Although the market is racing higher today, the South32 Ltd (ASX: S32) share price hasn't been able to do the same and is down almost 2% to $3.48. Unfortunately this could be the start of even greater declines for its share price if one of Australia's leading brokers is to be believed.
According to a note out of Deutsche Bank, the broker has downgraded the diversified miner's shares to a sell rating from neutral. Furthermore, its analysts have cut the price target on its shares to a lowly $2.80.
Deutsche Bank's price target implies potential downside of almost 20% for its shares over the next 12 months.
The investment bank is bearish on South32 due to its opinion that the miner's costs are going to increase greatly this year. Deutsche has suggested that costs could increase as much as 20% in FY 2018, impacting its earnings greatly.
As well as this, the broker has concerns around the future prices of key commodities including alumina, coal, and manganese.
Should you take profit?
With its shares up 28% this year I think it could be time to consider taking profit. After all, if costs do indeed rise by as much as Deutsche forecasts, then I expect earnings will decline on a year-on-year basis. This could mean its shares are overvalued at the current share price.
In light of this, I would consider selling South32 and investing in industry peers BHP Billiton Limited (ASX: BHP) and Santos Ltd (ASX: STO) instead. Both of these mining giants appear to have the wind in their sails at present and look to be great value.
