The Fortescue Metals Group Limited (ASX: FMG) share price has been in fine form in recent months.
As you can see below, since dropping to a 52-week low of $14.50 in late October, the mining giant's shares have raced 58% higher.
This means the Fortescue share price is now trading within a whisker of a 52-week high.
Where next for the Fortescue share price?
Unfortunately for investors, one leading broker believes the Fortescue share price could give back all these gains and some more.
According to a note out of Goldman Sachs, its analysts have reiterated their sell rating with a trimmed price target of $13.40.
Based on where the miner's shares are currently trading, this implies potential downside of approximately 42% over the next 12 months.
Why so bearish?
Goldman believes that the Fortescue share price is vastly overvalued, particularly in comparison to peers. It also feels that its dividends will come under significant pressure in the coming years as it spends big on decarbonisation.
Commenting on sector valuations, Goldman said:
The Australian bulk miner and steel sectors performed strongly in 4Q23 on the expectation of a China reopening and we now see the sector as more fairly valued trading on (simple averages) ~6x NTM EBITDA and ~1.05x NAV [net asset value].
However, the broker highlights that Fortescue trades at a lofty 1.62x NAV, making it the most expensive ASX 200 bulk mining share under coverage.
In respect to its decarbonisation spending, the broker adds:
We continue to think FMG is at an inflection point on capital allocation, and to fund the ambitious strategy, we assume the company raises ~US$5bn of new debt, reduces the dividend payout ratio from the current ~75% in FY22 to ~50% from FY24 onwards, and increases gross gearing to 30-35% by FY26 (in line with the company's target of 30-40%).
Goldman appears to believe investors should buy Rio Tinto Ltd (ASX: RIO) instead. It has a buy rating and $130.00 price target on the miner's shares.
