Broker gives its verdict on the Fortescue share price

Here's what this broker is saying about Fortescue's decarbonisation plans…

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The Fortescue Metals Group Limited (ASX: FMG) share price was out of form last week.

The mining giant's shares lost over 5% of their value to end the period at $16.76.

Investors were selling down the Fortescue share price amid the market volatility and concerns over its decarbonisation plans.

Will the Fortescue share price bounce back?

Opinion remains divided on where the Fortescue share price is heading from here.

As I covered here, analysts at Goldman Sachs see nothing put downside for its shares over the next 12 months.

Whereas the team at Morgans is sitting on the fence right now and feel the miner's shares are about fair value.

According to a note, the broker has responded to Fortescue's decarbonisation plans by retaining its hold rating with a modestly increased price target of $17.30. This implies potential upside of 3.2% for investors.

But like Goldman Sachs, Morgans is forecasting a series of big dividend cuts from FY 2024. It has pencilled in a 79.5 US cents per share dividend that year and then 60.8 US cents per share and 37 US cents per share in the following years.

This will mean yields of approximately 6.4%, 4.8%, and 2.9%, respectively.

Morgans highlights that these dividend cuts are being driven by materially lower free cash flow expectations. It commented:

Given the uncertain nature of the spend, with big portions attributed to innovation, there is material risk of FMG's decarbonisation budget slipping as the scope of work required evolves. FMG has also not baked any inflation assumptions into its capex budget, another realistic source of slippage.

While an adjustment to our assumptions, we expect this guidance to trigger a more material change for consensus – which does not appear to have any decarb capex factored in. We expect peak decarbonisation spend to come at a time of more moderate long-term iron ore prices.

One thing seems certain, FMG will generate materially lower FCF over the next decade versus the previous decade. FMG's aggressive decarbonisation push, combined no doubt with additional FFI projects, only acts to further increase FMG's dependence on the iron ore price by materially restricting its FCF profile. Although if FMG can successfully decarbonise it will unlock sustainable and material opex savings while vastly lifting its ESG profile.

Motley Fool contributor James Mickleboro 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 Scott Phillips.

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