Brokers have downgraded the Fortescue (ASX:FMG) share price. Here’s why

Fortescue Metals has fallen out of favour with a number of brokers. Let’s take a look at some of the reasons why.

| More on:
Man in mining or construction uniform sits on the floor with worried look on face

Image source: Getty Images

Analysts have downgraded the Fortescue Metals Group Limited (ASX: FMG) share price in response to ongoing issues with the miner’s troubled Iron Bridge project.

The magnitite project in Western Australia has raised questions in the past due to potentially higher than expected capex expenditure. Pushback on the project deadlines and increasing costs are also some of the catalysts noted.

What do the brokers say?

Goldman Sachs is one of the brokers that has changed its investment rating on Fortescue Metals. 

In its report last Friday, Goldman said it expected a strong June quarter and a record final dividend in August, but rated the company a sell based on its valuation.

According to the report, Fortescue’s net asset value (NAV) is trading at 1.6 times while rival iron ore miners BHP Group Ltd (ASX: BHP) and Rio Tinto Limited (ASX: RIO) trade at just a 1 time multiple.  NAV is the value of an entity’s assets minus the value of its liabilities. 

Grade depletion and ramp-up risks from Fortescue’s troubled Iron Bridge project and its mines were also factors, the broker said.

In addition, Goldman expressed some doubt about the company’s new green energy arm, Fortescue Future Industries (FFI).

FMG is targeting a 10% allocation of net profit after tax (NPAT) to Fortescue Future Industries (FFI) renewable energy projects (green hydrogen, solar, wind, etc) but only when a project is investment-ready.

Melbourne broker Shaw and Partners also expressed some doubts over Fortescue. In its newsletter to investors, it rated the miner a hold, also citing Fortescue’s 12-week review of the Iron Bridge project as the main reason.

The company reminded investors that Fortescue was a success story and had produced more than a decade “of best in class track record at delivering large/complex mining projects on time and budget”. But the report noted “it wasn’t just cost and capex that got in the way, but ‘culture issues’ reared as an issue in early 2021”.

Addressing the latter is critical to FMG’s overall way forward.

As reported by Motley Fool, analysts at Morgan Stanley have retained their underweight $17.45 price target. The blowout from the Iron Bridge project and the fear of grade downgrades were again the main reasons stated. 

At the time of writing, the Fortescue share price is trading at $23.42, up 0.6%

Wondering where you should invest $1,000 right now?

When investing expert Scott Phillips has a stock tip, it can pay to listen. After all, the flagship Motley Fool Share Advisor newsletter he has run for more than eight years has provided thousands of paying members with stock picks that have doubled, tripled or even more.*

Scott just revealed what he believes could be the five best ASX stocks for investors to buy right now. These stocks are trading at near dirt-cheap prices and Scott thinks they could be great buys right now.

*Returns as of August 16th 2021

Motley Fool contributor Frank Tzimas has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

More on Resources Shares