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Top broker says the South32 (ASX:S32) share price is in the buy zone

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The South32 Ltd (ASX: S32) share price has come under pressure on Monday and is dropping lower.

At the time of writing, the mining giant’s shares are down 1.5% to $2.73.

Is this a buying opportunity?

One broker that would see today’s weakness in the South32 share price as a buying opportunity is Goldman Sachs.

At the end of last week, the broker released a positive note which revealed that its analysts have retained their buy rating and lifted the price target on South32’s shares to $3.10.

Based on the latest South32 share price, this price target implies potential upside of 13.5% excluding dividends. Including dividends, this potential return increases to approximately 16% over the next 12 months.

Why does Goldman Sachs think South32 shares can go higher?

According to the note, South32 delivered a reasonably mixed second quarter update last week.

It commented: “S32 reported an 8% drop in Cu Eq production for the Dec Q, 2% below GSe, with lower than expected coal production from both Illawarra and South Africa offsetting a very strong performance from the high margin Worsley alumina, Aus manganese and Cannington lead/zinc assets.”

And while the broker has reduced its FY 2021 earnings estimates to reflect this, it has upgraded its estimates for the medium term enough to warrant remaining positive on the company.

Goldman said: “Our FY21 EPS is down 13% (but just US$59mn) however, our FY22-24 EPS is up 15-50% after incorporating our commodity team’s recent nickel, zinc and aluminium price upgrades, along with a significant upgrade to Cerro Matoso nickel’s production following the development approval of the higher grade Q&P deposit.”

In addition to this, it believes South32’s shares are great value at just 0.85x net asset value. The broker also feels that its free cash flow is recovering and expects a free cash flow yield of 5% over the next two years.

The latter bodes well for dividends, with the broker forecasting ~3.8% dividend yields in both FY 2022 and FY 2023.

This could make the South32 share price one to watch over the coming years.

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Motley Fool contributor James Mickleboro has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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