Fortescue Metals Group Limited (ASX: FMG) shares are trading lower on Monday.
In afternoon trade, the mining giant's shares are down almost 2% to $16.82.
However, if one broker is to be believed, there could be plenty more declines ahead for Fortescue's shares.
What is the broker saying about Fortescue's shares?
According to a note out of Goldman Sachs, its analysts have retained their sell rating and $13.40 price target on company's shares.
This implies approximately 20% downside for investors over the next 12 months based on where its shares are currently trading.
Why is Goldman bearish?
Goldman has just attended an investor tour of the company's Solomon and Eliwana mines, as well as being taken through the Pilbara decarbonisation investment and strategy.
In respect to the latter, the broker commented:
Run through of recently announced US$6.2bn Pilbara decarbonisation program (>US$7bn when including the Pilbara Energy Connect (PEC) project and Iron Bridge decarb).
Combined with de-bottlenecking work to increase production at Eliwana and elevated mine replacement and sustaining capex, Goldman expects Fortescue's capex to increase materially in the coming years. It also sees risks that costs could be even higher than it is forecasting. The broker explained:
Overall, we forecast FMG's capex to increase from ~US$3.2bn in FY23 to ~US$4bn by FY26 on mine and haul truck replacement and decarbonisation spend, but see upside risk to our estimate.
This is expected to weigh heavily on its free cash flow and ultimately its dividends. For example, after paying a dividend of US$1.50 per share in FY 2022, Goldman expects Fortescue's dividends to fall to 38 US cents by FY 2024, before reducing even further in the years that follow.
FY 2024's dividend estimate equates to a yield of just 3.6% at current levels. So, if Fortescue is going to continue to trade with big juicy yields, its shares are going to have to drop materially by then.
What else?
In addition, the broker continues to highlight that the Fortescue shares trade at a material premium to rivals BHP Group Ltd (ASX: BHP) and Rio Tinto Limited (ASX: RIO).
Goldman said:
The stock is trading at a premium to BHP & RIO; c. 1.5x NAV vs. RIO & BHP at c. 0.8x & 1x NAV, c. 6x EBITDA (vs. RIO & BHP on c. 3-5x), and c. 5% FCF vs. BHP & RIO on c. 5-10%.
In light of this, its analysts are urging investors to buy BHP and Rio Tinto shares instead of Fortescue.
