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.