Thank you, Darcy, and good morning or afternoon, everyone, and welcome to Fortescue's FY 2022 half year results presentation. Joining me today in Perth is Ian Wells, Chief Financial Officer. As always, I'll start with safety. The health and safety of all of our team members is our highest priority. I thank the entire Fortescue family for continuing to look out for their mates on our journey to zero harm. Pleasingly, our total recordable injury frequency rate, or TRIFR, reduced to 1.8 at 31 December, and that was 14% lower than 31 December the prior year. That was achieved while still managing the ongoing challenges resulting from COVID-19 restrictions. Fortescue maintains a robust COVID-19 management plan, which is designed to safeguard team members and communities.
This is regularly reviewed in light of changes to Commonwealth and state health requirements and the ongoing COVID-19 situation. In response to the recent increase in COVID-19 community transmission in Western Australia, we have introduced enhanced screening and testing in addition to our mandatory pre-flight screening. This includes daily testing of our team members working at our integrated operation center, the Fortescue Hive, as well as expanding our rapid antigen test program to include an additional test within 72 hours of arrival at a Fortescue site. We're also investing in business continuity planning measures, including ensuring we have adequate resourcing to help manage any potential increase in workforce absenteeism. During the half year, we conducted a workplace integrity review together with an independent assessment of site security and safety measures.
As a result, we've introduced a number of initiatives to enhance the safety, culture, and experience of working at Fortescue. We strongly encourage all of our team members to speak up in line with Fortescue's values and our zero-tolerance approach to harassment, bullying, and intimidation. Turning to the half year results, and Fortescue's performance for the first half of FY 2022 has been outstanding. We're very proud of the entire team who have delivered record half year shipments and contributed to net profit after tax of AUD 2.8 billion, the third-highest half year profit in Fortescue's history.
Ian will talk to the financials shortly, but I would like to highlight that the strength of our operating performance and our integrated marketing strategy resulted in revenue of $8.1 billion and underlying EBITDA of $4.8 billion, with an EBITDA margin of 59%. On the strength of this performance, the board has declared a fully franked interim dividend of $0.86 per share, and that represents a 70% payout of first half net profit after tax. This dividend continues our track record of delivering enhanced returns to shareholders and is consistent with our stated intent to target the top end of the dividend policy, which is to pay out 50%-80% of full year net profit after tax.
I will discuss a number of other significant developments shortly, but for now, I'll hand over to Ian to take us through the financials. Ian?
Thanks, Elizabeth, and hi, everyone. It's always a privilege to present a summary of our financial performance, and the results that you can see today have been driven by market factors. As you've heard, the first half wasn't without its challenges. Those included managing the impacts of COVID-19 and increasingly tight labor market supply chain disruptions, a material increase in diesel costs, as well as iron ore shipping and general market volatility. In that context, it was pleasing to deliver another clean set of numbers that are pretty much in line with market expectations. Turning to the results, we generated strong earnings and cash flow by focusing on what we can control, and that also includes the planning cycle.
We continue to invest and improve in that planning cycle through long-term investments in data analytics, digital systems, and processes improvement that support our integrated planning processes, which means we continue to deliver the best outcomes across the business. First half revenue of $8.1 billion was 13% lower than the same period last year, as average revenue per tonne declined by 16% to $96 a tonne. That was 70% realization of the 62 Platts index. We're obviously in an environment of industry-wide cost inflation. We've been really transparent on our cost profile and the drivers of these costs.
At the quarterly, we reported that unit cost increased 20% year-over-year, and that's a result of price escalation on key input costs, particularly diesel, also other consumables and labor, and importantly, the integration of the Eliwana operation as well as general mine plan-driven cost escalation. We also noted that our first half C1 cost of AUD 15.28 included the direct costs of managing COVID-19 of AUD 0.15 per tonne-AUD 0.20 per tonne. Just reflecting on the cost base at Eliwana, that relates to optimizing our existing operations and infrastructure, which has enabled an increase in systems capacity for both processing and rail. That's what positions us really well to deliver on this year's guidance of shipments of 180million-185 million tonnes per annum.
EBITDA was $4.8 billion in the half, and that's at a margin of 59%. Drilling down on the slide, for those following the webcast, you can see our track record of delivering and generating strong margins through the cycle. The EBITDA margin in H1 FY 2022 was $58 a tonne, and that compares with an average of around $50 a tonne achieved over the past five years. EBITDA flows through to NPAT, which was $2.8 billion in the half. That translates into $0.90 a share, and in Aussie dollar terms, AUD 1.24.
The next slide shows the EBITDA to NPAT waterfall relative to the same period last year, and you can see again all the moving parts, including the impacts of volume, price, and cost. Another point to note is the FFI operating expenditure of AUD 174 million, compared with AUD 22 million this time last year. You'll see when you get a chance to look at the financial statements, we've got updated segment disclosures, and we're showing now iron ore and FFI as separate segments, and also showing the net funding available for FFI expenditure. Moving to cash flow. As a reminder, the half year net operating cash flow included the FY 2021 prior per-period final tax installment, and that was just over AUD 900 million, as well as a working capital outflow, all of which reported in our quarterly result.
First half CapEx of AUD 1.5 billion, that was pretty much in line with plan. A touch under the halfway point of our full year guidance. Drilling down on that, AUD 1.5 billion, just under half. AUD 740 million combined expenditure of Chichester sustaining development and minor hub development capital. AUD 590 million in growth Iron Bridge and Pilbara Energy Connect. In terms of that full year capital expenditure guidance, that's unchanged from the quarterly at a range of AUD 3 billion-AUD 3.4 billion, and that reflects the announced acquisition of Williams Advanced Engineering. In terms of the split of the AUD 3 billion-AUD 3.4 billion, that includes AUD 1.1 billion-AUD 1.4 billion on growth CapEx.
