosing the full set of financial results at the end of the next month, end of August. On that note, Elizabeth, I'll pass it back to you.
Thanks, Ian. Fortescue is taking an industry-leading position on reducing emissions across our operations as we continue to transition to a global green energy and resources company. We've set clear priorities for our pathway to decarbonization, including investment in renewable energy through Pilbara Energy Connect, as well as investing in green technologies to eliminate the use of diesel in our mobile fleet. We're already seeing the benefits of our decarbonization initiatives with over 78 million liters of diesel consumption avoided in FY 2022 in our Chichester operations as a result of the Chichester Solar Gas Hybrid project, which included the first large-scale solar power generation from November last year. Development continues on the Pilbara Energy Connect project, which includes transmission infrastructure, hybrid solar gas generation, and large-scale battery storage.
PEC will integrate Fortescue's stationary energy facilities into an efficient network and enable the integration of additional renewable energy in the future. Recent milestones include the completion of the stage one transmission line construction and energization, which is now providing power to Iron Bridge, as well as the completion of the installation of all major structures and mechanical equipment at the expanded Solomon Power Station. During the quarter, Fortescue entered into a strategic partnership with tier one global heavy equipment manufacturer Liebherr for the development and supply of zero-emission green mining haul trucks. This agreement is a major step to decarbonizing our mobile fleet, and it leverages the capabilities and the considerable value that's been created through Fortescue's acquisition of Williams Advanced Engineering earlier this year.
Fortescue Future Industries is taking a global leadership position in green energy and technology and will be a key enabler in delivering on our decarbonization targets. Progress continues on the development of our Infinity Train project, which will use gravitational energy to recharge its battery electric systems without any additional charging requirements. Other milestones for FFI during the quarter included the appointment of Mark Hutchinson as CEO-elect, which follows the appointment of Dr. Guy Debelle as FFI CFO. Mark was the former president and CEO of General Electric Europe and held a number of senior positions during his 24-year tenure at GE. Other activities for FFI during the quarter included the construction continuing on FFI's 2 GW electrolyzer manufacturing facility at the Green Energy Manufacturing Center in Gladstone, Queensland.
FFI also participated in an Australian-German business coalition to release a green hydrogen roadmap for large-scale green hydrogen import into Germany. This follows FFI's previously announced MoU with E.ON, one of Europe's largest operators of energy networks and energy infrastructure, to deliver up to 5 million tons per annum of green hydrogen to Europe by 2030. In closing, building on a 3rd consecutive year of record operating performance, our FY 2023 guidance reflects our ongoing commitment to optimizing returns from our integrated operations and marketing strategy. With iron ore shipments in the range of 187 million-192 million tons, including 1 million tons from Ironbridge, a C1 cost per hematite in the range of AUD 18-AUD 18.75 a ton, and capital expenditure excluding FFI in the range of AUD 2.7 billion-AUD 3.1 billion.
We remain focused on innovation and productivity to maintain our industry-leading cost position and deliver strong operational performance despite the inflationary environment that we're all facing. Together with our focus on investing in growth through the Ironbridge Magnetite project and Fortescue Future Industries, we're well-placed to ensure our stakeholders continue to benefit from Fortescue's success. As always, I'd like to pass on my sincere thanks to all of our team members, contractors, and suppliers for their hard work and commitment during this quarter and the financial year as we continue to deliver on our strategic priorities and achieve a record operating performance. Thank you. I'll hand back to Harmony to facilitate Q&A.
Thank you. If you wish to ask a question, please press star one on your telephone and wait for your name to be announced. If you wish to cancel your request, please press star two. If you're on a speakerphone, please pick up the handset to ask your question. A reminder that there is a limit of two questions per participant. To ask further questions, please rejoin the queue. Your first question comes from James Redfern from Bank of America. Please go ahead.
Oh, hi, Elizabeth and Ian. Hope you're well. Just, yeah, two questions please for me. The first one, this has been talked about before, but just wanted to confirm the marketing strategy for the Ironbridge magnetite product that will start being produced from the March quarter next year. I bet it's only 1 million tons next year, but thinking more for FY 2024. Just wondering, will that be sold as a concentrate product directly to China or blended with Fortescue's other hematite products? Thanks.
