Shares of the freshly-listed South32 Ltd (ASX: S32) have extended their plunge today, slipping by as much as 4.6% to $1.87 per unit. That compares to a 0.4% decline from the benchmark S&P/ASX 200 (Index: ^AXJO) (ASX: XJO).
South32 started its life as a publicly traded company on 18 May after it was spun-off from parent company BHP Billiton Limited (ASX: BHP). Although shares opened at the lower end of the price range set by most analysts (between $2 and $3.50), it quickly grabbed the market's attention after it soared nearly 14% on its second day of trading. Shortly after, it hit a high of $2.45 but has been stuck in a downward trend ever since.
Indeed, there has been much debate regarding how much South32 is actually worth. Despite its high level of diversification and strong balance sheet, South32 is still exposed to commodity risk whereby a number of its key commodities have crumbled in price in recent months. Those commodities include aluminium, nickel, alumina, coking coal and manganese – the latter which forced the miner to delay operations at its Samancor Manganese joint venture earlier this month.
In fact, according to the Fairfax press, some analysts have even suggested South32's earnings could slump by up to 50% if current economic settings persist during the next 12 months.
Should you buy South32?
As is the case with any resources company, one of the biggest risks facing South32 is the unfavourable movements of commodity prices, which have certainly impacted the market's sentiment thus far. Further, South32 is also exposed to currency risk, together with political and other business risks due to its international operations.
Although its performance has thus far been disappointing, investors need to realise that it was always going to take time for South32's investment case to play out. One of the key attractions of South32 as an investment is its ability to improve the efficiencies of each of its assets after they were neglected for so long under BHP's management. Those improvements were never going to be made overnight, but could instead take years to play out.
As such, South32 could still make for a reasonable long-term investment for investors who are willing to remain patient through the ups and downs, especially at today's discounted price. In saying that however, many investors (myself included), would prefer to avoid commodity risk where possible, and may look to capitalise on the growth of other promising companies as a potentially more rewarding alternative.
