Stocks In Focus: Fortescue, October 22 2025

0:28A listener production. focus on the businesses that are appropriate. Maybe they're widely held. Maybe they're in the news. Maybe they're topical and interesting. We'll try and cover probably all three of those, actually, with today's guest and today's company. Before I do the formal introduction, though, a reminder of two things. Firstly, this is general advice only, not personal advice. In other words, we can tell you what we think about a company, an investment, an idea, an issue. What we can't do is tell you what's right for you personally. Firstly, it wouldn't be appropriate. We don't know who you are.

0:55Secondly, we're legally not allowed to. If you're a general advice provider, that's all you can do is say hey here's what we think it's your job now to work out either by yourself or with a financial advisor whether that advice is right for you and how it might pertain to your circumstances secondly we're recording this one towards the end of october 2025 by the way because the internet is forever so if you're watching this in 2073 thanks for dropping in if you're listening to it in 2084 thanks for listening in the meantime though anything could and will change between now and whenever you're listening to this or watching it on youtube so whatever the case, just please bear in mind it was at a point in time and also to add a price in time, right?

1:30That's important because the business may or may not change, the valuation, the price may or may not change. And so keep those things well and truly in mind. All right. With that out of the way, I'm going to welcome Mitchell Lawler. Mitch, g'day. How's it going, Scott? I'm very well. I hope you are too. Now, we're going to talk about Fortescue. Now, up front, I own a small number of shares in Fortescue, a genuinely small number, but it's a fascinating business, and you're going to take us through it. I'm going to get you to tell us about the business. I'm going to get you to share some pros and some cons, some reasons to invest, maybe some reasons not to, or at least things to be aware of.

2:02And I will ask you whether you think it's going to beat the market over the next five or so years. But I will again remind our viewers, and this is not a formal recommendation, right? This is just a thought, a point in time. We have formal recommendations inside the paid walls of the Motley Fool's membership services. And by the way, once a month on YouTube, we do a stock of the month where we pull back the curtain on a buy recommendation. So if you're not already subscribed to the YouTube channel, that's a very, very good reason to do it. One came out pretty soon, actually, about a week or so.

2:29So yeah, make sure you're there for that. Mitch, let's do this. Let's talk about Fortescue. I think people know it's a Western Australian iron ore miner, but tell us more. Yep, Fortescue founded in 2003 by Andrew Twiggy Forrest. It's become a great success story from the early beginnings. but yeah one of the largest iron ore miners in Australia not quite as big as BHP in Rio but certainly up there around 200 million tons of iron ore per year and the real differentiator is how it's been able to get its costs of production down over the years so I think it wasn't too long ago that its cost per tonne of ore was around$50.

3:14Now, in its latest result, it's around$18 per wet metric tonne of iron ore. So, through innovation and different processing techniques over the years, Fortescue has done an amazing job at reducing that cost of production. And that means that even without sort of the high-grade product that some of its competitors have had over the time, it's been able to generate really high margins and great earnings from that production. So, it's got three main mining hubs, the Chichester, the Western, which are both hematite iron ore and iron bridge which is magnetite and then the business is sort of separated into two main pillars so there's Fortescue metals which is your what most people will know about the the actual mining of the iron ore that includes those three three hubs and then there's Fortescue energy and that sort of encapsulates I suppose the new endeavor of Fortescue led by Twiggy, which is to use the innovations of renewable energy and the reduction in costs of generating renewable electricity to reduce its cost of production further and also delve into possibly green hydrogen production to diversify the business away from just iron ore, but also part of that is potentially going into green steel production itself.

4:57So moving away just from an iron ore producer and moving down that vertical supply chain, I suppose, down the supply chain towards the actual production of the steel. And part of that is also this underpinning driver from Twiggy that they want to achieve real zero by 2030, and that will be led by some of this introduction of renewable energy in their operations as well. Great summary, mate. I've got to say, 200 million tonnes of iron. Just think about the size of that. It is extraordinary. As you say, the smaller than real BHP, this is some seriously industrial scale mining operations being done.

