Fortescue going green at all costs: Twiggy promises to remove fossil fuels by 2030

Billionaire iron ore magnate Andrew Forrest has set Fortescue Metals (ASX: FMG) on an ambitious path to "eliminate fossil fuel use" across its iron ore operations by 2030.

The capital estimate for such an expeditious pivot is estimated to be US$6.2bn, with most of the investment expected to take place between FY24-28.

The investment to generate a positive net present value (NPV) as fossil fuels are replaced with lower cost alternatives and cost savings.

“We are already seeing direct benefits of the transition away from fossil fuels - we avoided 78m litres of diesel usage at our Chichester Hub in FY22 - but we must accelerate our transition to the post fossil fuel era," said Andrew Forrest.

Capital investment breakdown

The US$6.2bn capital investment is expected to ramp up from FY24 onwards and peak between FY26-27. Annual capex expenditure is expected to be capped at a maximum of US$1.5bn.

The investment will be allocated towards:

• US$3.2bn (52%) for renewables, battery storage and infrastructure

• US$1.3bn (21%) green fleet

• US$0.9bn (14%) site based infrastructure

• US$0.8 (13%) demand response

The project is expected to generate a positive NPV through the elimination of fossil fuels.

By 2030, Fortescue forecasts the investment to deliver cumulative savings of US$3bn and annual cost savings of US$818m at prevailing market prices.

The breakdown of cost savings include:

• 84% diesel (displace approximately 700m litres of diesel)

• 9% gas (displace approximately 15m gigajoules of gas)

• 7% carbon offsets

Decarbonisation roadmap

Source: Fortescue Metals

Valuation and revenue opportunities

Fortescue hinted that the green transition "supports higher price to earnings ratios".

Iron ore majors including BHP (ASX: BHP), Rio Tinto (ASX: RIO) and Fortescue have historically traded around low-to-mid single digit price-to-earnings. Which is surprisingly below the Materials sectors average PE ratio of 9.3, according to Morningstar.

But what would Fortescue's valuation look like in the event that it begins producing a carbon free iron ore product alongside the advanced infrastructure and technologies its developed to progress its green ambitions?

Fortescue share price chart