Fortescue Ltd (ASX: FMG) shares will be on watch next week.
That's because the iron ore giant is scheduled to release its first quarter update before the market open on Thursday 24 October.
Ahead of next week's release, let's see what the market is expecting from the miner.
Fortescue Q1 update
According to a note out of Goldman Sachs, its analysts are expecting Fortescue to report a meaningful decline in iron ore shipments for the three months ended 30 September.
Goldman is forecasting iron ore shipments of 47.6Mt for the period. This will be down 11% on the previous quarter and is a touch short of the consensus estimate of 47.8Mt.
The broker expects this to have been achieved with an average realised price of US$84 per tonne. This is down 9% quarter on quarter and is well short of the consensus estimate of US$97 per tonne.
Also heading in the wrong direction could be Fortescue's costs according to Goldman Sachs.
It is expecting C1 unit costs of US$19.60 per tonne, which would be 6% higher than the previous quarter. The consensus estimate for C1 unit costs sits at US$19.20 per tonne for the quarter.
Should you invest?
Goldman Sachs doesn't think that investors should be buying Fortescue's shares at present. In fact, the broker feels that shareholders should be selling them before they tumble deep into the red.
The note reveals that its analysts have a sell rating and $15.10 price target on its shares. This implies potential downside of 26% for investors over the next 12 months.
There are a number of reasons why the broker is so bearish on Fortescue's shares. One is its valuation and another is its weak dividend outlook. It recently explained:
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).
We continue to think FMG is at an inflection point on capital allocation, and to fund the ambitious strategy, we assume the company reduces the dividend payout ratio from the current ~70% to ~50% from FY26 onwards (bottom end of the 50-80% guidance range), and increases gross gearing to ~30% by FY27 (but in-line with the company's target of 30-40%).