5:41And as you say, the stuff on the side, Twiggy's been really vocal about environmental causes We've got some great YouTube videos worth a watch. Certainly not backwards and coming forwards about calling out some of this stuff. So lots of things to talk about. We won't delve into that particularly in this instance. We're talking about the investment itself. So let's do that, Mitch. Let's talk about the pros and the cons. If you looked at Fortisky, I said, hey, here are some reasons maybe to consider buying the shares. What would you put in that list? I think the first one is just that the business is still a cash machine.

6:08You know, the iron ore price has fallen over the last few years. It's not quite as high as what we saw back in, I think it was 2021 or 2022 was the peak. But even at this diminished iron ore price, the business is generating around US$15 billion of revenue in the last financial year. That translated into about$3.4 billion in net profit after tax or bottom line profit. Free cash flow of about$2.6 billion. So, it's still a very profitable business. And actually, surprisingly, some people mightn't be aware of this, but the net margins of Fortescue in the latest financial year have actually beaten out the likes of Rio Tinto and BHP.

6:54So, its net margin around 22 % versus Rio's of 19 % and BHP's of 18%. So, again, that focus on constraining the costs, I think, is the real appealing factor in Fortescue. And I suppose looking forward is you're sort of backing the management through Twiggy and that long-term vision of continuing to reduce that cost that feeds into the business, being able to maintain its competitiveness against those bigger players. Secondly, I would say the decarbonization optionality in this business. So with the focus on implementing more of renewable electricity into its operations, and that also means utilizing this technology for its rolling stock, its trains on its rail network.

7:51And just to let everyone know, too, I should have mentioned this in the beginning, but Fortescue owns a lot of its infrastructure, has over 600 kilometers of rail network. It owns the rolling stock that goes on that rail. It owns part of the port operations as well, its own stockyard, and then also its own ships. So it's looking to electrify a lot of those assets in order to further reduce the cost to operate. So I suppose that is an upside potential in the business if it can do that. One of its biggest costs is diesel. When you're a mining company, a lot of diesel goes into this heavy equipment.

8:38And if you can strip out the cost of diesel through utilizing essentially free energy, I mean, there are costs in implementing solar panels or wind turbines, but that's an upfront capex cost. The opex then is far smaller than diesel on an annual basis. So I think it's around 700 million dollars or 700 litres of diesel is expected to be saved annually if they can electrify their infrastructure. And then lastly, I would say that movement down the supply chain. So if they are able to produce green steel, which is utilising this renewable energy to actually produce the steel, that could actually differentiate the business a bit further again.

9:31There's a market for clean infrastructure, clean materials, and Fortescue could be on the front foot with that. They're still in the pilot stage. I think the green metal project is a pilot program at the moment. So it's worth keeping an eye on that to see how they progress. Optionality is not a word we use very often with miners, Mitch. So it's a nice differentiator, as you say, from maybe just the pure dig it out of the ground and throw it on a ship type stuff. By the way, ChatGPT helped me out while you were chatting. 200 million tonnes a year of iron ore is equipped with 31 great pyramids of Giza.

10:10So there you go. Just a bit of... If you're having trouble visualising as I was, that's a remarkable amount of stock. Motley Fool Money. For more, subscribe to the free newsletter at fool.com.au forward slash listener.

10:25Let's go to the cons, mate. Let's talk about the reason why we might not want to invest in forestry or the risks at least of doing so. What did you put in that column? Yeah, I think the first one is clearly the reliance on iron ore. So still at this stage, 95 % of their revenue is housed in that Fortescue Metals business through iron ore. The other portion of it is their ambitions within the energy domain. So there's a high reliance. And we know that mining companies, it's very much a price taker industry where what you make is defined by the market, the supply and demand at any given time. So there's a lot of risk there if the iron ore price were to fall substantially.