Thanks, James. Look, we've built the infrastructure so that we can blend. I think that's an important part of this, is that the infrastructure at the port will facilitate the blending of the concentrate with our hematite fines. As to whether we actually blend will depend on the best value that we can generate from the sale of the magnetite concentrate at the time. We've got the flexibility to do that. At this stage, it's probably leaning towards sale as a standalone product. I think importantly, we can also sell a virtual blend, which is, you know, magnetite concentrate and also acquiring sinter fines. The team are working on the marketing strategy for magnetite. We know there's gonna be very strong demand for a high-grade magnetite concentrate in the market.
Okay, excellent. Thank you. The second question is around CapEx. Sustained CapEx appears to have increased to around AUD 8 a ton from AUD 6 a ton previously, which is higher compared to your peers. Then also the amount, the spend in FFI that is gonna be expensed, so it's 85% in FY 2023, up from 70% in FY 2022. I just wanna understand, one, why is the sustained CapEx so high? And two, why is the amount that's being expensed in FFI up compared to FY 2022? Thank you.
Well, maybe we'll start with sustaining CapEx. I'll ask Ian to answer that one, and then I'll-
The sustaining CapEx, I think we've been pretty consistent all the way through in terms of I suppose the cycle that we're in. We spoke about our heavy mining equipment and the maintenance cycle. We're heading into a fleet replacement cycle later in the year. We've also had mine plan led investment and I suppose differentiating our sustaining capital to our peers. You could probably also look at our production performance relative to our peers. We're getting a good return on reinvesting back into our assets. Elizabeth spoke about the FY 2019, 168 million tons versus 188. That's like 20 million tons per annum. It doesn't take long to get that to add up.
If you look at our average EBITDA over the past five or so years, that's $50 a ton. You know, there's a very quick payback, let alone $100 a ton. We're in that cycle, you know, supporting operations. Looking forward, we expect our overall capital to reduce as Ironbridge completes. Obviously, PEC will wind off as well, and excluding the decarbonization investment, which will be further down the track. You know, looking forward, you should think about it from the perspective, we've flagged our fleet replacement and associated investment as production increases, you know, mine plan led. We've also then got hub development, which the smaller hubs will feature until the next major hub, which we've spoken about, is likely to be Nyidinghu with a FID on Nyidinghu probably around FY 2025.
you know, I think we're really well-placed. The production performance and consistency of our operations and remembering that T155 was 155 million tons per annum. We've had effectively very low capital cost production creep, and that's where we're seeing that we're getting an appropriate investment on that capital.
Maybe I'll pick up on the FFI, and Ian might want to add to that. In terms of the percentage of OpEx versus CapEx, I'm not sure we should look at it as a fixed percentage. It's just the, how the numbers have played out. In FY 2022, there was investment across HyET Solar, some other smaller acquisitions. The current split is a function of the CapEx is largely on the manufacturing initiatives, and the OpEx reflects the current activities across the business, largely centered on project identification and targeting specific assets and specific projects. Those costs can't be capitalized until we actually have a project. They'll be an operating expenditure until there is a project.
Anything you wanna add to that, Ian?
Yeah, start-up business and the operating expenditure treatments are a function of the accounting standards.
Mm.
Understood. Okay. Thanks, Elizabeth and Ian. Thank you.
Thanks, James Redfern.
Next question comes from Hayden Bairstow from Macquarie. Please go ahead.
Yeah, morning, Ian and Elizabeth. Just a couple from me. Just on the CapEx, Ian. Just wanted to touch back on sustaining. I mean, is that sort of level then a fair number to use, ignoring all of the other stuff which clearly is gonna roll off? Should we be thinking about sort of around that sort of AUD 1.5 billion mark for the hematite assets going forward? Then there'll be, as you say, need new hubs and things like that that make it a bit more lumpy. Is that a good way to think about it?
