Although analysts remain divided over the prospects of the freshly listed South32 Ltd (ASX: S32), the miner certainly appears to offer investors reasonable value today.
South32, which spun-out of its parent entity BHP Billiton Limited (ASX: BHP) as a result of an overwhelming shareholder vote in favour of a demerger, made its debut on the ASX on Monday last week, hitting the boards at $2.13. Following a brief decline, the stock soared to a high of $2.45, but has since trended lower to trade at $2.25 giving investors another opportunity to buy.
Unlike its parent or various other miners such as Rio Tinto Limited (ASX: RIO) or Fortescue Metals Group Limited (ASX: FMG), South32's focus isn't on iron ore, or even on China. In fact, according to estimates from Bloomberg, China will account for as little as 11% of South32's sales with a greater reliance being placed on Europe and nations in southern Africa.
It maintains a heavily diversified portfolio, consisting of 10 commodities (such as aluminium, metallurgical coal, manganese, lead, nickel and silver) which span across multiple countries. Of course, this leaves it open to political risk (especially given its operations in South Africa), but its diversification should help to spread that risk.
What is arguably the most convincing reason to invest in South32 is its ability to trim down costs and improve efficiencies considerably. Under the management of BHP, the assets that are now housed under South32 were mostly neglected in favour of BHP's core commodities (being iron ore, coal, copper and coal). However, they will now become the primary focus of CEO Graham Kerr and his team, which should help improve profitability considerably.
Meanwhile, the miner has begun life as a separate entity with a reasonable amount of debt and a BBB+ credit rating from Standard & Poor's. As highlighted by the Fairfax press, Macquarie analysts believe that this could allow South32 to hand another US$400 to US$500 million (A$517 to $647 million) back to shareholders over the next two years, whilst still maintaining that rating.
As highlighted above, there are risks involved with investing in South32, but at its current price it could be worth a closer look.