Iron Bridge and the Pilbara Energy Connect projects. On free cash flow, historically matches net profit after tax when CapEx and depreciation align. As we continue to invest in growth CapEx, just calling out the key variances between NPAT and free cash flow for the half, were the working capital outflow, which we spoke to earlier, the AUD 1 billion prior period tax payment, and also CapEx was about double depreciation, with the variance being AUD 750 million, which is clearly the growth CapEx that I spoke to earlier. If we move now to the balance sheet, cash on hand pre-reported at 31 December was AUD 2.9 billion, and gross debt increased to AUD 4.6 billion after we drew AUD 400 million term loan facility.
That term loan facility of $1 billion is now fully drawn. We also retain additional liquidity through the $1 billion revolving credit facility, and that is undrawn. If you're on the webcast, we've got balance sheet to investment grade credit metrics. What those credit metrics show is that we have balance sheet capacity within our targeted investment grade credit metrics, which are gross debt to EBITDA of 1-2 times, and gross gearing, which is the book value of debt to debt plus equity of 30%-40% through the cycle. What this simply means is we have balance sheet capacity to fund future growth.
We also flagged in the quarterly that we've established our sustainability financing framework, and that will enable future issuance of green and social debt instruments to fund eligible projects. The framework leverages off Fortescue's commitment to ESG leadership and our market-leading emissions targets for scope one, two, and three, and also recognizes the growth in sustainable and green sources of capital in the marketplace. You heard from Elizabeth, the fully franked interim dividend declared by the board represents a payout ratio of 70% of half-year net profit. Looking at the last 12 months, including the final dividend from last year of AUD 2.11, that's AUD 2.97 over the last 12 months, which implies a trailing fully franked dividend yield of 13.5% on a share price of AUD 22.
Moving to capital allocation, and just a reminder on our capital allocation framework. It incorporates the four pillars of reinvesting in the business, maintaining a strong balance sheet, capital returns to shareholders, and investing in growth. Our disciplined capital allocation is really important to us. For us, that simply comes back to doing what we say we're going to do, and that's evident in the capital allocation slide in the pack. Just a summary, since FY 2014, so over the past 8.5 years, Fortescue's generated over AUD 40 billion of net operating cash flow. We have reinvested AUD 12 billion of that back into the business and into growth. We've repaid AUD 9 billion worth of debt, and we've declared now AUD 19 billion of dividends, or that's about AUD 8 per share.
That equates to a payout of almost 70% of net profit since 2014. In closing, we've achieved strong financial results in the first half and really well-positioned heading into the second half. Central to our consistent and predictable performance is our values remaining focused on the things that we can control, safely maintaining operating and capital discipline, which optimizes margins and delivers returns to shareholders. On that note, Elizabeth, back to you.
Thanks, Ian. Touching on sustainability, as societal expectations change, sustainability has never been more important to our investors, our stakeholders, and our employees. As a business, we're very focused on meeting and exceeding these expectations. Our continued focus on sustainability generated strong recognition throughout the first half. There were a number of highlights, including a Gold Class Sustainability Award in the 2022 S&P Global Sustainability Yearbook, and the inclusion in the Australian, Asia Pacific, and World Dow Jones Sustainability Indices for a third consecutive year.
In line with our commitment to working with our native title partners on protecting Aboriginal heritage, during the half year, we announced the establishment of a co-management framework with members of the Wintawari Guruma Aboriginal Corporation. Fortescue supports the modernization of Western Australia's Aboriginal Heritage legislation, and the Aboriginal Cultural Heritage Bill 2021 was passed in the Western Australian Parliament and was proclaimed into law in December. We're actively engaging and contributing to the co-design of the important regulations and guidance which will shape the transition from the 1972 Act. Turning to climate change, during the half year, the momentum of Fortescue's transition to a vertically integrated green energy and resources company continued to accelerate. We're progressing a range of initiatives to decarbonize our operations by 2030 and to remove net emissions from our entire value chain by 2040.
Fortescue Future Industries will be a key enabler of delivering on these targets. FFI is taking a global leadership position in green energy and green technology, leading the effort to decarbonize hard-to-abate sectors. It was this time last year that we updated Fortescue's capital allocation framework to include the allocation of 10% of net profit after tax to fund FFI. As at 31 December, FFI's unutilized funding commitment is AUD 651 million, and that's after taking into account first half operating and capital expenditure of AUD 242 million. It's been a busy period for FFI. In November, FFI received planning approval from the Queensland Government for the Global Green Energy Manufacturing Center in Gladstone, Queensland.
The first stage development is an electrolyzer manufacturing facility with initial capacity of 2 GW per annum and an investment of up to AUD 83 million. FFI has also successfully completed the first phase of studies with Incitec Pivot to convert the Gibson Island ammonia production facility to be powered by green hydrogen. Of course, last month, Fortescue entered into an agreement to acquire U.K.-based Williams Advanced Engineering, and Williams will be vertically integrated into Fortescue and managed via FFI. Its critical technology and expertise in high-performance battery systems and technology are integral to developing battery electric solutions for our green fleet.
FFI is investing to develop a global portfolio of green energy projects to supply 15 million tons per year of green hydrogen by 2030 and is rapidly establishing the building blocks, which will allow us to fully integrate technologies, manufacturing capabilities, and green energy generation and distribution to deliver across the entire value chain. In closing, the team has delivered an outstanding operating and financial performance for the first half of the financial year. The iron ore market outlook has improved compared to late last year, and while we anticipate further price volatility, global market conditions remain supported with an expectation of an increase in activity in China in coming months and constrained global iron ore supply growth.
