There are plenty of reasons for investors to be bearish on Australia's mining sector right now. Mining stocks are being hit hard due to falling commodity prices and waning capital expenditure (capex), while Chinese growth is expected to continue declining over the coming years.
But while investors are largely turning their backs on traditional mining stocks such as BHP Billiton Limited (ASX: BHP), Rio Tinto Limited (ASX: RIO) and Fortescue Metals Group Limited (ASX: FMG), there is plenty of interest surrounding the freshly-listed South32 Ltd (ASX: S32).
Here are 10 things you need to know about the new mining dynamo.
- Creation. South32 listed on the ASX on 18 May, 2015. It was spun-out of BHP Billiton as a result of overwhelming shareholder approval, where more than 98% of participants voted in favour of the split. Its primary listing is on the ASX while it has secondary listings in London and Johannesburg as well.
- Purpose. The rationale behind the BHP/South32 split was to allow the management of both entities to focus on their own growth trajectories to ultimately unlock greater shareholder value.
- Management. The company is led by Mr Graham Kerr. Kerr was a long-term employee of BHP Billiton and most recently acted as the mining giant's Chief Financial Officer.
- Debut. The stock debuted at just $2.13, which was at the lower end of its forecast range of $2 to $3.50. Still, it automatically became Australia's third largest miner with a market capitalisation of $11.3 billion.
- Markets. It maintains a heavily diversified portfolio consisting of 10 commodities. These are: alumina, aluminium, energy coal, metallurgical coal, manganese ore, manganese alloy, nickel, lead, zinc and silver. It is the world's largest manganese producer.
- China. South32 has a significantly lower reliance on China than what most other miners do. In fact, Bloomberg estimates suggest that as little as 11% of South32's sales will come from China, with a greater reliance being put on Europe and South Africa. As such, South32 could be a great way for investors to play Australia's resources sector without such a high level of exposure to China.
- Acquisitions. South32 began life with a minimal amount of debt, putting it in a good position to expand. However, the miner's CEO, Graham Kerr, has stated that he is more focused on achieving organic growth rather than going on a spending spree, preferring to wait for better opportunities in the future. This disciplined management is a good sign for long-term investors.
- Growth. One way South32 will grow earnings is by heavily reducing costs and improving efficiencies. The assets that are now housed under South32 had long been neglected by BHP's management who focused their attention on their 'core' assets, so any improvements made should flow down to South32's bottom line.
- Risks. Like any resources business, South32 is exposed to heavy commodity risks (i.e. it has no control over the price at which it sells its mined resources). It is also exposed to political risk – particularly given its heavy exposure to South Africa – and acquisition risk should it overpay for new mines or assets.
- Dividends. South32 intends to distribute at least 40% of underlying earnings on a semi-annual basis. South32 began life with a zero franking credit balance so the dividends will not be franked initially, although the intention is for this to change over time. Pleasingly, the company has not instigated a 'progressive dividend policy' like its parent entity, giving it greater flexibility to manage its capital moving forward.
After having debuted at $2.13, the stock rocketed to a high of $2.45 but has since retreated back to $2.14. Although South32 is by no means a risk-free investment (as previously mentioned), it is certainly worth a closer look at its current price.
