South32 Limited (LON:S32) has been upgraded to a ‘buy’ from a ‘neutral’ rating by UBS who said the recent drop in the miner’s share price, coupled with its strong growth potential made it an attractive play.
Shares in the Australia-based miner – spun-out from BHP Billiton plc (LON:BLT) in 2015 – are down 21% since the start of October and is trading at a significant discount to the likes of BHP and Rio Tinto.
“We see the commodity risk as balanced with there being clear upside risk to spot aluminium and nickel prices medium-term - with prices now well into the cost curve - offset by downside risk to spot met-coal and ore,” analysts at UBS wrote in a note to clients.
“South32 has a strong balance sheet and is reshaping and upgrading its portfolio, with the acquisition of Arizona Mining & Eagle Downs in 2018, the potential exit of SA Energy Coal in 2019, and the development of an exploration portfolio,” they added.
The Swiss investment bank said South32 was balancing growth with shareholder returns, pointing to the US$85m remaining of its current US$845mln share buy-back programme.
UBS added that South 32 is, in part, trading at a discount to BHP and Rio due to operational issues at its key sites, which in turn has impacted management credibility and the perceived quality of the business.
The bank trimmed its price target to 210p from 215p but said it expects the miner to report a solid operational performance across its assets during its fiscal second quarter, meeting guidance for all business units except refineries.
“We expect this to be a positive catalyst for the stock,” the analysts added.
South32 shares were 0.6% up at 3.23p in mid-morning trade.