We've had a strong start to the second half, and we're well-positioned to deliver on our guidance for the full year, which is for iron ore shipments in the range of 180 million tons-185 million tons. Our C1 cost guidance is a range of $15/ton-$15.50/ton, which retains our industry-leading cost position. Capital expenditure, excluding FFI, is a range of $3 billion-$3.4 billion. Guided by our unique culture and values, Fortescue is strongly positioned to transition to a global green energy and resources company, and we will continue to deliver on our strategic priorities of optimizing returns from our mining operations and investing in growth in green energy, supported by our strong balance sheet and disciplined capital allocation framework.
As always, I'd like to thank our team members, contractors, and suppliers for their contribution to an outstanding first half operating and financial performance. On that note, I'll hand back to Darcy to facilitate Q&A. Thank you.
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 to limit your questions to two per person. If you wish to ask further questions, please rejoin the queue. Your first question comes from Rahul Anand from Morgan Stanley. Please go ahead.
Hi, Elizabeth and Ian. Thanks for the opportunity. My two questions. First one is on the Williams acquisition, if I may. The $225 million that's outside the capital budget for FFI, but could you help me understand perhaps what's the current capital draw per annum in terms of salaries or whatever other costs are in the business, or rather for the business, and where will those costs fit for Fortescue? Would that be part of the AUD 400 million-AUD 600 million budget that we have for FFI? That's the first one. I'll come back with the second thing.
Well, Ian might want to comment, Rahul, but for Williams, we made it clear the acquisition is actually by Fortescue because it's gonna facilitate the decarbonization of our mining fleet. We updated our guidance on capital expenditure for Fortescue, excluding FFI, to that range of AUD 3-AUD 3.4 at the quarterly, and that incorporates the capital for Williams as well.
Yeah. Rahul, think about the publicly available information for Williams. I think it would indicate that they made a modest EBITDA profit off the back of the financials. Obviously that's their operating costs and we've purchased on the basis of you know that we're gonna improve that and obviously the vertical integration into decarbonization is important. If you're thinking about the capital expenditure that Fortescue Iron Ore will incur, it will be in relation to the development costs of the battery electric solutions haul trucks and other vehicles as well, which will be a decarbonization cost for the iron ore business.
I think that's how you sort of look at Williams as a standalone, but ultimately it's gonna have a contract with Fortescue to develop those battery electric solutions and integrate it into FFI using you know, because as we said, it's gonna be managed by FFI. You know, it's a reflection of our business becoming vertically integrated and also a little bit more complicated than it has been in the past.
Okay. Sure. Look, the second one is on the low-grade discounts. They are wider than what they've been, and I mean, we can talk about perhaps the extra supply that's coming from Rio, and also the port stocks. If you can provide a bit of color if those port stocks are majority low grade or not. But I guess more importantly, if we look into the next 12-18 months, Elizabeth, is there any flex in the system at all whereby perhaps by foregoing, you know, strip ratios, and beneficiating a bit more perhaps, that you can improve the grade at all and try to capture some of that margin uplift or do we have to continue with the mine plan as it sits?
I refer to a long time ago, Fortescue had gone the other way, i.e., low-graded operations to save on costs. I'm just trying to understand if the opposite is perhaps possible in the current environment, and if you can provide some color around the low-grade discount as well. That's it. Thanks.
Yeah, quite a lot in that question. Look, I think in terms of current discounts in the environment that we're obviously seeing some ongoing volatility. Importantly, underpinning all of that is strong demand for our products. Certainly we're supplying products to our customers under our long-term contracts. We expect to see a pickup in steel production coming out of the Winter Olympics. Steel inventories are low. As I said, I guess the fundamentals of the market in terms of demand and supply, there's no major new supply of iron ore, though there might be difference in some of our competitors increasing supply of lower-grade products, but the overall fundamentals of supply and demand remain largely unchanged.
In terms of low-grade volumes in port inventories, they have increased, and we referenced that at the quarterly. Our share of port inventories has actually come down a little bit, and we've been pretty consistent at around 10% or now down around 9% of port inventories. That really underpins the fact that we see strong ongoing demand for our well-established suite of products. When it comes to beneficiation, we obviously already beneficiate our ores. We've added the WHIMS at Christmas Creek. The biggest change to our Iron Bridge, the addition of a 67-grade magnetite concentrate product. We are obviously looking forward Iron Bridge product into our overall suite of products.
We don't have any major plans to change our beneficiation or our product strategy. We've got a well-established suite of products. Importantly, as Ian said, at AUD 58 EBITDA margin in the half, the average of the last 5 years has been AUD 50. Throughout the cycle, we've demonstrated that we continue to generate strong margins, and we do remain focused on keeping our costs low. We have an industry-leading cost position, and by keeping our costs low, that means we can actually, I guess, still prosper through the various cycles of the market.
Thank you. Your next question comes from Kaan Peker from Royal Bank of Canada. Please go ahead.
Hi, Elizabeth, Ian, and team. Just, I suppose following up on Rahul's question, maybe asking a different way, but is there an update on Eliwana and when FMG can access that higher grade portion of the ore body? I believe you indicated that it won't occur through FY 2022. But what about FY 2023? I'll circle back on the second question.
Yeah, look, I think that those discussions and assessment are ongoing. You know, we've made our product mix for this year has been very stable. In terms of accessing those areas, there's still heightened sensitivity. Access to resources to conduct surveys is pretty challenging for the whole industry at the moment, particularly with COVID as well. We work closely with our native title partners to work with them. Certainly, you know, getting access to the resources for heritage surveys, as I mentioned, is pretty challenging, but we're very focused on delivering on our existing product mix.
