The South32 Ltd (ASX: S32) share price is having a subdued session on Tuesday.
At the time of writing, the mining giant's shares are down 0.5% to $3.96.
This latest decline means that South32 shares are now down over 21% since this time last year. This can be seen on the chart below.
Image source: Getty Images
Are South32 shares now a bargain buy?
When it comes to mining shares, investors shouldn't look at a price-to-earnings multiple to judge whether a company is cheap or expensive.
That's because a miner's earnings per share is not a reliable metric to judge it on. Instead, most analysts will use the net asset value (NAV) metric in combination with another metric to judge whether a mining share is good value or not.
The good news is that, according to Goldman Sachs, South32 shares could be in bargain territory based on this metric.
A recent note reveals that the broker estimates that South32 has a NAV of $4.49 per share. So, with South32's shares trading below $4.00, they are changing hands for less than the net value of its assets.
That's a good start! But there's a little more to the broker's valuation model. The NAV side of the equation accounts for half of its valuation. The balance comes from an EBITDA multiple of 4.5x.
With Goldman expecting South32 to generate EBITDA of US$4 billion over the next 12 months, this equates to an enterprise value (EV) of US$18 billion. On a per share basis, this represents US$3.57 or A$5.10 per share.
So, to find our final valuation, we add its NAV of $4.49 to its EV per share of $5.10 and divide by two to come up with $4.80.
This means that with South32 shares trading at $3.95, there's a potential return of 21.5% on the cards for investors before dividends. As for the latter, the broker is forecasting a 4.5% yield in FY 2023 and an 11% yield in FY 2024.
