Morningstar equity analyst Jon Mills retained his fair value estimate for Fortescue (ASX: FMG) of $15 a share after the world's fourth-largest iron ore exporter reported higher sales in Iron Ore for the quarter.

Fortescue is the world's fourth-largest iron ore exporter. Margins are well below industry leaders BHP (ASX: BHP) and Rio Tinto (ASX: RIO), and some way behind Vale, meaning Fortescue sits in the highest half of the cost curve.

Fortescue generally produces lower-grade ore than competitors with attracts a discount to the benchmark price. The average realised price per metric ton is down 5% in fiscal 2023 vs. fiscal 2022. However, the discount has shrunk compared to the benchmark iron ore pricing to 14% from 28%. Discounts tend to shrink when steelmaking margins contract, as mills seek to maximise margins and minimise raw materials inputs costs. A situation currently occurring.

However, Mills still sees the shares are significantly overvalued as they are currently trading at a 52% premium. He believes that investors are overly optimistic about Iron Ore pricing and Fortescue’s bold green energy ambitions. The company is investing 10% of net profit in clean energy. The focus green hydrogen and green ammonia, with the goal of producing 15Mt of green hydrogen by 2030. Its efforts in this regard are at an early stage and have no certainty of success.

Going forward Mills assumes iron ore averages about USD 110 per metric ton from 2023 to 2025, up from around USD 85, based on the futures curve. His assumed midcycle iron ore price remains USD 60 per metric ton from 2026 based on our estimate of the marginal cost of production. Our midcycle estimate considers the recovery of product from Vale and Rio Tinto starting production on the Simandou mine.

We also anticipate a drop in demand from China. We forecast around 2.1 billion metric tons of global steel production in 2026, with production from China around half of this as its economy moves away from one reliant on fixed-asset investment to a more consumption-based economy, and as its scrap-based production increases.