Yeah. I think, Hayden, I've been consistent in sort of talking about depreciation as a proxy for capital, noting that you do have some lumps and bumps and not that you'd be bored enough to go back and have a look at it. If you look at our investment over the last 10 years, it's not surprisingly matches up pretty close to depreciation. A couple of things. Depreciation's increasing. We've been investing at higher than depreciation for the last few years through our growth projects and so forth. Going forward, that's a fair proxy.
The key points of the lumpiness I spoke to answering James's question, which is the fleet replacement, the smaller hub developments, which is maintaining production and then the new being the major one. That's excluding decarbonization, which is something that we haven't provided to you yet. More broadly, we've got some capital guidance for this year, which is early stage studies type and the research and development expenditure as opposed to the major investment required to support our broader decarbonization by 2030.
Lift the D&A to match the sustaining capital guidance, I guess, the message there. But then just confirm that. Then also on Iron Bridge, not gonna produce much this year or FY 2023. Do I just assume it's all capitalized for this year, or are we gonna run it through the P&L in the early phases with an effective loss?
The way the accounting works, Hayden, is that the first production, as soon as you've got revenue, it's not about it being necessarily profitable revenue, but as soon as you've got revenue, you kick in from CapEx to OpEx. Your cost on a per ton basis is kind of irrelevant to the production. It's kind of what the cost is. There is some inventory, but if you think about Eliwana and the ramp up of Eliwana, you know, the first batch of production over a number of months is disproportionate on a cost basis on the long run cost versus the cost within that period. Short version is there'll be operating costs for Ironbridge that we recognized along with that 1 million tons.
Again, the cost will be disproportionate to the 1 million tons.
Okay, great. Thanks.
Thank you. Your next question comes from Kaan Peker from Royal Bank of Canada. Please go ahead.
Hi, Elizabeth, you and the team. Two questions from me. Just wondering if you could give a little bit more guidance around the portion of West Pilbara fines for FY 2023. I mean, do we expect it to stay in sort of that single-digit % for the product mix?
Yeah, it'll be kind of consistent with the sort of volumes we saw in FY 2022.
Sure. Also, maybe on Iron Bridge, when will we be able to get a unit cost update for that?
Yeah. Well, I think that's probably for next financial year. You know, we're currently in the midst of completing the development. We'll have some costs, as I mentioned to Hayden, but I think guidance for Iron Bridge will be later in this year, if not this time next year.
Sure. Just quickly, still on Iron Bridge, just wondering how we sort of know that 1 million ton guidance with March 2023 first production. It seems like a slow initial start up, if that's fair to assume.
Well, we indicated a 12- to 18-month ramp up. I think for FY 2024, it's relatively linear. We'd probably see in FY 2024, depending on where we are in that range, between 7 and 11 million tons. I think that would give you an indication. That would be the indication in terms of FY 2024 volumes based on that ramp up profile.
Yep. Yep.
We've had a lot of success with ramping up Eliwana. You know, we know how to ramp it up and that's where the focus will be once we get the project complete and commissioned.
Thank you. Your next question comes from Robert Stein from CLSA. Please go ahead.
Hi, team. Congratulations on a record year. Just a couple of questions on-
Hi, Robert.
Couple of questions on the hydrogen side of the business. One, just on the electrolyzer facility, how flexible are you in changing technology between different types of electrolyzers as they either compete or get better versus, say, their competition? You know, the PEM electrolyzers, for example.
Well, I think the team is doing right across developments. There is some flexibility in that. We're looking at a sort of automated, assembly
Facilities. As things change in flex, there is some flexibility there to change with that, new and emerging technology as well.
You're not locked into a technology at the start? You can adapt and move as different cost competitors-
Well.
Different technologies change.
It's a combination of the stack, and then you get the sort of balance of plant and the technology. This is an initial stage, but there is importantly this automated capacity to automate the assembly. You can, as we know with many manufacturing facilities, things can change, and then you have that flexibility with an automated assembly function. Yeah, we're at the initial stages now. The team is staying right across that emerging technology, and there'll be the opportunity to flex as that opportunity emerges. You know, we've talked about this being stage one. There could be other stages of that facility.
