Why the South32 (ASX:S32) share price is outperforming today

The South32 Ltd (ASX: S32) share price is outpacing gains on the broader market after a broker upgraded its shares.

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The South32 Ltd (ASX: S32) share price is outpacing gains on the broader market after a broker upgraded its shares.

The diversified miner jumped 3.3% to $2.84 in morning trade when the S&P/ASX 200 Index (Index:^AXJO) gained 0.4%.

South32 share price leading the pack

While ASX mining shares are leading the charge higher, few of the majors can keep up with the South32 share price.

The BHP Group Ltd (ASX: BHP) share price, Rio Tinto Limited (ASX: RIO) share price and Fortescue Metals Group Limited (ASX: FMG) share price increased by less than 2% each.

Asset sale and broker upgrade

South32 announced today that the transfer of its shareholding in South32 SA Coal Holdings (South Africa Energy Coal) to Seriti Resources Holdings Proprietary Limited is expected to be completed by the end of this month.

The news will please shareholders concerned about their exposure to climate change. But that is probably not the main reason for the South32 share price outperformance.

An upgrade by Macquarie Group Ltd (ASX: MQG) is a more likely driver for the shares. The broker lifted its recommendation on South32 to "outperform" from "neutral".

Why the South32 share price was upgraded to "buy"

Macquarie's decision came after it revised up its price forecasts for a range of commodities that South32 produces. This included manganese, silver and aluminium.

As a result, the South32 share price is trading on a free cash flow yield that's close to 10%.

"The earnings upgrades for S32 are driven by a combination of the more bullish outlook for silver and aluminium, and near-term increases in our manganese and zinc-price expectations," said Macquarie.

"Our FY21 and FY22 earnings estimates rise 51% and 49%, respectively. S32's medium-term earnings also see solid upgrades of 12% for FY23, 11% for FY24 and 9% for FY25."

Other ASX mining shares on the upgrade path

The South32 share price jumped by 52% over the past year. That's roughly on par with the BHP share price, while the Fortescue share price doubled and Rio Tinto's up 26%.

Macquarie's 12-month price target on South32 is $3.10 a share.

But South32 isn't the only miner to be upgraded by Macquarie on the back of the broker's commodities price upgrades.

The Jupiter Mines Ltd (ASX: JMS) share price was boosted to "outperform", while the Alumina Limited (ASX: AWC) share price was lifted to "neutral".

Motley Fool contributor Brendon Lau owns shares of BHP Billiton Limited, Macquarie Group Limited, Rio Tinto Ltd., and South32 Ltd. The Motley Fool Australia owns shares of and has recommended Macquarie Group Limited. 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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