It's a sea of red across the resource sector this Monday morning after iron ore price slumped to US$48 a tonne. Iron ore mining giants BHP Billiton Limited (ASX: BHP), Rio Tinto Limited (ASX: RIO) and Fortescue Metals Group Limited (ASX: FMG) are all down heavily.
Meanwhile, South32 Ltd (ASX: S32) which has no exposure to iron ore is also being sold down. By mid-morning, the stock is off 2.7% to $1.46.
With South32 trading back near 52-week lows, which also represent all-time lows, many shareholders– whom mostly received their holdings via the spin-off from BHP rather than a direct decision to acquire shares – may be asking themselves whether they really want to continue holding the stock.
It's an understandable question, particularly considering the share price has fallen 29% since first trading in May this year. At these levels, however, arguably there is more upside than downside over the medium term.
Here are three reasons to stick with your South32 shares…
Commodity prices at multi-year lows
It's not just iron ore that is trading at multi-year lows. Many other commodities are too. Alumina, bauxite, coal, manganese, silver, lead, zinc and nickel – all of which South32 is exposed to – face their own set of headwinds.
Cost out efficiency drive
As often occurs when smaller, non-core operations are de-merged from their parent, management has an opportunity to run a leaner, more strategic operation. This would certainly appear to be the case for South32 with management having already identified US$350 million in controllable costs that it is working towards removing from the group's operations by the end of financial year 2018.
Undemanding multiple
If we are currently somewhere near the bottom of the commodity cycle, then the $8 billion market capitalisation of South32 would not appear a very demanding price to pay considering the group (as at 30 June 2015) had debt of just US$402 million, pro forma earnings before interest and tax of US$1 billion and net assets on the balance sheet of US$11 billion (A$15.8 billion).
