The South32 Ltd (ASX: S32) share price fell on the last day of the week to return some of Thursday's strong gains but the stock is unlikely to stay down for long as expectations build that it will declare a special dividend in 2019.
The S32 share price fell 1.2% on Friday to $3.41 even as other miners like the BHP Group Ltd (ASX: BHP) share price, Rio Tinto Limited (ASX: RIO) share price and Alumina Limited (ASX: AWC) share price chalked up decent gains.
In fact just about all sectors bar utilities rallied to push the S&P/ASX 200 (Index:^AXJO) (ASX:XJO) index up 0.5%.
South32 may have returned some of Thursday's 3.5% gain when management released a pleasing quarterly production report but several brokers are tipping the stock to rise over the next 12 months.
Macquarie Group Ltd (ASX: MQG) described South32's latest production update as "solid" and noted a strong performance from the miner's core cash-generating assets with management upgrading its guidance for its Illawarra coal mine by 7% to 6.5 million tonnes for FY19.
"Given the speed of the on-market buyback (US$167m in 1H FY19), we see potential upside to current capital management initiatives in the form of a US$80m [$111 million] special dividend," said the broker.
"We have factored this into our forecasts, and we expect this to be supportive of the share price in the short term."
Macquarie has an "outperform" recommendation on the stock with a price target of $3.80 per share.
Citigroup also noted the potential for South32 to undertake more capital returns following the December quarter production update.
"At spot prices S32 can still generate US$3.6b in free cash flow over next three years that could further top up returns to shareholders through either buybacks or dividends," said Citigroup.
"Further, binding bids for SA Energy Coal are expected in the current half. Citi forecasts a net cash position of US$816m at end FY19 before any asset sale."
Citi reiterated its "buy" rating on the stock but lowered its price target by 20 cents to $4.30 a share due to lower cash realisation, higher costs from its aluminium business and a higher tax rate.
However, there's potential for South32 to enjoy further consensus profit upgrades over the medium term as the spot prices of many of South32's key commodities are higher than the average assumptions made by brokers.
