The Fortescue Metals Group Limited (ASX: FMG) share price is trading lower on Tuesday.
At the time of writing, the iron ore giant's shares are down 1% to $21.08.
Why is the Fortescue share price trading lower?
One thing that could be weighing on the Fortescue share price today is a bearish broker note out of Goldman Sachs.
In response to the company's full year results release, the broker has retained its sell rating and $19.90 price target.
Based on the current Fortescue share price, this implies potential downside of 5.5% over the next 12 months.
Why is Goldman bearish on Fortescue?
According to the note, there are four key reasons why Goldman Sachs doesn't see value in the Fortescue share price at the current level.
One is its valuation in comparison to fellow mining giant Rio Tinto Limited (ASX: RIO). Its analysts note that Fortescue trades at ~1.7x net asset value (NAV) compared to Rio Tinto at ~0.85x NAV.
Another concern the broker has is the widening of low grade 58% iron ore product realisations. Current spot realisations for Fortescue 58% product is at ~75% of the 62% Index versus 84% in the June quarter. It feels that this could worsen as China cuts steel production in the second half of the year.
What else?
Another reason the broker is bearish on the Fortescue is its capital expenditure risks at the Iron Bridge project.
Goldman explained: "Capex has increased to US$3.3-3.5bn (100% basis), c. +US1bn higher since the initial cost when it was approved in April 2019, with a 6-month delay and a slower expected ramp up. We model capex of US$3.7bn and first ore in Q1 2023 (FMG: by Dec 2022), and an 18-24 month ramp up."
Finally, the broker also has concerns over its diversification plans with the Fortescue Future Industries business.
All in all, the Fortescue share price may be down 14% in 2021, but this leading broker feels it can still go lower.
