South32 Ltd (ASX: S32) shares are a popular option for investors that are looking for mining sector exposure outside BHP Group Ltd (ASX: BHP) and Rio Tinto Ltd (ASX: RIO).
But are they a good option right now? Let's see what analysts at Macquarie Group Ltd (ASX: MQG) are saying about the diversified miner.
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What is the broker saying about the miner?
Macquarie notes that South32 recently released its full year results for FY 2025 and unfortunately they were a touch disappointing.
It notes that while its EBITDA was in line with expectations, its earnings per share, dividend, and free cash flow were not. The broker explains:
FY25 EBITDA (0%) was in line, while EPS (-5%) missed vs VA consensus; USc2.6 DPS was a 7% miss on a weaker-than-expected FCF result.
Looking ahead, FY 2026 looks set to be a difficult year with Macquarie highlighting that its "costs to increase across board." It explains:
Maiden cost guidance was issued for FY26, with Worsley the only asset in line with MQe (+0%). GEMCO, SA Manganese and Sierra Gorda were all lower than MQe (-8%/-29%/-21%). Cannington, on lower volume, was also 27% lower than MQe. Capex FY26G of US$1.4b was 13% below VA cons, as Hermosa capex is expected to grow to US$0.75b.
South32 shares downgraded
According to the note, the broker thinks that South32's cost guidance means that its shares are now fully valued. It commented:
Downgrade to Neutral on cost increases: S32 company-wide cost inflation has impacted our view on the fundamental value for the stock. Increases to costs at Cannington and South African Manganese (in line with guidance) have all but eroded value for those assets. Similar increases in Sierra Gorda mining costs have driven a 25% reduction to its NAV.
With little in the way of a catalyst backdrop (Hermosa still two years away) and 60% of NAV sitting in Worsley, Hillside and Sierra Gorda; Hermosa (35% NAV) becomes critical. Action is required to either rectify the portfolio imbalance, reduce costs or outline a pathway back for the troubled assets.
As mentioned above, Macquarie has downgraded South32's shares to a neutral rating with a reduced price target of $2.70. This is broadly in line with where its shares trade today.
It concludes:
We downgrade S32 to Neutral on a weaker near term earnings outlook and NAV declines across the portfolio. While guidance was disappointing, we see some potential in Cannington's reserve conversion and life extension strategy.
