The Fortescue Metals Group Ltd (ASX: FMG) share price is dropping again on Friday.
In morning trade, the mining giant's shares are down 3.5% to $22.12.
What's going on with the Fortescue share price?
Investors have been hitting the sell button today after brokers responded relatively negatively to the miner's quarterly update.
For example, analysts at Goldman Sachs were pleased with the company's performance in the quarter but not with its guidance for FY 2024. The broker highlights:
FMG reported a strong but in-line June Q operating result, with iron ore shipments of ~49Mt, unit costs of US$17.6/t and realised price of US$96/t (87% realisation), net debt of US$1bn all in-line with GSe. Our focus from the release and results call was on FY24 guidance and the ramp-up of Iron Bridge magnetite, with iron ore shipments ~5Mt lower than expected."
In light of this, the broker has lifted its earnings per share estimate for FY 2023 by 2% but lowered its FY 2024 and FY 2025 estimates by 2% and 8%, respectively.
This has ultimately led to the broker retaining its sell rating and cutting its price target by 3% to just $14.50.
Based on the current Fortescue share price, this implies a potential downside of 34% for investors over the next 12 months.
Isn't that a bit low?
While this might seem like a significantly low valuation, it isn't when you compare it to rivals BHP Group Ltd (ASX: BHP) and Rio Tinto Ltd (ASX: RIO). Goldman highlights that Fortescue's shares trade at a ~50% premium to these giants on a net asset value (NAV) basis. It explains:
The stock is trading at a premium to RIO & BHP on our estimates; 1.5x NAV vs. BHP at c.1.0x NAV and RIO at 0.9x NAV, c.7.5x NTM EV/EBITDA (vs. BHP/RIO on c.6.5x/5.0x), and FY24E FCF of c.3% vs. BHP/RIO on c.5%/6%.
It is also worth highlighting that Bell Potter also sees significant downside risk. This morning it has retained its sell rating with an improved price target of $15.97. This suggests a potential downside of 28%. It said:
While operations continue to perform at the top end of expectations, a forecast decline in iron ore prices, earnings and dividends combined with the uncertainty over capital allocation and investment returns for both FFI and the Belinga project in Gabon, causes us to see limited upside from the current share price.