11:12I think it's less of a risk maybe than other competitors because of Fortescue's low cost of production and its potential of further decreasing that. So if we move into a down cycle within the mining industry, I think Fortescue is probably well placed, but it's still a very real risk. Secondly, I would say the decarbonisation effort. I mean, there's going to be an enormous amount of capital that has to go into this. When you're talking about electric ships or battery powered rolling stock trains, we're talking just billions of dollars. So, there's the potential that those costs could blow out they could maybe not yield the return on investment that was envisaged to begin with.

12:08So, that's a very real risk as well. And then lastly, I'd say the regulatory and geopolitical risk. So, China is the primary end market for Fortescue's iron ore and relations with China can come and go. There can be weak points. And we've seen this recently. I think it was BHP that had some issues with China. So what came of that is I think BHP now has to actually sell and receive the Chinese yuan for payment of that. So there's a lot that can happen in those negotiations that are at the whim of our geopolitical relationships with China. If those were to tarnish, maybe that could create an issue for Fortescue because they don't really have too much of a market elsewhere for this iron ore.

13:07So yeah, I would say that sort of summarises the key risks for Fortescue that I see at the moment. Nice, man. Lots of upside, but some risks that comes with it. I will ask you what you think of the business over the long term, but before I do that, a really quick add. If you're listening on the Motley Fool Money podcast, thank you. Please jump over to YouTube, youtube.com forward slash foolau. And you can see us in all of our Technicolor glory. If you know what Technicolor is, ask your parents, kids. But yes, the video version of this and plenty of other content besides. Actually, I'm planning to do a YouTube Live later in the week.

13:37So there's, I'll put myself on the agenda for that one. But that's going to happen. Lots of great stuff on YouTube, two or three videos a week, most weeks. So yeah, if you're liking what we're doing, hopefully you are listening on the podcast, jump over there and have a look. If you're watching this on YouTube, thank you. While you're there, do me a favor. Hit the notification bell after you've hit the like and subscribe buttons. I know everyone says that. Here's the thing. If you hit like, other people find the video. Good for us. Hopefully good for them. If you're liking what we're doing, you want more of it, the best way is to subscribe to the channel and hit the notification bell so YouTube lets you know when we drop some new content.

14:06I think that's how the cool kids say it. So yeah, good stuff coming and hopefully you'll enjoy that. By the way, check out the Motley Swine podcast feed as well while you're doing that. All right, let's move on from that, mate. Let's get to Tintax. As you said, plenty of upsides, plenty of potential risks. And of course, then there's valuation. From today, do you reckon Fortescue is likely to be a market beta or is it likely to lag the ASX over the next five plus years? I think the valuation is relatively attractive at the current levels. But I would say that Fortescue is probably either in the next phase of Australian industrial leadership, or it could be a world-class mining business making one very expensive science experiment is how I would probably put it.

14:51Nasty foot. So, you know, it's the valuation, if it continues to push down costs through its decarbonisation efforts, I think is attractive, but it's a big if. There's a lot of capex to go into this, a lot of unknowns with that investment. and it's still exposed to supply and demand. And there's nothing to say that much more well-financed competitors, the bigger dogs in the battle like BHP and Rio Tinto, don't start to look at how to implement some of this electrification themselves. So, you know, there's a possibility, but I would say that it skews probably more towards underperformance over the long term from here.

15:41Very good. Thank you, Mitch. That is Fortescue. FMG is the ASX code if you're playing along at home. Mate, thanks for sharing your expertise with us. Of course, thanks for watching. Thanks for listening. Thanks for being part of Stocks in Focus in whatever form you choose to partake. Thanks for being part of the Motley Fool community as well. We are investors, effectively talking to other investors. So hopefully you're getting some value out of these pieces of content that go to you free, which is a pretty good price to pay. Mitch, thanks again. Thanks again for watching and listening. Until next time, Fool on.

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