Why Morgans upgraded South32 (ASX:S32) shares to a buy rating

Morgans is feeling bullish about South32…

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The South32 Ltd (ASX: S32) share price is pushing higher again on Thursday.

In afternoon trade, the mining giant’s shares are up 1% to $3.83.

Why is the South32 share price rising this week?

Investors may have been bidding South32 shares higher today in response to a bullish broker note out of Morgans this week.

According to the release, the broker has upgraded the company’s shares to an add rating with an improved price target of $4.10.

Based on the current South32 share price, this implies potential upside of 7% for investors over the next 12 months.

But it gets better. Morgans is forecasting a fully franked 26.5 cents per share dividend in FY 2022. This represents a yield of 6.9%, bringing the total return on offer to approximately 14%.

What did the broker say?

Morgans made the move after factoring the acquisition of a 45% interest in the 180,000 tonne per year Sierra Gorda copper operation in Chile into its estimates.

The broker believes this is a solid acquisition and notes that it introduces copper, molybdenum, and gold to the mining giant’s diversified portfolio. Furthermore, it is expected to be immediately earnings accretive.

It is the diversity it bring that Morgans finds particularly attractive. Especially in comparison to other mining giants such as BHP Group Ltd (ASX: BHP), Rio Tinto Limited (ASX: RIO), and Fortescue Metal Group Limited (ASX: FMG).

The broker explained: “We upgrade our recommendation on S32 to Add, from Hold, seeing an attractive investment proposition of upside to our target, an attractive 7.6% [6.9% now] dividend yield FY22F, and capacity to keep pursuing new growth. S32 also boasts superior diversification compared to its fellow ASX mining peers (with BHP divestments in oil & gas and coal, RIO’s oversized iron ore exposure, and FMG’s single exposure to iron ore and ground-floor entry into renewables).”

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Motley Fool contributor James Mickleboro has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. 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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