Fortescue Ltd (ASX: FMG) shares were out of form on Thursday.
The iron ore giant's shares sank 5.5% to end the day at $20.14.
Investors were hitting the sell button in response to the release of the miner's quarterly update.
This means that its shares have now lost a third of their value since hitting a 52-week high in January.
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Where next for Fortescue shares?
Unfortunately for its shareholders, one leading broker believes that the company's shares could continue to fall from current levels.
According to a note out of Goldman Sachs, its analysts have reiterated their sell rating on its shares with a reduced price target of $15.50 (from $16.20).
Based on the current Fortescue share price, this implies potential downside of 23% over the next 12 months.
What is the broker saying?
While Goldman was impressed with its stronger than expected iron ore shipments, this was largely offset by a larger than forecast discount for its lower grade iron ore. It commented:
FMG reported record June Q iron ore shipments of ~54Mt, above our 52Mt, with FY24 shipments reaching 191.6Mt, just below the bottom end of the guidance range of 192-197Mt. However, iron ore realisations were 82% of the 62% Index, below our 84% estimate as higher volumes of lower grade Super Special Fines (SSF) were shipped. Unit costs were broadly flat at US$18.5/t despite record volumes and a low strip ratio (waste/ore) of just 1.5x.
Four reasons to sell
Goldman has named four reasons why it thinks Fortescue shares are a sell right now. The first is its valuation:
Relative valuation vs. BHP & RIO: the stock is trading at a premium to RIO & BHP on our estimates; ~1.3x NAV vs. BHP at ~0.9x NAV and RIO at ~0.8x NAV, ~6.5x NTM EV/EBITDA (vs. BHP/RIO on ~5.5x/4.5x), and ~1% FCF vs. BHP/RIO on c. 6%/7%. FMG continues to trade at a >10% premium to RIO & BHP on an EV/EBITDA basis, but at a >30% premium on a P/NAV basis, despite being less diversified and having a lower margin and FCF/t iron ore business. The valuation gap implies >US$10bn of value for hydrogen projects in FMG's share price in our view. To justify this valuation gap, we think FMG would need to build 20 Gibson Island sized projects or 40 Phoenix sized projects globally (assuming >10% IRR) selling green ammonia at >US$1,500/t (including government support).
Another reason to sell is the "widening of low grade 58% Fe product realisations over the medium to long term due to our expectations of increasing supply of low grade iron ore from other projects."
Goldman also highlights execution and ramp up risks for the Iron Bridge project as a reason to be cautious. It said:
Execution and ramp-up risks on the Iron Bridge project in FY25 & FY26 due to water availability and also reliability and performance of key processing equipment (air classifiers etc) which is still yet to be fully tested.
And finally, it is concerned about "higher near to medium term capex, uncertainties around the Energy and Pilbara decarbonisation and impact on FCF, dividend and balance sheet."
