Why Fortescue shares are still a sell

Goldman Sachs doesn't believe that this miner deserves to trade at a premium to peers.

| More on:
Two men in hard hats and high visibility jackets look together at a laptop screen at a mine site.

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

Fortescue Ltd (ASX: FMG) shares were out of form on Thursday.

The mining giant's shares ended the session 2% lower at $18.62.

This was despite the iron ore miner releasing an update and revealing a record quarterly performance during the second quarter of FY 2025.

This latest decline means that the Fortescue share price has lost 35% of its value over the past 12 months.

Where next for Fortescue shares?

The team at Goldman Sachs was impressed with the company's performance during the second quarter. It commented:

FMG reported a stronger than expected Dec Q result (see Exhibit 2) with Fe shipments of 49Mt 4% ahead of GSe resulting in a slight cost beat with C1 unit costs of US$18.2/t below GSe at US$18.7/t. Iron ore price realisations for hematite (85% of the 62% Fe Index) and magnetite (113% of Index) were broadly in-line with GSe.

However, this was not enough for the broker to become more positive on Fortescue. In fact, Goldman continues to believe that its shares are overvalued at current levels.

As a result, the broker has retained its sell rating on the miner's shares with an improved price target of $16.40 (from $16.30). Based on its current share price, this implies potential downside of 12% for investors over the next 12 months.

Why is it a sell?

Although its operational performance has been pleasing, Goldman cannot look beyond its valuation. It highlights that Fortescue's shares trade at a significant premium to BHP Group Ltd (ASX: BHP) and Rio Tinto Ltd (ASX: RIO) shares, which it doesn't believe is justified. Goldman explains:

[T]he stock is trading at a premium to RIO & BHP on our estimates; ~1.1x NAV vs. BHP at ~0.85x NAV and RIO at ~0.75x NAV, ~5x NTM EV/EBITDA (vs. BHP/RIO on ~5x/4x), and ~3% FCF vs. BHP/RIO on ~4%/7%. FMG continues to trade at a >10% premium to RIO & BHP on an EV/EBITDA basis, but at a >30% premium on a P/NAV basis, despite being less diversified and having a lower margin and FCF/t iron ore business.

The valuation gap implies >US$10bn of value for hydrogen projects in FMG's share price in our view. To justify this valuation gap, we think FMG would need to build 20 Gibson Island sized projects or 40 Phoenix sized projects globally (assuming >10% IRR) selling green ammonia at >US$1,500/t (including government support).

In light of this, the broker thinks investors should avoid Fortescue and buy BHP and Rio Tinto shares.

Wondering where you should invest $1,000 right now?

When investing expert Scott Phillips has a stock tip, it can pay to listen. After all, the flagship Motley Fool Share Advisor newsletter he has run for over ten years has provided thousands of paying members with stock picks that have doubled, tripled or even more.*

Scott just revealed what he believes could be the 'five best ASX stocks' for investors to buy right now. We believe these stocks are trading at attractive prices and Scott thinks they could be great buys right now...

See The 5 Stocks *Returns as of 30 April 2025

Motley Fool contributor James Mickleboro has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has positions in and has recommended Goldman Sachs Group. The Motley Fool Australia has recommended BHP Group. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

More on Materials Shares

A man wearing a shirt, tie and hard hat sits in an office and marks dates in his diary.
Materials Shares

Rio Tinto share price tumbles on CEO bombshell news

The mining giant is now looking for a new leader.

Read more »

a mine worker holds his phone in one hand and a tablet in the other as he stands in front of heavy machinery at a mine site.
Materials Shares

What's going on with the Fortescue share price today?

This mining giant is making changes to its leadership.

Read more »

Happy construction worker at a building site with a group of workers at the background.
Materials Shares

After its result, does Macquarie rate James Hardie shares a buy, hold or sell?

The company announced its FY25 earnings on Wednesday.

Read more »

Miner and company person analysing results of a mining company.
Materials Shares

Fortescue shares fall on Iron Bridge blow

Iron Bridge is taking longer to ramp up than planned.

Read more »

Three miners looking at a tablet.
Materials Shares

Buy Rio Tinto shares for a 23% return

Let's see which broker is tipping this mining giant as a top buy.

Read more »

A bricklayer peers over the top of a brick wall he is laying with a level measuring tool on top and looks critically at the work he is carrying out.
Materials Shares

Brickworks shares have surged 15% in a month. Are they still good value according to Macquarie?

Here's what this broker has to say about the stock.

Read more »

A man checks his phone next to an electric vehicle charging station with his electric vehicle parked in the charging bay.
Materials Shares

Are Pilbara Minerals shares too cheap to ignore?

A leading broker has given its verdict on this beaten down lithium miner.

Read more »

An unhappy man in a suit sits at his desk with his arms crossed staring at his laptop screen as the PointsBet share price falls
Materials Shares

Does Macquarie rate James Hardie shares a buy, hold or sell?

The company is set to report FY25 earnings this week.

Read more »