Fortescue Ltd (ASX: FMG) shares have come under significant pressure over the past four months.
During this time, the ASX 200 mining stock has lost 35% of its value as iron ore prices tumbled.
Unfortunately, despite this decline, a number of brokers believe that its shares are still overvalued.
One of those is Goldman Sachs, which has a sell rating and $15.40 price target on its shares. This implies potential downside of approximately 13% for investors from current levels. It recently commented:
[T]he stock is trading at a premium to RIO & BHP on our estimates; ~1.2x NAV vs. BHP at ~0.85x NAV and RIO at ~0.75x NAV, ~6x 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.
In light of this, investors may want to skip Fortescue and look at other ASX 200 mining stocks. But which ones? Let's look at two alternatives that are rated as buys.
Iluka Resources Limited (ASX: ILU)
Goldman Sachs thinks that this mineral sands producer could be dirt cheap and is tipping it an ASX 200 mining stock to buy. It has a buy rating and $9.00 price target on its shares. This suggests that upside of 48% is possible for investors. It commented:
Compelling Mineral Sands FCF and Rare Earth growth potential: ILU is trading on a FCF yield of 17%/14% in 25/26 without the RE refinery capex. We are positive on ILU's project pipeline and forecast >20% production growth in mineral sands volumes, ~18ktpa of Rare Earths (~4ktpa of high value NdPr) over the next 5yrs.
We think ILU's Eneabba RE refinery is a strategic asset considering it will be only the third significant western world RE refinery. Despite the recent capex increase to A$1.7-1.8bn we continue to think the economics are attractive when including the large Wimmera project (GSe A$0.93bn capex, 30yr life project with heavy rare earths and ~70ktpa of zircon) as feed in the base case with a long run NdPr price of ~US$70/kg (real $, from 2028) required to deliver a ~15% IRR on our estimates.
South32 Ltd (ASX: S32)
Another ASX 200 mining stock that has been tipped as a buy is diversified miner South32.
Goldman has a buy rating and $3.60 price target on its shares, which implies potential upside of approximately 13%. It said:
GS commodity team are bullish copper, aluminium, zinc and met coal (~90% of S32 FY25 EBITDA), and we forecast Cu Eq growth of ~5% in FY26 on recovering manganese, aluminium and copper volumes. On our forecasts, S32 is trading on a FCF yield of ~6-8% in FY25 & FY26 (excluding met coal sale proceeds).