Yeah. No, no problems. Thanks for that. The second part of that question is relating to the green iron technology that we've heard a little bit about in the past. We haven't heard on it much recently. Can you just give us an update on how those pilots are going, with you know, the conversion of low-grade iron ore in the Pilbara to that green iron at low temperature?
Yeah. Oh, look, that work is progressing. We're obviously, we think we're in a unique position to scale green iron and potentially green steel production in a decarbonizing economy. Through Fortescue Future Industries, we are evaluating a range of pathways. This includes electrochemically converting iron ore to green iron at low temperatures. We've had a pilot plant, and we're now establishing a separate facility here in Perth to really advance that work and get to lab-scale testing in that work. There's a lot of work underway in this, particularly in that LTE, which is that low temperature electrochemical conversion. We've established this dedicated facility to advance that work. We're also looking at DRI studies as well.
Thank you. Your next question comes from Lyndon Fagan from JP Morgan. Please go ahead.
Thanks very much. So the first one is just on the AUD 600 million-AUD 700 million spend on FFI, which I can see broadly equates to 10% of NPAT this year. However, when I think about that going out a few years and I look at consensus a few years out, which is AUD 3.8 billion NPAT, which implies sub AUD 400 mil going into FFI, I'm just wondering whether that 10% of NPAT guidance is up for debate or whether, I guess, the company moves away from it, because it's very hard to envisage that the spend goes down given all the projects that need to be built. Now, I'm guessing whether ultimately that spend fluctuates with the iron ore cycle.
Well, look, there's a funding commitment unutilized at the end of June, as Ian called out, of AUD 728 million. You know, FFI has been off to a very strong start from that 10% NPAT allocation. As we mentioned earlier, as the team are assessing the portfolio of projects and going through that asset identification and the feasibility and operating expenditure. When a project is actually approved, that'll be capital expenditure and that project will need to have its own funding source. It's heavy on operating expenditure at the moment as we go through that target identification and the way the accounting standards work, that needs to be an operating expense.
As we actually go through and identify those projects and approve those projects, that'll be through capital expenditure, as I said, with its own funding source. I think, you know, we talk a lot about the cost and the investment, but then there's the demand side of it. What we're seeing is strong demand for renewable energy. I think that's evidenced by the MoU with E.ON in Germany. In fact, we've had the Chief Operating Officer of E.ON, Patrick Lammers, here in Perth recently visiting our operations. Their view is, can you do it quicker? Because there is very strong demand for green renewable energy. We're seeing that strong demand. You know, the revenue that comes from that will also be an important part of that overall equation.
As the team are doing a lot of work, the 10%, we've been very clear and very disciplined in our asset allocation. We remain focused on that overall capital allocation, the strength of our balance sheet. With FFI, as I said, as those projects develop and that flips to capital expenditure, and then having that source of funding to support those projects will be part of that development.
Thanks for that. Just to clarify, if for instance, we end up with a AUD 2 billion budget for FFI in a few years, if 1.5 of that was from project funding, that wouldn't be included as part of the 10% of Fortescue NPAT, just to try and use a worked example. Is that how I should think about it?
Yeah. We've been clear on that from the start, Lyndon, that any project will require its own source of funding. That wasn't intended to be funded from the 10% NPAT allocation. An actual project is intended to have its own source of funding.
Okay, great. Then first cab off the rank, is it possible to just update us on what that might be? I guess I'm still struggling to try and value FFI and just thinking about what might be coming up.
I think we've been. You know, we've communicated there's been a number of releases in terms of the areas of focus for FFI. There's work advancing on the feasibility studies for Gibson Island in Brisbane. That's certainly getting a lot of attention and focus from the team. There's work underway on other domestic opportunities, including Esperance here in Western Australia, the Pilbara region of Western Australia, as well as some international opportunities in Brazil, New Zealand and in Africa. A range of project initiatives that the team are focused on. I think domestically, those would be and Bell Bay in Tasmania, those would be the areas of more near-term focus.
Thank you. Your next question comes from Paul Young, from Goldman Sachs. Please go ahead.
