Fortescue Ltd (ASX: FMG) shares did not make the list of five S&P/ASX 200 Index (ASX: XJO) mining stocks receiving an outperform rating by Macquarie on Friday.
The ASX 200 miners that the broker does believe look undervalued are:
- BHP Group Ltd (ASX: BHP)
- Rio Tinto Ltd (ASX: RIO)
- Mineral Resources Ltd (ASX: MIN)
- Deterra Royalties Ltd (ASX: DRR)
- South32 Limited (ASX: S32)
Here's why.
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ASX 200 mining shares oversold
As The Australian noted, Macquarie thinks the above five ASX 200 mining stocks may have been sold off too heavily by investors concerned about the plunging iron ore price.
Though not Fortescue shares.
In early January, the industrial metal was trading north of US$140 per tonne. Earlier in September, iron ore prices dipped below US$90 per tonne. It's currently fetching around US$93 per tonne amid concerns over ongoing weakness in China's steel hungry property markets.
However, Macquarie now thinks the iron ore price is more aligned with the near-term outlook.
According to the broker:
Equity markets are now pricing in much lower iron ore prices, and we see some value in BHP and Rio Tinto at these levels and have upgraded the pair on valuation grounds.
The broker has a $44.00 price target on BHP shares, representing a potential 11% upside from the current $39.67 a share.
In addition to BHP and Rio Tinto, Macquarie also upgraded Mineral Resources and Deterra Royalties to an outperform rating. The broker still prefers South32 to lead the pack.
As for Fortescue shares, Macquarie kept its underperform rating on the ASX 200 miner.
"Fortescue, unfortunately, with its higher operational leverage, feels the full force of iron ore commodity prices without any long-term benefit from higher base metals prices, like BHP and Rio," Macquarie said.
Commenting on BHP's outlook last week, Josh Gilbert, market analyst at eToro, said:
BHP's status as the world's lowest-cost iron ore producer gives it a competitive edge, allowing it to maintain strong margins and navigate current market volatility more effectively.
Gilbert added that atop iron ore, "Copper remains a key focus for BHP. The company saw a 9% year-over-year increase in copper production, supporting a 2% rise in underlying profit."
The bullish case for Fortescue shares
Not everyone agrees that Fortescue shares deserve an underperform rating.
Auburn Capital Wealth Management's Jabin Hallihan has a buy rating on Fortescue.
According to Hallihan (courtesy of The Bull):
This iron ore producer presents a buying opportunity given the stock has fallen significantly in calendar year 2024. The shares have plunged from $29.39 on January 2 to trade at $16.495 on September 12.
Despite short term pressure from lower iron ore prices, Fortescue's diversification efforts in Africa and green energy projects offer long term growth potential.
With a potential 7% dividend yield in fiscal year 2025, long term investors may benefit by establishing a position while the shares trade on a discounted price-earnings multiple.
Fortescue shares currently trade on an 11.4% fully franked trailing dividend yield.
