Leading broker UBS has reviewed the situation with Fortescue Ltd (ASX: FMG) shares after it fell materially below its previous price target of $17.30, which was a prediction of a decline at the time of the call. At the time of writing, its sitting at $16.18 after rising more than 2% today.
UBS changed its rating on the ASX mining share to neutral because the "risk-reward is now more balanced."
The ASX iron ore share has declined amid worries about iron ore demand and the possible fallout from a trade war between the US and China.
Let's have a look at what experts from UBS now think about Fortescue shares.
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Concerns about iron ore price and quality too pessimistic?
UBS said in a note to clients that it thinks concerns about the iron ore price outlook is overdone because of its expectations that the price could hold between US$90 to US$100 per tonne for the next five years.
UBS forecasts the iron ore price could be US$100 per tonne in 2025, US$95 per tonne in 2026 and US$90 per tonne in 2027.
The iron ore price has been "firmer than expected, with supply tighter due to weather disruption, and demand stable, resulting in Chinese port stocks normalising."
Supply growth from Mineral Resources Ltd's (ASX: MIN), Onslow project, Fortescue's Iron Bridge, Rio Tinto Ltd's (ASX: RIO) Simandou, and the Brazilian Vale business "will accelerate and deliver growing surpluses" in 2026 and 2027, putting downward pressure on prices.
The broker also believes the concerns about the discount for Fortescue's lower grade of iron ore is "overdone" too. However, UBS did acknowledge "the possibility of steel curtailments". But, the broker isn't expecting a Chinese curtailment this year.
UBS decided to reduce its earnings per share (EPS) projections for the financial years of FY25 to FY27 to between 3% to 6%. This led to a reduction of the price target to $16.70, which suggests where the broker believes the Fortescue share price will be in a year from now. That implies a slight rise from here it is today after a 2% rise.
Balance of risk and rewards for Fortescue shares
UBS said there are a range of scenarios that illustrate the balance of risks amidst its "operationally levered portfolio". The broker said:
FMG is leveraged to the iron ore price, resulting from its single commodity exposure across its operating portfolio. While Energy will eventually drive modest diversification as the business decarbonises towards Real Zero 2030 targets, it is the iron ore price and low grade discounts/high grade premiums that drive the investment case. We run scenarios around our base case to highlight the risk-reward. In our upside scenario, we hold low grade discounts around current spot levels of ~14%, and run iron ore prices 10% above our base case across the forward estimates. This derives an upside fair value of A$22.5/sh. In our downside scenario, we widen low grade discounts to 18% and reduce our iron ore price profile by 10% across the forwards, with a resulting fair value of A$11.0/sh.
As a reminder, the new UBS price target on Fortescue shares is $16.70.
The broker thinks Fortescue can generate EPS of $1 in both FY25 and FY26. That puts the current Fortescue share price at around 16x forward earnings.