Sure. Okay. I suppose the second one, just wanted to ask about the Global Green Energy Manufacturing Center. I think our previous indication of guidance was that construction for GEM would commence in February 2022, followed by approvals and electrolyzer scheduled off the production line in 2023. How's this tracking? I think previous guidance was for up to $650 million, with the initial electrolyzer investment of $83 million. What does the 650 include? Does that $83 million mean that the electrolyzer would be in production?
Look, in terms of the Global Green Energy Manufacturing Center in Gladstone, we're absolutely on track. We've got the approvals that we needed. We're turning ground. Construction is commencing, and our plan is still for, you know, first production of electrolyzers in early 2023. No change to our plans there. That initial phase was up to 2 GW for a $83 million investment. The broader phase is the expansion of the manufacturing capabilities, which may include wind turbines and other aspects of renewable energy. The focus at the moment is on the development of the manufacturing facility. That's the categories we've guided to initially, but that's all on track as we had originally got it.
Thank you. Your next question comes from Lyndon Fagan from JP Morgan. Please go ahead.
Thanks very much. My first question is on the Uaroo renewable energy hub that's been put out for public comment. I can see it's 5.4 GW. If I put AUD 2 billion a gigawatt on that, on the AUD 10 billion, I'm just wondering if you maybe talk a bit about that, when it could start construction and whether that broad CapEx is about right.
I'm not sure that just that straight extrapolation is correct, Lyndon. Look, at the moment, it is the 5 GW that's gone to a public consultation process, and a submission to the EPA. It is in its study phase, and that timing of development and ultimate project investment will be determined by detailed studies. I'm not sure extrapolating AUD 2 billion, because obviously we're looking at lowering our capital intensity emerging technologies, so that's a real focus for the team. We are currently targeting a final investment decision in calendar year 2023.
Okay. That's helpful. I guess while we're on capital intensities, the 15 million ton hydrogen production target, would you point to a market capital intensity that we should refer to to sort of come up with how much that would cost?
Not at this stage. As I said, technology is evolving. We're looking at, you know, we're seeing costs come down significantly globally for electrolyzers, and we're establishing, we see our own electrolyzer manufacturing capabilities. No, I wouldn't point to a number at this point in time.
Thank you. Your next question comes from Hayden Bairstow from Macquarie. Please go ahead.
Morning, Elizabeth and Ian. Just the two from me, just back on the Uaroo Hub. Is that just confirming, so that is the power requirements that you'll need just for the iron ore business? Or are you looking to have some sort of third-party revenue in there to help sort of justify whatever the final investment might actually be? And then the Iron Bridge. i mean, the project looks like it's going okay, but given the cost pressures you're seeing at the moment, is it likely, and obviously power costs and whatever costs you think are gonna be associated with this energy hub. I mean, is the likelihood that we'll see some sort of revision to the long-term cash cost guidance for that project at some point?
Well, maybe starting with Uaroo. I mean, that's that sort of 5.4 MW, that's more than we need for our own ore operations. Look, obviously, we're looking at opportunities where there may be other demand in the Pilbara for renewable energy. There is the opportunity. As I said, that's, you know, it's a study phase where your detailed feasibility studies look at that demand profile and scale it accordingly. That's part of the process that the team are working through. Iron Bridge, you know, we are seeing, you know, inflation more broadly and in costs like fuel costs, we've seen a substantial increase in fuel costs in this half versus the same period last year. You know, those are significant.
You know, we've guided to a life of mine Iron Bridge. there are certain assumptions in there around fuel costs, for example. One of the benefits of Pilbara Energy Connect is we're adding additional capacity at Solomon through our gas-fired power station, and we're adding 150 MW of solar generation. That's, you know, for stationary energy. The strategy is to provide low-cost energy for stationary energy, and then obviously there's the mobile fleet. That all goes into the mix. We're obviously entering a cycle of inflation. As I said, it's a life of mine guidance. There's no change to the fundamentals of what we anticipate, but it'll be subject to the actual costs of fuel, currency, for example. Obviously, exchange rates will have a big impact.
We're comfortable where we currently are based on the assumptions that we made.
Yeah. Perhaps add to that is that remembering that the FID was, you know, done back in 2019, so there's gonna be a change to that, and we're coming into first production by the end of this year. So, you know, part of our guidance for next year is gonna be capital Iron Bridge. as you'd expect, it's always gonna start at the start, which is, you know, you don't put your whole fixed cost base on, but it's pretty close, and you've obviously got a ramp-up period as well.
We're gonna be in a better position to provide additional detail, but also add that the revenue side of the equation, you know, in terms of an expectation of getting value for that high grade magnetite, low impurities, you know, firms up every day as opposed to, you know, perhaps some of the more conservative assumptions that look, you know, in hindsight when that investment decision was made. There's a few balancing items there as well just to consider.
Thank you. Your next question comes from Paul Young from Goldman Sachs. Please go ahead.
Hi, Elizabeth. Hi, Ian. First question's on iron ore reinvestment, and in particular, sustaining CapEx and reinvestment in the mines. I mean, sustaining CapEx is, you know, around $8 a ton, sort of double what it was five years ago, without major investment in new mines, and it's gone up for a lot of participants in the Pilbara. Ian, we're rolling through the near term, and I guess the question for you is around-
You know, the five-year mine plan and how you think about the timing on, you know, Nyidinghu versus a Flying Fish investment to replace Firetail?
