Fortescue Metals Group Ltd (ASX: FMG) shares are having a good session.
At the time of writing, the iron ore miner's shares are up over 1% to $21.82.
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Can Fortescue shares keep rising?
Unfortunately, as far as the team at Goldman Sachs is concerned, the mining giant's shares are trading well beyond fair value.
According to a note from this morning, following a tour of the Pilbara, the broker has reiterated its sell rating with a trimmed price target of $16.20.
Based on where Fortescue shares are currently trading, this suggests a potential downside of approximately 26% for investors over the next 12 months.
What did the broker say?
In respect to its Pilbara tour, the broker was impressed with the company's roadrunner battery electric haul truck development. However, it sees low barriers to entry for other original equipment manufacturers (OEMs), so isn't feeling overly bullish on this avenue. It explains:
FMG's roadrunner battery electric haul truck has been developed in just 6 months and is running for 4hrs per charge in a dedicated test pit, with charging time down to just 30min. While this is an impressive achievement we think that the barriers to entry for other truck OEMs will be relatively low considering the rapid development of battery technology globally. Although FMG believes that their software is a key advantage. Commercial roll-out is targeted in FY26.
Goldman likens this technology to Fortescue's truck automation in the past. It adds:
We think it will likely be similar to FMG truck automation experience with CAT where they rapidly developed the technology by taking on production risk, only to see other major miners then deploy the technology.
Why are its shares a sell?
Goldman's sell rating is based on its belief that Fortescue shares are severely overvalued compared to other miners. It explains:
Relative valuation: the stock is trading at a premium to RIO & BHP on our estimates; 1.45x NAV vs. BHP at c. 1.0x NAV and RIO at 0.85x NAV, c. 5.5x NTM EV/EBITDA (vs. BHP/RIO on c. 5.5x/4.5x), and c. 5% FCF vs. BHP/RIO on c. 5%/7%.
In addition, the broker warns about the "uncertainties around Fortescue Energy diversification and Pilbara decarbonisation and impact on dividend and balance sheet."
