When South32 Ltd (ASX: S32) was spun-off from BHP Billiton Limited (ASX: BHP) in May this year, enormous expectations were placed on the miner.
The logic behind the separation of the two entities was that the move would unlock considerable shareholder value, whilst allowing management of both companies to increase their focus on their own assets. Many investors even held onto their BHP Billiton shares specifically for this reason, assuming that in doing so their fortunes may finally turn around.
So far, this has not come to fruition. In fact, since the shares listed on the ASX on 18 May, they have fallen 27.7% and trade at $1.54. By comparison, BHP's shares have fallen an adjusted 16.8%, while the S&P/ASX 200 (Index: ^AXJO) (ASX: XJO) is down 8.5%.
What went wrong?
Although it is too early to tell whether the separation was a mistake, South32's sharp fall does reflect the headwinds that are currently facing the entire resources industry.
Before the company listed on the ASX, many were suggesting its value could be worth roughly US$15 billion, but now see it as worth a fraction of that price. Indeed, commodity prices have continued to crumble as China's growth prospects have diminished, while its cost-cutting efforts and initiatives designed to improve efficiencies have failed to keep pace. It has even been forced to close some of its operations temporarily until prices do recover so as to not be operating at a loss.
Until recently, it's possible that speculation of a possible takeover by Glencore may have been supporting the share price somewhat, but global investors have since become increasingly concerned about that company's level of debt, selling its shares down sharply. This should make management think twice before splashing out billions of dollars on a company like South32.
Should you buy?
Although South32 is one of the most diversified mining corporations in the world, even diversification can't protect you when your major commodities are feeling the pinch. Just as BHP Billiton is struggling under the weight of falling iron ore and oil prices, South32 is feeling the effects of falling manganese and nickel prices which could continue to weigh on the miner's overall earnings.
In saying that, I do believe there is potential to cut costs further, which could help improve the miner's margins. Indeed, this always has been one of the key attractions to invest in South32's shares.
As is the case with any company operating in the resources industry, South32 is a risky bet, but could be one of the more attractive options in the sector. While investors may want to remain on the sidelines until conditions stabilise (or until the share price falls even further), investors may want to keep their eye on South32 for the long run.
