Fortescue Ltd (ASX: FMG) shares have been having a tough time in 2024.
Despite a recent rebound following the announcement of new Chinese economic stimulus measures, the ASX 200 mining stock remains down by a third this year.
Unfortunately, one leading broker doesn't believe that this weakness has created a buying opportunity.
In fact, its analysts think that Fortescue's shares could be heading lower from here.
What is the broker saying about this ASX 200 mining stock?
According to a note out of Bell Potter this morning, the broker believes that the short term increase in iron ore prices won't last. This is due to increasing supply and softening steel production in China. It commented:
Overall, while certain iron ore products (e.g. high grade ores which are more carbon efficient and for which supply constraints are emerging) may have specific tailwinds, we remain of the view that in the medium term, iron ore prices face pressure from increasing ore supply, plateauing steel production in China and the maturation of urbanisation trends there driving a less steel intensive economy.
Bell Potter has lifted its earnings estimate for FY 2025 to reflect recent strength in iron ore prices but has held firm with its medium term estimates due to the above. It said:
We mark-to-market for December quarter 2024 iron ore prices, for a modest 8% EPS upgrade in FY25. EPS forecasts for FY26 and FY27 are unchanged. Our NPV-based valuation is up 1% to $17.17/sh on the slightly higher iron ore price. While we see potential for some near-term macro tailwinds, lower production, higher input costs and reduced price realisations remain company-specific challenges for FMG in FY25 after a slow start relative to guidance. Retain Sell.
Time to sell
As you can see above, the broker has retained its sell rating on the ASX 200 mining stock with a slightly improved price target of $17.17 (from $17.04).
Based on the current Fortescue share price of $19.48, this implies potential downside of approximately 12% for investors over the next 12 months.
And while Bell Potter sees potential for a higher valuation if the stars align with iron ore prices and the Australian dollar, even then the upside would be limited. It concludes:
Even so, we find that the bullish combination of 10% higher iron ore prices and 0.60 exchange rate still gives us a <$20/sh Target Price. Earnings and dividends benefit, but in our view only become secondary supports for the share price below A$20/sh as yields approach 7-8%. In summary, even taking a bullish outlook on these macro factors, we see limited upside from the current share price.