Yeah. I think over that five-year period, Nyidinghu's probably at the back end of that. Or Nyidinghu or the equivalent of Nyidinghu or major hub, if we maybe just call it that, is that we're going to have to be spending some money at the back end of that period to have that in production. Then we did call out the fleet cycle that we're going into, so obviously decarbonization linking into the fleet replacement cycle. Also, increased maintenance because coming into the, you know, maintenance cycle as well. Going into FY 2023 is a couple of things which we called out for as a reminder on our sort of ex-hub development sustaining capital, would expect to be in around the same level.
However, the fleet replacement cycle is changing. We're producing more tons, and also mine life costs and capital costs are increasing. You've got the hub development capital or the smaller satellite hubs continues. LE1 is a good example of access to mining areas means investment in other areas. I think you need to take those into consideration as well. When you add sustaining plus hub and ops development for this half, which is we put those all together, you get $8 a ton, noting that there's some ops development capital, which will probably drop off for next year. In the most part, that'll just be replaced by reinvesting back in, more than likely the fleet is the sort of the major category that we called out.
There's probably water from a mine planning perspective. Also we've been investing in resource definition drilling as well over and above what we have in the past, for all of the reasons that we've been explaining for quite some time.
Okay, great. With that, maybe moving on to FFI. Just noting the slides in the presentation with the projects you've listed, a bit of ebb and flow, you know, projects coming and going based on, you know, what FFI's announced on MOUs. I presume that that's all a timing issue with respect to, you know, agreements with governments and levels and advancement of studies. The question I have is that, you know, you've obviously got the 10% of NPAT number out there, but, Ian, based on your projections on cash flow, iron ore price forecasts and reinvestment in the iron ore business, what is the, you know, roughly the theoretical level of annual spend that FMG can actually handle on FFI?
The allocation and NPAT to free cash flow aligns, as we've spoken about, depending on working capital and capital expenditure. That's the funds that we're allocating to FFI at that point in time. Depending on your iron ore price assumptions, we'll give you it 10%. You can work that out. It comes back to the capital expenditure, the reinvestment in the iron ore business through sustaining and decarbonization, which part of that is reinvestment back in the fleet that we're gonna spend anyway, but the development costs and the associated energy infrastructure. Clearly we've got capacity in our balance sheet, on the basis that we'll continue to be disciplined in it.
It's a balancing sources and uses of funds. We've got the levers, and ultimately, the math works back to an assumption on the iron ore price, managing our costs, generating strong Iron Bridge capital is that we're almost at the Iron Bridge capital and, you know, we're very close to free cash flow. So that's also a consideration from our, you know, our sources of funds, where Iron Bridge coming in as well, which is an important part of the equation.
Thank you. Your next question comes from Peter O'Connor from Shaw and Partners. Please go ahead.
Elizabeth, Ian, good afternoon. Two short ones, Elizabeth, that should just need a yes or a no answer. Culture, Exco. There's a level of turnover at the Exco in the past 12 months. Is that typical or normal? If the answer is yes, should there be a cultural review of that area? The second question, in terms of average selling price or the discounts you receive, has that discount moved higher or lower, this current period?
Well, look, I'll start with it's not so much culture, I think it's people, and we sort of talked about this at the quarterly. The majority of people and turnover we've seen are people who have been with us for more than a decade. I think that longevity we've had of people in executive team is actually quite unusual. That's a testament to the strength of the culture at Fortescue. Clearly, we're seeing some movement. There's strong demand for talent. What I'm really pleased with is that we've brought in a combination of external talent, as well as seeing some really good succession in our people within Fortescue as a result of those movements. Obviously, Dino Otranto's joined us as Chief Operating Officer, Iron Ore. Warren Fish recently joined as Director of Aboriginal Engagement, Community, and Government.
We have a new General Counsel, Paul Shillington, joining us. Adam Maher was promoted to the Director of Health, Safety, and Environment role. Really pleasingly, we've seen some movement of our general managers with Katie Quirk who was the general manager at Eliwana has now transitioned to the larger operation at Solomon. We've just had the appointment of our first Aboriginal general manager at Eliwana, Rosli Wheelock. We've seen some great talent. We've seen progression, we've seen succession, and I'm really pleased with the composition of our Executive and Leadership Team. We don't need to do a review. I think we're really pleased with the talent that we've attracted to the business, and the people who have left, we wish them well, and we thank them for their contribution to Fortescue.
In terms of average selling price, look, we've seen some volatility. We saw some improvement in pricing leading into February, but we are seeing ongoing volatility. For us, it's about making sure we're staying close to our customers, delivering under our long-term contracts, and making sure that we're integrated across our operations and marketing to make sure we're meeting that demand. But we do see strong demand for our products, and we're very focused on keeping our costs low. As you know, Peter, that's our core focus is making sure that we generate those very strong margins throughout the market cycles.
Thank you. Your next question comes from Robert Stein from CLSA. Please go ahead.
Hi, Elizabeth and team. Just firstly, congratulations about the strong result.
Thank you.
Really a testament to cost control in this, in this period. Just thinking about FFI and hydrogen and the value chain, are you able to provide us an indication of the energy losses across that value chain from generation to transportation, right through to sort of customer consumption and of the green hydrogen, including, you know, any conversion losses from ammonia? The basis for the question is I'm just trying to get a handle on how to appropriately size renewable CapEx and renewable CapEx intensity for a hydrogen, so a hydrogen project or a hydrogen business at 15 million tons, and it'd be great to sort of get an energy balance, if you will.
Yeah.
I've got a second question as well.
Yeah, good question, Rob. I think that's one for a deeper dive with the FFI specialist folks, and certainly we'll work with Andy to make sure we can address those questions. I think that's a subject for a bigger discussion.
