Fortescue Ltd (ASX: FMG) shares were out of form on Thursday.
The iron ore giant's shares ended the day over 3% lower at $19.13.
Why did Fortescue shares fall?
Investors were hitting the sell button following the release of a quarterly update which fell short of the market's expectations.
For the three months ended 30 September, Fortescue achieved total iron ore shipments of 47.7 million tonnes (Mt). While this represents a record for the first quarter and a 4% increase over the prior corresponding period, it was down a sizeable 12% from 53.5Mt during the previous quarter.
In addition, the miner recorded C1 costs of US$20.16 per wet metric tonne (wmt) for the three months. This is up 9% quarter on quarter and higher than the consensus estimate of US$19.20 per wmt.
Commenting on the quarter, Bell Potter said:
Overall this was a soft result, in our view. It also highlighted additional headwinds being faced by FMG into FY25. C1 costs look likely to be skewed to the top of the guidance range on persistent cost inflation and, while sitting within the guidance range, a 12% production drop qoq (including a big lift from Iron Bridge) also shows downside risk.
Price realisations have emerged as a concern across both hematite and Iron Bridge concentrate products, particularly considering the higher quality blend of iron ore production for the quarter. Unexpectedly, for Iron Bridge concentrate, a previous premium to benchmark has flipped to a discount.
Downgrades
In light of the above, Bell Potter has downgraded its earnings estimates for the medium term.
It is now forecasting earnings per share of $1.12 in both FY 2025 and FY 2026 and then 93 cents in FY 2027. This means that its shares are changing hands for 17x forward earnings, which is expensive for a miner.
But the broker hasn't just downgraded Fortescue's earnings, it has also done the same to its shares.
Bell Potter has cut its rating from hold to sell with a reduced price target of $17.04. This implies potential downside of 11% for investors from current levels. The broker said:
EPS changes in this report are: FY25: -19%; FY26: -10% and FY27: -3%. Our NPVbased valuation is cut 3% to $17.04/sh on higher costs and lower price realisations. While we see potential for the iron ore price to be supported around current levels, this is factored into our forecasts. However, lower production, higher costs, reduced price realisations and lower dividends reduce our earnings forecast and valuation. We downgrade our recommendation from Hold to Sell.
