Is it possible that the South32 Ltd (ASX: S32) share price could go above $6 in 2022? One expert thinks so.
This company has operations spread across the world in Australia, Southern Africa and South America. It produces several different commodities including bauxite, alumina, aluminium, metallurgical coal, manganese, nickel, silver, lead and zinc.
South32 shares have had a volatile start to the year, going as low as $3.74 and reaching as high as $5.36 earlier in March. At the time of writing, the South32 share price is down 0.63%, trading at $4.74.
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What could happen next?
The brokers at Macquarie think that the ASX mining share has plenty of potential for growth over the next 12 months.
Macquarie believes that the commodity outlook is looking stronger for many of South32's commodities including nickel, copper, coal and aluminium. That's why the broker increased its profit expectations for South32 for FY22 and FY23.
The South32 share price target from Macquarie is $7. That implies a potential rise of more than 40% over the next year, if the broker ends up being right.
This ASX mining share is also expected to see strong free cash flow over the next couple of financial years. This could lead to South32 deciding to distribute elevated shareholder payouts.
Potential dividends
Bigger profits can lead to larger dividends for investors. How big could the dividend be this year and next year?
At the current South32 share price, Macquarie estimates that the FY22 grossed-up dividend yield will be 11.8% in FY22 and 12.6% in FY23.
Recent earnings wrap
A month ago, the ASX mining share announced its half-year result for the six months to December 2021, showing some of the growth that Macquarie is expecting for FY22.
In HY22, South32 revealed underlying revenue rose 32% to US$4.6 billion. The underlying earnings before interest, tax, depreciation and amortisation (EBITDA) increased 138% to US$1.87 billion. Underlying earnings before interest and tax (EBIT) rose by 288% to US$1.51 billion. Underlying earnings per share (EPS) surged 671% higher to US21.6 cents.
Confidence on long-term commodity prices
The company says that its portfolio is well-positioned for a rapid global transition to a low carbon economy. Demand for most of its commodities is expected to grow "significantly" with the uptake of low carbon technologies.
South32 said that long-term aluminium prices are expected to be supported by higher inducement cost projects, excluding China, powered by green energy. Alumina prices are expected to be supported by Chinese domestic bauxite depletion and environmental policy, together with higher raw material costs.
Copper prices are expected to be supported because the commodity is going to play a key role in the global decarbonisation and energy transition.
Zinc supply is expected to fall by 3.5% per annum to 2030, requiring investment in new mine supply.
The metallurgical coal price will be underpinned by strong demand from India and other emerging Asian markets.
South32 share price valuation
Based on Macquarie's FY22 profit estimate for South32, the ASX mining share is valued at under 6x FY22's projected earnings.
