It's been a rough ride for South32 Ltd (ASX: S32) since it went public late last month. After making a debut at $2.13 per share and rising to a high of $2.45 shortly after, the stock has since retreated to just $1.93 as investors continue to doubt its potential.
Following an overwhelming shareholder vote in favour of the transation, South32 spun-off from mining behemoth BHP Billiton Limited (ASX: BHP) in what was the industry's biggest demerger in almost a decade. South32 is now home to the assets that were for so long neglected by BHP's management in favour of their 'core' commodities.
In its short time as a public company however, it's been mostly south for South32's shares as investors and analysts alike become increasingly concerned with its potential to generate meaningful profits.
The commodities that looked so promising in the lead-up to the spin-off have since crashed in price, with some analysts even suggesting that earnings could slide by more than 50% if these tough conditions persist. That includes commodities such as aluminium, alumina, nickel, coking coal and manganese.
Should you buy South32?
Commodity risk is one of the biggest dangers facing South32, just as it is with all mining companies. Lower commodity prices will certainly have a negative impact on operating margins and overall profitability, so the recent fall in share price is arguably justifiable.
With the exception being the price of South32's key commodities however, nothing else has materially changed between the time of its listing on the ASX and today. It is still a well-diversified mining business led by the experienced Graham Kerr with the potential to improve its operating efficiencies considerably.
Although the stock's 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. I have faith in management's ability to improve those efficiencies, although I also expect that could take years to come to fruition.
As such, I believe South32 could still be a reasonable investment for long-term investors who are willing to remain patient through the ups and downs. In saying that however, I also understand that some investors would prefer to invest in stocks without that element of commodity risk where possible, and may instead look to capitalise on the growth of other promising companies as a potentially more rewarding alternative.
