Green Machine | Fortescue Metals Group (FMG) Recommendation

Ord Minnett Research Recommendation: Fortescue Metals Group (ASX: FMG)  

Fortescue Metals Group’s first development project to be undertaken by its Fortescue Future Industries (FFI) vehicle is likely to be a 250,000-tonne-per-annum (tpa) green ammonia plant in Tasmania, with a final investment decision due this year.

Ammonia is a concentrated source of nitrogen, an essential element for plants to grow. It is a key intermediate product from which a variety of nitrogen-based fertilisers and industrial products are produced. At temperatures below -33°C, ammonia turns into liquid at atmospheric pressure.

Ammonia is also an excellent hydrogen carrier, and can be cracked to produce nitrogen and hydrogen. New applications are investigating the potential for ammonia fuel cells and ammonia as a fuel, although none are on a commercial scale.

Global ammonia production was 144Mt in 2020, with around 80% consumed by the fertiliser industry. The remainder was used in industrial applications such as explosives, plastics, and refrigerant and cleaning products. The traditional production process is energy- and carbon-intensive. The potential development of green ammonia plants via a green hydrogen industry, however, would provide a pathway to very low- or zero-emission ammonia production.

Fortescue’s proposed 250,000tpa plant in Tasmania could be in production in 2023. We have reviewed the potential economics of the project and the outlook for green ammonia, and make the following observations:

• Green ammonia demand growth could be significant for carbon-neutral fertilisers and as a potential carbon-free shipping fuel. If a quarter of the global fleet were to use ammonia, this could see global demand rise by about 80%.
• Green ammonia production costs are likely to be around US$550/t at US$2 per kilogram hydrogen. We estimate a 50% green price premium would be required to generate an 8% internal rate or return on the Tasmanian project, based on a preliminary model.
• Ammonia also holds promise as a means to transport hydrogen, given the existing infrastructure and less onerous refrigeration requirements.

Green ammonia production is still in its infancy worldwide, although in our view the outlook for consumption by the shipping and green fertiliser industries indicates significant potential. We maintain our Buy recommendation with a $28.00 target price.