Okay. The reason why I ask is it's pretty fundamental to, I guess, the capital intensity of the projects that we're trying to all model and put in valuations to justify, I guess, the gap from the iron ore business to the
Yeah
... to the share price. You know, any further disclosure would absolutely help on that.
Yeah. Look, I think I would add, look, we understand that. Look, technology is evolving, and we're investing in technology. You know, this is fast-moving. We're seeing that huge increase in fuel prices. We're gonna continue to see volatility in fuel prices. The fact is we're actually doing a lot to be part of what will be a super cycle of a transition to green energy. Fortescue is very well-positioned throughout that entire value chain. It's not just about decarbonization, decarbonizing stationary energy. I understand that you want those level of details and to prepare those models, and we can certainly get some of the subject matter experts to give some further guidance on that. It is evolving, and that's why we're investing in technology.
The acquisition of Williams Advanced Engineering will also contribute to that evolution and, you know, the manufacturing electrolyzers in Gladstone, that's all part of how we're looking to reduce our capital intensity. But certainly we can provide some further detail on that in a separate discussion.
Perfect. The second question I had is more related to the iron ore business. Like, if the thesis on hydrogen and green carbon is and the green premium is correct, and we start to see that flow through to hydrogen and making it profitable and get an economic return, what does that mean for the 58 business for iron ore? Because you could see similarly that that business would struggle to have a future in that world. If it does move quickly, how should we think about capital intensity of sustaining production at, say, 180 million tons-200 million tons for the iron ore business?
You know, if we shift up to a 65-68 magnetite style, you know, sustaining profile, then that's gonna be significantly more capital intensive than the, you know, the $4-$5 a ton and the hub replacements that we've probably all got in the models going forward. Are you able to just provide a little bit of an indication to how we should think through that capital intensity?
Well, I think that relies on the basic premise that there'll be that preference for the high-grade magnetite. Really, the work that we're doing around the future of green iron is testing of our existing sinter fines through that process. There is a lot of emerging technology. We're doing a lot of work internally as well as working with specialists in the field and others and looking at the opportunity for DRI. There's a lot of work that's underway. That doesn't necessarily mean we will, you know, that the focus will only be on magnetite. There's, you know, the view is there'll be strong demand, ongoing demand for our hematite fines. That doesn't signal any shift in terms of our focus on sustaining our current levels of activity across the entire business.
Robert, a couple other points from me, to add in terms of your considerations. With our 2030 targets, Fortescue will be producing iron ore that is emissions-free, so it's gonna be 10-20 years in advance of our competitors. Logically, would that be valuable to our customers? It may very well. When you start to work through the economics of that, producing at 200 million tons per annum adds up quite quickly, you know, a $5-$10 number is large. The other point is low-cost renewable energy, which clearly will have been done by that point in time, does change the economics associated with iron ore production. We're already doing that right now. we're doing that at Iron Bridge.
We would expect, as we continue to add renewable energy to our network, and Uaroo is something that clearly can do that, other areas can do that as well, at lowering our cost of energy, opens up. It doesn't only provide an economic benefit, but it Iron Bridge monetizing that ore body really has boiled down to a lower energy intensity and a lower cost of energy. They're the other parts of the equation that I guess we are certainly thinking about and would encourage you to have a think about that as well.
Thank you. Your next question comes from Lachlan Shaw from UBS. Please go ahead.
Yeah. Hi, Elizabeth and Ian. Thanks for the briefing. First question is on the Uaroo Renewable Energy Hub. Just interested in your thoughts around funding and the funding model. Is this something that you would look to do in-house on the balance sheet? Or perhaps sign a long-term PPA and contract it out for someone else to build and run for you? Second question is just on the dividend payout ratio. Obviously, it's come back a little bit to 70%, just above the midpoint of the guidance range. Is this sort of how we should be thinking about the payout ratio going forward, given that you are sort of facing to a period in the medium term where there is a bit more CapEx coming through? Thanks very much.
Well, maybe I'll start with the dividend question, and Ian might want to talk about Uaroo. Look, in terms of the dividend, it's actually the payout's pretty consistent with our FY 2019 and 2020, where our interim was at the sort of middle, exact middle of the range at 65%. Recognizing that we're in that sort of, from a seasonal perspective, you know, around that period, there can be some volatility. Then for both of those years, we ended up at 77%- 78%. It's sort of based on the full year net profit after tax, since you're weighting towards the final dividend. The full year was at that 77%-78%, and that's our target, which is to target the upper end of the range of full year net profit after tax.
70%, you're right. The board take into consideration capital investment, and we have been funding Eliwana and Iron Bridge from operating cash flows. We've got, obviously, peak construction workforce on Iron Bridge, so all of those are taken into account. Certainly 70% is consistent with our sort of towards the upper end of that range, and then we look at the full year net profit after tax, as we have done every other year.
I think in terms of funding, ran through a couple of options which, there's I suppose there's two parts to it. One part is the decarbonization of Fortescue's iron ore division, which would be on the balance sheet, I suppose. Funding that capital, whether it's through a third-party PPA or directly kinda comes back onto balance sheet. If you're talking about third-party hydrogen export, you know, hydrogen export, you know, into the FFI side of things, and hydrogen production for export, that's a separate funding solution that we've been clear on. Non-recourse specific to project financing, which obviously takes it to a different level and has its own opportunities and challenges associated with that.
The sort of project is interesting 'cause it bridges over both. If we get back to the clear and present thing of Fortescue decarbonization, then that's Fortescue capital one way or the other and will be funded part of our existing capital allocation framework, which we've talked about. Obviously having balance sheet capacity is important, certainly in the development phase.
Thank you. Your next question comes from David Coates from Bell Potter Securities. Please go ahead.
