Forget Fortescue and buy this ASX mining stock now

This could be the iron ore miner to buy according to Goldman Sachs.

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When it comes to investing in iron ore, Fortescue Ltd (ASX: FMG) shares are a popular option for investors.

But with almost all brokers saying that the mining giant's shares are overvalued right now, it may not be the best ASX mining stock to buy to gain exposure to the steel making ingredient.

Instead, one of the best options in the space could be the often-overlooked Champion Iron Ltd (ASX: CIA).

That's because analysts at Goldman Sachs have just named it as an ASX mining stock to buy and are tipping big returns over the next 12 months.

What is the broker saying about this ASX mining stock?

Goldman notes that Champion Iron recently released a solid full year result. It commented:

CIA reported record EBITDA of C$553mn for FY24, up 11% YoY, broadly in-line with GSe of C$541mn but +9% vs. VA consensus. The balance sheet remains well-placed to fund growth and ongoing capital returns with net debt of ~C$140mn, and CIA declared their sixth consecutive C10cps semi-annual dividend. Improvements in rail volumes and drawdown in iron ore inventory at site is still expected from Sep Q 2024.

In light of this in-line performance from the Canada-based miner, the broker has retained its buy rating and $9.30 price target on its shares.

Based on its current share price of $7.02, this implies potential upside of 32% for investors over the next 12 months.

In addition, the broker is forecasting dividends per share of 27.2 Canadian cents in FY 2025 and then 38.8 Canadian cents in FY 2026. At current exchange rates, this equates to dividend yields of 4% and 6%, respectively, for investors.

Why is the broker bullish?

Two key reasons that Goldman is bullish on this ASX mining stock are its valuation and production growth. It explains:

Supportive Valuation: the stock is trading at 0.8x NAV (A$8.8/sh) and ~4.4x 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.

Bloom Lake has operated 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).

All in all, this could make Champion Iron worth considering ahead of fellow ASX mining stock Fortescue. Incidentally, Goldman has a sell rating and $16.90 price target on the latter's shares.

Motley Fool contributor James Mickleboro has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has positions in and has recommended Goldman Sachs Group. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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