The Fortescue Metals Group Limited (ASX: FMG) share price has been in sensational form over the last six months.
As you can see on the chart below, the iron ore miner's shares have risen a sizeable 22% since the start of August.
Can the run continue or is the Fortescue share price heading lower?
While the Fortescue share price has been defying gravity for some time, a growing number of analysts are warning that it could fall heavily in the near future.
One of those is Goldman Sachs, which this morning has reiterated its sell rating with a $13.60 price target. Based on where its shares are trading now, this implies potential downside of 39% over the next 12 months.
Goldman's bearish view is driven by its valuation, decarbonisation, and dividend concerns. In respect to the former, the broker highlights that Fortescue's shares trade at a significant premium to rivals BHP Group Ltd (ASX: BHP) and Rio Tinto Ltd (ASX: RIO). It said:
Relative valuation: the stock is trading at a premium to RIO & BHP on our estimates; 1.7x NAV vs. BHP at c. 1.15x NAV and RIO at 0.95x NAV, c. 7.5x NTM EV/EBITDA (vs. BHP/RIO on c. 6x/5x), and c. 3% FCF vs. BHP/RIO on c. 5%/7%.
Goldman has also warned investors that there's no guarantee that Fortescue will be able to continue paying big dividends in the near future because of its decarbonisation spend. It explained:
Our recent FMG site trip to the Pilbara highlighted ongoing elevated spend to maintain hematite group shipments at ~190Mtpa going forward. Combined with the ~US$7bn decarb program, we forecast FMG's capex to increase from ~US$3.2bn in FY23 to ~US$4.6bn by FY26. We continue to think FMG is at an inflection point on capital allocation, and to fund the ambitious strategy, we assume the company raises ~US$5bn of new debt, reduces the dividend payout ratio from the current ~75% in FY22 to ~50% from FY24 onwards, and increases gross gearing to 30-35% by FY26 (in-line with the company's target of 30-40%).
This sentiment is echoed by analysts at Morgans. Its analysts have retained their reduce rating with a $15.60 price target. It warned:
Significant capex is still to come from FMG's decarbonisation spend and various projects targeting FID in CY23. FMG expects to fund this spending through its iron ore cash flow, which sees its FCF yield reducing significantly over the next few years, and increasing its sensitivity to any unexpected market volatility.
Morgans thinks it will get so bad that Fortescue's shares will provide a yield of just 1.4% in FY 2025.
All in all, the broker community appears to believe the good times are coming to an end for this mining giant.