Good morning, Elizabeth. Good morning, Ian. Thanks so much for the call. Look, you just answered my dividend question. So look, I've just got Iron Bridge. you know, now, first production's now less than sort of 12 months away. Should we be thinking about that and more in terms of replacing or displacing, you know, current production, and the narrowing, you know, grade and quality discount? Or should we be thinking about it as over and above the current production rate?
Yeah, David, thanks for the question. No, look, it's we've always said from the outset this is a growth project, so it's over and above current production. In fact, we've had our license capacity to the port to Port Hedland increase from 175 million tons- 210 million tons to accomodate Iron Bridge. this is incremental volume.
Great. No, I just wanted to sort of revisit that quickly. Thanks very much. That's good.
Thank you. The next question comes from Glyn Lawcock from Barrenjoey. Please go ahead.
Good afternoon, Elizabeth. Just two quick ones from me. Just I note in the half, you had SG&A at AUD 125 million, and you make a comment about you've included cost of incentives. Just wondering if you could give me some thoughts around, you know, what I should think about going forward. That's quite a big number at AUD 125 million. Is that incentives, is that the question earlier, I guess, around staff turnover, just trying to keep some of the staff in place. Then the second question, I think Ian talked a lot about this already, but I just wanted to clarify. You have your capital management framework, you know, 10% FFI, 10% growth, 50%-80% dividends.
Just, can you elaborate a little bit, you know, does the FFI 10% spend have to compete on a returns basis, or is that 10% fixed such that if you grow the iron ore business, the only bit that gives is the dividend? I'm just trying to make sure I understand, you know, is it, is it just FFI is 10% stays and so growth versus returns is the other 90%? 'Cause I just, you know, clearly if you're gonna keep spending AUD 400 million-AUD 600 million on FFI with people's projected profits, you'll need more than 10%. Thanks.
Yeah. Thanks, Glyn. Look, I'll start with SG&A. I mean, certainly our costs of SG&A have been at around sort of AUD 100 million. We obviously did have a cost of an incentive. That's in all of staff incentives. Every single person who works at Fortescue, that's not part of the executive team received. We had a record year, AUD 10.3 billion. On top of their existing incentives, we actually had a one-off incentive for everybody across the business, as we did the previous year with a record year. That's just to recognize and reward the fantastic contribution to what was a record year. Nothing to do with executive departures or anything else. It was for every single person who works as a full-time employee of Fortescue. Ian, did you wanna touch on that?
Yeah, I'd just add, Glyn, the AUD 125 million is the total-
Mm.
SG&A, it's sort of disproportionate because the bonus is a material portion of the total in the half. It's called out in the accounts because of talking through the variance, and the variance is largely the increased dividend. In terms of FFI, I think it's an important question that you ask: is that capital immediately allocated or does it compete? I can guarantee you, it continues to be competed for and clearly, the carried forward amount is a function of what hasn't been spent. We're just saying that's the amount that's available, not 100% locked in, and it's subject to competition at a group level.
I can also guarantee it's a subject for competition within the FFI group as well, and the various managers competing for scarce resources and putting that money to work on various areas of studies, technology development, manufacturing and so forth. I guess it flexes with free cash flow or net profit after tax in and of itself. Also the point of FFI and the capitalization of FFI is to get into free cash flow as soon as possible and become self-funding and become a business unit. Our profit center in its own right is the longer term objective, clearly.
Can I just clarify, there will be AUD 100 million per half then for SG&A? Is that sort of a ballpark number? Because that's even higher than the last few halves, I would imagine.
No. It's more like AUD 150 million.
Hmm.
AUD 150 million per annum, you mean?
Yeah, per annum.
Yeah.
And, and that-
Thanks very much.
I guess, sorry, just to clarify for everyone else's benefit as well. That's why we've taken FFI out separately.
Mm.
to separately identify because FFI's costs, whilst they're they will have a future economic benefit in the future, they get expensed to the P&L until we get a project that it can be capitalized against.
Thank you. Your next question comes from Saul Kavonic from Credit Suisse. Please go ahead.
Thank you. A quick question just again on funding for FFI. I'm just trying to understand, I guess, the 50 million ton green hydrogen production by 2030, that's gonna involve multiple projects. Presumably, you don't wanna all sequence them at the end, so you want at least one or two projects relatively soon. Just clarify exactly what stage are we at regarding funding discussions and offtake negotiations, for the nearer term hydrogen projects?
Yeah. Look, we have announced a couple of MOUs for offtake, so one with JCB and Ryze in the U.K. and Covestro recently in Germany. There has been discussions around offtake at MoU stage. A number of projects have been assessed at various stages of studies. You're right, it won't all be, you know, all invested at one point in time. We've made it clear from the outset that these projects and the major projects will need a source of funding, and those discussions are ongoing as well. There's a range of opportunities for funding, and that could be partnering with others as well as looking at direct project finance without recourse to Fortescue. Range of funding opportunities being assessed, offtake arrangements being discussed and progressed. You're absolutely right.
It's about pulling all those pieces together as we assess each project and advance those discussions.
Logically, the projects are in their early stage consideration, so the funding conversations as a consequence are very early stage as well. Noting, you know, clearly we're all seeing sources of capital for those sorts of investments, but you still need to get the investments right with the right economics to be able to access the various funding sources in the market.
Thanks. Just a second quick question, which again, just highlighting the distinction on WAE sitting within Fortescue Group rather than the FFI division. When you acquired WAE, you mentioned that there's, you know, obviously opportunity for that divisional business to make money beyond Fortescue's internal operations. Just because it is gonna make money from third parties, is the benefit and the revenue and the profit from that WAE part of the business gonna go into FFI, or is that going into Fortescue's kind of base business? I'm just trying to understand is, you know, is there scope for more capital or M&A to be spent by Fortescue in base business, which is gonna be giving kind of freebies to FFI, or is it very distinct kind of separation?
