The South32 Ltd (ASX: S32) share price has been hit hard by weaker coal prices, market oversupply and dwindling investor sentiment. But Macquarie Group Ltd (ASX: MQG) maintains a positive stance on the stock.
As of lunchtime today, South32 shares are trading hands at $3.03, which is a minor 0.33% rise over the day. The share price is currently 16.76% lower over the year.
It's been a tricky 12 months for the company. Its share price plummeted 30.38% with a 2.5-week period in late-March to early-April this year off the back of commodity price volatility and slow revenue growth.
The miner's share price fell to a four-year low of $2.52 on 9 April.
Despite the volatility, Macquarie still sees a positive outlook for the stock.
Here's why.
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Outlook for South32 and its shares
The broker maintains its outperform rating and $3.60 target price on the stock. This represents a potential 18.8% upside from the trading price at time of writing.
While the broker's outlook for the company's production is mixed, and lower production is expected for some business segments, it still sees value in South32 stock.
More specifically, the broker forecasts a weak production result for the June quarter with a small 3% increase in alumina and a 3% decline in copper. Macquarie sees other commodities as being largely in line with market consensus.
According to its note to investors, compared to the company's prior quarter performance, Macquarie expects stronger alumina, silver, lead and manganese. It expects production of other metals to be lower quarter-on-quarter.
We anticipate the production rate at Sierra Gorda to be largely flat in the June quarter at 17kt. Updates on the Fourth Grinding Line design to accommodate for a higher clay content of ore are a near term focus for SG.
According to KGHM's [South32's partner in the Sierra Gorda copper mine in Chile] monthly production result, the asset produced 5.2kt and 6.1kt of copper in April and May respectively (S32 equity share). Our forecast of 17kt has assumed stable production rate in June.
South32 mines and produces commodities, including bauxite, aluminium, copper, silver, lead, zinc, nickel, manganese and metallurgical coal. Its high diversity means the company has no single asset that is critical to company earnings.
South32 was spun out of BHP Group Ltd (ASX: BHP) in 2015 when the iron ore giant – then known as BHP Billiton – demerged some of its assets.
