Goldman Sachs names 3 reasons why the South32 share price is a bargain buy

Here’s why South32 shares could be great value for investors…

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Key points

  • South32's shares pulled back this week following the release of its quarterly update
  • The team at Goldman Sachs believe this could be a buying opportunity
  • Its analysts have named three reasons why its shares are a buy

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.

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.

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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