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Will the South32 Ltd share price tumble lower?

Credit: South 32

Since being spun out of BHP Billiton Limited (ASX: BHP) in May 2015, the South32 Ltd (ASX: S32) share price has collapsed.

When South32 hit the ASX boards in May, its shares were sold for $2.13 apiece, giving the company a market capitalisation of $11.3 billion. Fast-forward less than a year and the South32 share price is just $0.885 and the company is worth around $4.80 billion, according to Google Finance.

In the year ended 30 June 2015, South32 revealed a 58% fall in pro forma earnings per share, despite a 220 basis point (2.2%) increase in its return on invested capital (ROIC), from 4% to 6.2%.

Unfortunately, sharp declines in commodity prices have flooded share markets with negative sentiment towards resources shares, like South32. But it’s easy to see why South32 has been caught in the mess.

Data sourced from Indexmundi.com

Data sourced from Indexmundi.com

The Commodity Metals Price Index shown above includes the copper, aluminium, iron ore, tin, nickel, zinc, lead and uranium prices. South32’s two most valuable products are coal and aluminium.

Given its slim profit margins, the recent mid-teen percentage falls in both aluminium and coal prices could place further pressure on South32’s profits in the near future.

Foolish takeaway

Given the recent falls in key commodity prices and more concerns out of China – the world’s biggest consumer of raw materials – the outlook for South32 appears tough, in my opinion. Therefore, it may be best kept on your watchlist, for now.

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Motley Fool writer/analyst Owen Raszkiewicz has no position in any stocks mentioned.

Owen welcomes your feedback on Google plus (see below), LinkedIn or you can follow him on Twitter @ASXinvest.

Unless otherwise noted, the author does not have a position in any stocks mentioned by the author in the comments below. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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