SELL South32

There are good reasons for optimism at miner South32. Recovering steel prices have helped lift manganese, metallurgical coal and nickel prices while a surge in aluminium prices promises riches ahead.

This will all mean sensational profits for the miner, which is already buying back shares aggressively and is likely to pay a fat dividend this year and next.

With a cash balance of almost $US3 billion ($4 billion) and over $US2 billion in free cash flow expected, the surging share price would appear to be well deserved.

That is exactly why we should now sell.

We bought South32 because it was unloved and under-earning. That’s changed: now it is neither maligned nor profitless.

The time to buy is when profits are miserly and enthusiasm is spent. Today profits are bountiful and the disposition sunny.

The share price, trading at 1.5 times net tangible asset value, implies that the market is already pricing in rather healthy returns. That may last a bit longer but it won’t last forever.

Although South32 remains a decent quality miner with better than average assets and outstanding capital allocation, it is fully priced. Time to SELL. Disclosure: The Intelligent Investor Equity Growth and Equity Income portfolios own shares in South32.