The Fortescue Ltd (ASX: FMG) share price is still materially lower than it was in February 2025, it's down around 20% as the chart below shows. A lower valuation could be a good time to invest.
ASX mining shares, particularly ASX iron ore shares, have demonstrated a history of volatility and a somewhat cyclical nature. I think there's a fair chance that Fortescue could be undervalued on a medium-term basis.
As one of the biggest iron ore companies in the world, it is very aligned with the iron ore price and demand from China. I think the following three reasons explain why the Fortescue share price is underrated.
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Iron ore price remains solid
The current iron ore price is at a level where Fortescue can still generate a strong level of profit.
According to Trading Economics, the iron ore price recently traded at around US$100 per tonne. While it's not as high as it was in May 2024 at above US$110 per tonne, it's still capable of making good earnings.
I don't think the iron ore miner's valuation reflects how the future could be better than expected. While the future is unclear, I think it's possible China may decide to launch financial stimulus to help its economy, which could boost iron ore demand and the iron ore price.
UBS is projecting that Fortescue could generate around US$3.1 billion of net profit after tax (NPAT) in FY25 and FY26. If the iron ore price ends up stronger than expected, this could please the market.
Solid dividend yield
That level of profit generation could allow Fortescue to pay a solid dividend for shareholders.
UBS predicts that Fortescue could pay an annual dividend per share of AU 98 cents in FY25, which would translate into a grossed-up dividend yield of 9%, including franking credits, at the current Fortescue share price. While that's not the biggest yield on the ASX, at the current valuation it could still represent a good level of return for investors.
Increasing production
Fortescue can't do much about Chinese demand or the iron ore price, but it does have control over how much of the commodity it produces.
The ASX iron ore share is doing a good job at increasing its overall production across its projects. This can help boost its revenue and help support profitability.
The FY25 half-year period saw the business ship 3% more iron ore than the prior corresponding period. With the ongoing ramp-up of the Iron Bridge project, I think Fortescue's total production can continue climbing.
Overall, I think the company's outlook is more compelling than the market is pricing in with the Fortescue share price.