Good afternoon, Elizabeth and Ian. A few questions on the hematite business. The first one is just an observation about, you know, the record quarter, doing a fantastic job and really probably leading the way for the industry on how to debottleneck operations, particularly at the port. Just an observation around, you know, the hematite ops are doing, you know, 190 of shipments for the next twelve months. If Iron Bridge, assuming it gets to 20-odd million tons, 22, I should say in FY 2024, that does put you at the cap of 210, which is a good problem to have, Elizabeth.
Any sort of discussion internally about, you know, if you do get there that, you know, potentially you might, you know, look to change the license to go beyond that?
Well, you know, we were comfortable with the call it the 210 million tons, which was notionally 22 million tons of magnetite and 188 million tons of hematite. As you said, we've seen fantastic performance across the hematite operations. We have got a ramp-up profile, so we've got some time with magnetite, but to consider what our future port requirements might be. You know, there's always an opportunity for us to look to increase that capacity at the appropriate time. We're comfortable that we've got the infrastructure in place at the port with the concentrate handling facility. Just completed Canyon G, which gives us that flexibility from a blending perspective. We've got the capacity that we need for that 210 million tons.
You know, we work well with the Pilbara Ports Authority. They keep us abreast of their plans for the port. We're comfortable where we are at the moment, and given we have that ramp-up profile, but we're always staying very focused on future plans and future developments.
Yep. Great. Thanks. Just FY 2023 guidance, and looking at costs and, you know, what's embedded in that. Obviously, you know, the less waste you move, you know, theoretically the better. Your strip ratio is only 1.1 in the June quarter. You know, traditionally, you've said or historically, I should say that we should be using, you know, 1.5. What will the strip ratio be in FY 2023 and understanding that, you know, you don't have a huge amount of flex?
Look, it'll be around that 1.5, Paul. That's what we've guided for, you know, 1.5 thereabout. Yeah, a bit lower in that June quarter. We expect to be around about that level. We've guided for that over the sort of five-year mine plan.
Just a reminder that full year was 1.4 as well.
Yeah, the full year for FY 2022.
That's not a linear equation.
Yeah. No, I understand.
You know, the cost are a function of all the other inflationary factors that we're seeing, diesel, labor, other consumables.
The good news is.
Understand.
The good news is the planners have got it right because, you know,
Yeah.
that natural mine life inflation, which we've been talking about for a while, is, you know, that's a reality that you need to deal with and mitigate.
Yeah. No, I understand. Ian, just while you're there, did I hear correctly on Flying Fish that the spend on Flying Fish in FY 2023 on mine replace? I might have misheard that.
Yeah. No.
Yeah. In the hub development. Yeah.
Hub development. Just on that, Ian. Is that coming early? Because I thought that Flying Fish was more a 2030 sort of timeframe.
Well, you know, these things change. I don't know about where the 2020-2030 has come from, but that's what the schedule has popped out, and we've been working on Flying Fish for a good couple of years, I think, at least. I reckon you've perhaps misconstrued the 2030.
Thank you. Your next question comes from Glyn Lawcock from Barrenjoey. Please go ahead.
Good afternoon, Elizabeth and Ian. Elizabeth, could you just clarify your comments to Paul just before about the limits at Port Hedland. When you said 188 and 22, are they firm limits or is it you can ship whatever you like in the 210?
No, we announced at the time when we received the 210 million ton increase that that was 188 of hematite and 22 million tons of magnetite. Having said that, Glyn, we're actually actively in discussions with the regulator around increasing that to having greater flexibility given the ramp-up profile of Iron Bridge and the magnetite contribution from magnetite. It's 210 total. There were limits in terms of the split, but we're actively in discussions. That's been reported on in the past in discussions about the flexibility within that split.
Could that see some extra spend at the port then to manage dust if you get a larger split for DSO? Or is there any risk of more spend?
No. Look, nothing material at all. I mean, that's what we're working through. No, there wouldn't be anything material.
Okay. That's a calendar year limit? You've got to get the solution done before year-end?
It's a calendar year limit. On the current run rate, by the end of this calendar year, we want to have clarity on that. We're well advanced on that.