Please, please let me answer.
So, um.
Let me answer that question.
Fortescue is acquiring Williams Advanced Engineering, and it will be consolidated, obviously, into the group results as a subsidiary within Fortescue. The cost associated with it and revenue it generates will form part of the iron ore business, and that's where that entity will sit.
Thank you. Your next question comes from Adrian Prendergast from Morgans Financial. Please go ahead.
Yeah, hi, guys. Just a follow-up on a question earlier from Glyn. I just didn't quite understand the explanation that was given, just in terms of how iron ore, FFI, and dividends compete in the framework for capital. I thought I could've misunderstood, but I thought the explanation was that while FFI does compete for capital, yeah, any amount of the 10% of NPAT not spent is carried forward. Does that mean it's not competing and really it's just a fixed amount that remains within that subsidiary?
No. Think about it that you still gotta come up with a business case to spend the money like any allocation of capital, whether it's operating costs or capital expenditure. All that we're doing is we're de-identifying what the 10% was, how much is spent, and therefore, in theory, how much is available. I can guarantee you that every dollar is precious and needs to have its own return metrics on what are we getting for that money. In terms of a forward-looking estimation, some folks have taken the 10% of NPAT and assumed that it's funded, which obviously has an impact on the future NPV of the company. That's obviously ignoring any return on investment.
It's budgeting 101. When the iron ore division, the guys come up and we're looking at the operating or capital expenditure for the business, it goes through a rigorous process, whether it's operating or capital costs. I think that's the conclusion you should take from that.
That's really clear. Just, I guess one follow-on question. I mean, you know, the different parts of your business are very interesting but very different from each other. Just to get some idea, I bet it's not just straightforward sort of return profile, but just how you sort of compare FFI versus iron ore growth. Just to get an idea on how you think about these different opportunities that you have in different spaces.
Well, I think it's a bit like as Elizabeth was talking about the question regarding magnetite production versus hematite production or mining area A versus mining area B. It's our job as a management to work out where we get the best return on investment from the group. We've got a number of different levers to do that. Delivering on our customers' requirements and maximizing margins on the iron ore division and balancing that off with Iron Bridge and balancing that off with FFI is that they're different businesses, but the same fundamentals of return on capital employed and so forth for the group is really important for us.
Capital allocation, capital discipline, operating disciplines, it always comes back to the same things. Maximizing returns to shareholders is holistic rather than one-dimensional.
I think it's pretty clear in terms of that capital allocation framework. The dividend allocation from the 10% to FFI and the benefit of 10% of NPAT, which is variable, and it will flex with iron ore price, costs, production. It's inextricably linked to the results and performance of Fortescue's iron ore business. There's a 10% allocation of NPAT. If that's unutilized, as we've pointed out in the half year results, there's a carry forward. Every budget that they've prepared goes through the same scrutiny process, and any capital investment will again need to fit within the allocation of that NPAT or, if it's a significant project, have an identifiable source of funding.
We've been clear on that from the outset, and I think that's the benefit of that discipline we've shown in our capital allocation framework. Certainly the benefit of 10% of NPAT that is variable in nature means everyone's very focused on the cost base and capital of FFI as well as the iron ore business.
Thank you. Your next question comes from Kaan Peker from Royal Bank of Canada. Please go ahead.
Thanks, Elizabeth. Just two quick follow-ups. Just an accounting one. I think on your balance sheet there's a non-current inventory of around AUD 400 million. What does this relate to? Second one is more of a hypothetical. Just assuming FFI was capital constrained, what would be your top three projects? Thanks.
Do you wanna deal with the outlays?
The non-current inventory, Kaan, is a function of the age of our business now. What it reflects is run-of-mine inventory that's sitting down in the business, so out on the sites, which is not scheduled to run through the plant for longer than 12 months, non-current. It's a scheduling. It's a more accurate representation of the inventories that we've sort of progressively built over time, and that run-of-mine inventory will be run through the plant in due course and monetized. Therefore it's an improvement in our systems and processes and tracking of our iron ore units in the system.
that just reflects the timing of monetizing those assets.
Look, I think.
Does that relate to Eliwana or it?
No, it's more than just Eliwana. Previously, the reason why there's nothing in the previous half is because we've updated our accounting procedures and its recognition of the same inventory. It's just splitting it between current and non-current.
Okay. Thank you.
Look, just on FFI, I mean, the capital constrained or not, its priorities are decarbonizing Fortescue's iron ore business is an absolute priority. We are progressing a domestic project and opportunity and one of the international portfolio projects. Those would be. There's a, you know, raft of opportunities to choose from, and it's selecting those that give the best timeframe in terms of, speed to market, return profile, capital intensity, operating costs. It'll be the usual discipline around what gives us the better return. Rather than just saying one or two particular projects, it is, it's in that category. I think a strong domestic project and an international project that plays in decarbonizing Fortescue is a key objective of FFI.
No specifics?
No, those were the specifics.
Sorry. I told you.
Okay. Thank you.
Thank you. There are no further questions at this time. I'll now hand back to Ms. Gaines for closing remarks.
Thanks, Darcy. Thanks everyone for your participation today. Appreciate the questions, the interest in Fortescue, and obviously we're very pleased with an outstanding set of results, including our third highest half year profit. We're very well positioned for the second half in delivering on our guidance this year. I look forward to touching base with you again with the next quarterly. In the meantime, stay safe. Thank you.