Guess which ASX 200 mining stock could offer a 22% return

Goldman Sachs expects strong returns from this miner's shares.

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There could be some big returns on the cards for buyers of South32 Ltd (ASX: S32) shares.

That's the view of analysts at Goldman Sachs, which believe the ASX 200 mining stock is great value at current levels.

What is the broker saying about the ASX 200 mining stock?

Goldman has responded positively to news that the company has agreed to sell its Illawarra metallurgical coal operations.

The broker highlights that the total consideration of up to US$1.65 billion is above its US$0.97 billion asset valuation and implies a possible 6% uplift in its South32 net asset value estimate of $3.54 per share.

In light of this, the broker is feeling even more positive on the company and has reiterated its buy rating and $3.50 price target. This implies potential upside of 19% for investors over the next 12 months.

In addition, the broker is expecting a 3% dividend yield in FY 2024. This boosts the total potential return to approximately 22%.

Why is it bullish?

There are a number of reasons why Goldman is bullish on the ASX 200 mining stock. This includes its improving free cash flow and dividend yield. The latter is expected to more than double in FY 2025. It explains:

GS are bullish copper, aluminium, zinc and met coal (~65% of S32 NTM EBITDA) in CY24. Together with lower capex, working cap unwind and higher production, we forecast ~US$700mn of FCF in the June H. On our forecasts, S32 is trading on a FCF yield of 6% in FY24 and 10% in FY25 (~5% at spot).

We assume the on-market share buyback is reinstated (at ~US$250mn p.a) with the FY24 results with net debt forecast to fall well below S32's net debt target of US$1-1.5bn through the cycle. S32 continues to pay out 40% of earnings (min div payout). On our estimates, S32 is on a dividend yield of c. 3% in FY24, but increasing to 7% in FY25.

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 positions in and has recommended Goldman Sachs Group. 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 Scott Phillips.

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