Fortescue Ltd (ASX: FMG) shares are a popular option for investors that want iron ore exposure.
But that doesn't necessarily mean they are the best way to invest in this side of the market.
In fact, for some time now, analysts have been warning that Fortescue shares are severely overvalued.
As a result, it won't be a surprise for many to see that the mining giant's shares have fallen 16% since the end of January.
However, what might be a surprise is that most analysts continue to believe that the miner's shares remain very expensive despite this pullback.
For example, earlier this week, the team at Macquarie put an underperform rating and $14.00 price target on its shares, whereas Ord Minnett put a lighten rating and $17.30 price target on them.
These price targets suggest further downside of 44% and 31%, respectively, from current levels.
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Forget Fortescue shares and buy this iron ore miner
The team at Goldman Sachs thinks investors should dump Fortescue and buy Champion Iron Ltd (ASX: CIA) shares instead.
Goldman, which has a sell rating and $19.60 price target on Fortescue, believes that big returns could be on offer from the Canadian iron ore miner.
According to a note this morning, the broker has retained its buy rating and $9.40 price target on its shares. This implies potential upside of 30% for investors over the next 12 months.
And with Goldman forecasting a 3.2% dividend yield in FY 2024 and a 4.5% dividend yield in FY 2025, this increases the total potential 12-month return beyond 33%.
The broker believes that its shares are cheap at the current level. It commented:
Supportive Valuation: the stock is trading at 0.8x NAV (A$8.7/sh) and ~4.0x EBITDA (NTM). Our NAV is based on a long run Fe price of ~US$105/t (real) for 65% Fe and ~US$75/t premium for DRPF above 62% Fe Index. For every ~US$10/t increase in our long run price, our CIA NAV would increase by ~A$1.5/sh.
Goldman also highlights that the Bloom Lake operation is performing strongly and looks set to generate significant cash flow next year. It adds:
Bloom Lake now running above nameplate 15Mtpa, strong OCF in FY25, with de-bottlenecking options to 18Mtpa: CIA has now ramped-up Bloom Lake Phase II to 15Mtpa nameplate, and we expect this to support +50% EBITDA growth and doubling of Operating Cash Flow (OCF) in FY25, which could fund de-bottlenecking of Bloom Lake to 18Mtpa (not included in GSe base case).
