The South32 Ltd (ASX: S32) share price was out of form on Tuesday.
The mining giant's shares ended the day 8% lower at $4.46.
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Why did the South32 share price tumble?
Investors were selling down the South32 share price yesterday amid broad weakness in the resources sector and a negative reaction to the company's quarterly update.
The latter revealed that South32 has increased its cost guidance to reflect higher input costs, royalties, and foreign exchange.
Is this a buying opportunity?
According to a note out of Goldman Sachs, its analysts remain very positive on the South32 share price and appear to see yesterday's selloff as a buying opportunity.
The broker has retained its conviction buy rating with a trimmed price target of $5.70.
Based on the current South32 share price, this implies potential upside of 28% for investors over the next 12 months.
In addition, Goldman is forecasting a fully franked 8% dividend yield in FY 2022 and then 13% in FY 2023 and FY 2024.
Why is Goldman bullish?
Goldman Sachs has listed three key reasons why it is bullish on the South32 share price. It explained:
Valuation: The stock is trading at c. 0.95x NAV (A$5.10/sh) including the completion of the acquisition of a 45% stake in the Sierra Gorda copper mine in Chile.
Strong FCF outlook: We forecast a FCF yield of c. 18% in FY23 (over 25% at spot), driven mostly by exposure to base metal price momentum (aluminium & alumina c. 50% of FY23 EBITDA, copper c. 10%, zinc/nickel c. 20%), met coal (c. 15% of EBITDA), a c. 30% or c. 280ktpa increase in aluminium production over the next 18 months from the Alumar restart & a c. 17% increase in Mozal stake, creep in nickel from Cerro Matoso and lead/zinc/silver from Cannington, and uplift from the Sierra Gorda acquisition.
Increased capital returns: We assume the buyback continues to be extended (at ~US$200mn p.a) and assume S32 resets its balance sheet metrics (we think targeting US$0-800mn net debt through the cycle based on our view of suitable balance sheet leverage) pays out 60% of earnings (40% ordinary, 30% special dividend component) with the FY22 result. On our estimates, S32 is on a dividend yield of c. 8-13% in FY22-FY24."
All in all, this could make South32 a top option if you're looking for exposure to the resources sector.