Okay. Just the second question, just on the electrolyzer facility in Gladstone. You said projects will be funded by non-recourse funding. Where does the electrolyzer facility sit then? Is that not an FFI project that should be funded non-recourse to Fortescue shareholders?
No. That is an FFI project, but we announced the capital spend on that, which was a relatively modest, about an AUD 80 million investment. We had support from the Queensland Government as well. That project sort of fitted within that allocation of NPAT well and truly.
Thank you. Your next question comes from Kaan Peker from Royal Bank of Canada. Please go ahead.
Thanks for taking my questions. I just wanted to ask you, with Nyidinghu, just wondering if that capital spend was to start in 2024, or is that part of the capital spend currently being started in 2023?
The study's expenditure in FY 2023. We're advancing our studies expenditure for Nyidinghu, but that's very small. I mean, it's not a significant spend in FY 2023 for Nyidinghu at this point in time.
Sure. Thank you. Just on the last couple of quarters, project volumes are larger than shipped volumes for the second quarter in a row. I'm just sort of asking more around the cost profile.
Sorry, Kaan. Didn't quite catch the beginning of the question. Could you repeat that?
Processed volumes are larger than shipped volumes for the last two quarters. Just wondering, should we expect that to reverse in the first half of the year?
No.
Normal-
No. Just normal, yeah, normal planning cycle. Stock levels. Yeah, managing stock levels.
Sure. Thank you.
Thank you. Your next question comes from Lachlan Shaw from UBS. Please go ahead.
Good morning, Elizabeth and Ian. Just a couple ones from me. Firstly, on Pilbara Energy Connect, AUD 462 million spent so far. Over what timeframe should we think about the remaining spend there occurring?
Lachlan, I'd say most of it in this year, but it could go into next year as well. In terms of the original range, we said it was gonna cost us AUD 700 million, so there's AUD 250 million to spend. Some of that is gonna be in this year and it could go into next year.
Mm-hmm.
Probably more weighted to this year.
Yeah.
than next year.
Yeah.
We'll have to wait and see.
Got it. That's helpful. Thank you. Just a second question. Just back to FFI and funding, financing the projects. How are you thinking about target final equity hold from FFI's point of view?
Well, I think that perhaps back on the 10%, if you think about the 10% as being the equity capitalization of the business right now, and so the previous question about the split of debt and equity and projects having debt funding, but also naturally the size of the projects will require some level of partnering. For example, we use the example of the success we've had with Formosa, for example. From a joint venture perspective, that's not to say that all of the FFI projects will be joint ventures, but you can foresee arrangements where offtakers become equity partners as well, because an important part of this whole process is, well, there's asset identification and technology development, but there's also access to capital.
I guess it's difficult to say precisely other than maximizing returns to Fortescue shareholders would be our overriding objective, which is an obvious statement, but nonetheless, it's hard to say at this point in time.
Got it. Okay. Understood. I might just sneak one more in if I can. Just on, the China buying platform, centralization, do you have any thoughts or observations on that?
Lachlan, I think, you know, we're obviously monitoring that very closely. We continue to stay very close to our customers. You know, we continue to see it's really a market-based approach. That means that the prices will ultimately be determined by supply and demand for iron ore. We haven't had any formal guidance yet on how that may operate, and we're obviously, as I said, monitoring that closely. You know, we've been selling iron ore to China under our current approach for over 14 years, and it's been industry standard for most of the time. It works well. Having said that, we're always open to engaging with our customers to better understand their needs and demands for products, and ultimately that will determine price. We will engage, actively engage and monitor the situation as it develops.
Excellent. That's helpful. Thanks again. Thanks again for that.
Thank you. There are no further questions at this time. I'll now hand back to Elizabeth Gaines for closing remarks.
Thanks, Harmony. Thanks, everybody, for attending today's call. Really appreciate your interest in Fortescue. As you can no doubt tell, we're very pleased with the continued operating performance right across Fortescue, and we look forward to sharing the full year results with you at the end of August. Stay safe, and we'll speak to you then. Bye.
That does conclude our conference for today. Thank you for participating. You may now disconnect.