Top broker slaps sell rating on Fortescue (ASX:FMG) share price

The Fortescue Metals Group Limited (ASX:FMG) share price could be overvalued according to one leading broker. Here's why…

| More on:
An ASX investor looks devastated as he watches his computer screen, indicating bad news

Image source: Getty Images

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

The Fortescue Metals Group Limited (ASX: FMG) share price underperformed on Thursday following the release of its third quarter update.

The iron ore producer's shares fell 0.2% to $22.58.

What happened in the third quarter?

For the three months ended 31 March, Fortescue shipped 42.3 million tonnes of iron ore. While this was flat on the prior corresponding period, it remains on track to achieve its shipments guidance in FY 2021.

The mining giant averaged US$143 per dry metric tonne, which was up 17% on the second quarter of FY 2021. It also represents revenue realisation of 86% of the average Platts 62% CFR Index.

And although its C1 costs increase quarter on quarter by 16% to US$14.90 per wet metric tonne, the company remains on track to achieve its costs guidance.

Though, one thing that is not on target is its capital expenditure. Fortescue has lifted it by up to US$300 million for the year.

Is the Fortescue share price in the buy zone?

According to a note out of Goldman Sachs, its analysts don't see value in the Fortescue share price at the current level.

It commented: "FMG delivered a weaker than expected March Q with; (1) iron ore price realisations drifting down 5% QoQ to 86% vs. the Index (below GSe at 88%), despite some modest provisional pricing tailwinds and generally low and supportive steel mill margins for low grade Fe up until late Feb, and (2) FY21 capex guidance lifted by c. 10% to US$3.5-3.7bn due to further escalation on the Iron Bridge project during the project review, spend of renewables projects and FX strength. We model US$3.7bn of capex for Iron Bridge vs. last company guidance of up to US$3bn (100% basis). Unit costs increased 16% QoQ to US$14.9/wmt (the highest in around 5-yrs), and shipments of 42.3Mt of iron ore were down 8% QoQ but flat YoY."

Valuation concerns

Goldman also has concerns over its valuation, noting that the Fortescue share price is trading at 1.6x net asset value (NAV).

This compares to a much more reasonable 1x NAV for both BHP Group Ltd (ASX: BHP) and Rio Tinto Limited (ASX: RIO)

In light of this, the broker has retained its sell rating and cut its price target to $18.30. Based on the current Fortescue share price, this implies potential downside of 19% over the next 12 months.

Motley Fool contributor James Mickleboro has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

More on Broker Notes

A cute young girl with curly hair sips a glass of milk through a straw with a smile on her face.
Broker Notes

Up 37% this year, why Macquarie expects A2 Milk shares to keep outperforming

Macquarie remains bullish on A2 Milk shares heading into 2026. Let’s see why.

Read more »

ASX shares Business man marking buy on board and underlining it
Broker Notes

Leading brokers name 3 ASX shares to buy today

Here's why brokers believe that now could be the time to snap up these shares.

Read more »

An older female ASX investor holds a gangster-style fist pump pose showing off gold rings with dollar signs on them.
Broker Notes

Why Macquarie forecasts Northern Star shares are set to surge 55%

Macquarie believes Northern Star shares are well-placed to rocket higher.

Read more »

Two miners examine things they have taken out the ground.
Broker Notes

Up 64% this year! What's Macquarie's price target for Lynas Rare Earths shares?

Clouds on the horizon?

Read more »

a group of people in business attire gather around a computer in an office environment with expressions of concern as they try to nut out the answer to a challenge they are facing.
Broker Notes

Leading broker just downgraded the Fortescue share price. Is it time to sell?

Downside ahead for the iron ore titan?

Read more »

a man sits back from his laptop computer with both hands behind his head feeling happy to see the Brambles share price moving significantly higher today
Broker Notes

Broker tips Domino's Pizza share price to rise 54% in FY26

Ord Minnett says the current Domino's Pizza share price offers "very attractive value".

Read more »

A female ASX investor looks through a magnifying glass that enlarges her eye and holds her hand to her face with her mouth open as if looking at something of great interest or surprise.
Broker Notes

Top brokers name 3 ASX shares to buy next week

Brokers gave buy ratings to these ASX shares last week. Why are they bullish?

Read more »

A smiling businessman in the city looks at his phone and punches the air in celebration of good news.
Broker Notes

These ASX 200 shares could rise 50% to 60%

Brokers believe these shares could deliver big returns for investors.

Read more »