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Why the share price of South32 Ltd (ASX:S32) is heading higher

The share price of South32 Ltd (ASX: S32) jumped higher this morning as the surge in zinc prices, positive offshore leads and an upbeat production report places the stock in a sweet spot.

The price of zinc enjoyed its best one-day gain in a year due to falling inventories and bargain hunting even as the US dollar rebounded, which is normally a negative for commodities.

The stock rallied 1.5% to $3.64 in morning trade when the S&P/ASX 200 (Index:^AXJO) (ASX:XJO) is up 0.5%.

South32’s latest quarterly update will also put a smile on investors’ faces as the diversified miner reported a record performance at Australia Manganese with total production of the mineral increasing 10% in FY18 when demand and price was strong.

The miner’s Mozal Aluminium business also pulled off another record production result in the last financial year while payable nickel production from Cerro Matoso in Mexico improved 20%.

However, production for most of its commodities apart from manganese and nickel actually fell on a full-year basis, although the market had been expecting that.

What is more important is the quarter-on-quarter production improvements on 9 of the 10 products it sells with payable zinc production seeing the biggest increase of 45% as its silver, lead and zinc Cannington mine performed a little better than management had expected in the three months to June.

We are also likely to see a good uplift in earnings from its South Africa Energy Coal business in FY19 given that the costs associated with its restructure into a standalone business will be recorded in its FY18 accounts, although redundancies and other one-off costs will shave around US$60 million from its bottom line.

South32 is tipping a substantial cost reduction in that business going forward and is promising to provide further details when it hands in its FY18 results next month.

What’s also noteworthy is that the miner has around US$400 million left in the kitty for capital returns, which could include share buybacks and/or special dividends.

If management was mulling other acquisitions following its deal to buy Arizona Mining Inc. and a 50% stake in the Eagle Downs coal project, it wasn’t saying. While this is a conducive environment to chase acquisitions, South32 might need to take a breather to bed down what it has before contemplating another acquisition.

South32 isn’t the only miner on fire today. Shares in BHP Billiton Limited (ASX: BHP) and Rio Tinto Limited (ASX: RIO) are up over 1% each as well, while OZ Minerals Limited (ASX: OZL) is nearly 2% ahead.

I think investors should stay overweight on the sector.

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Motley Fool contributor Brendon Lau owns shares of BHP Billiton Limited, Rio Tinto Ltd., and South32 Ltd. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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