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Why South32 Ltd’s share price hit a new low today

Credit: ginger_ninja

With the S&P/ASX 200 (Index: ^AXJO) (ASX: XJO) down 1.6%, few stocks have been spared, and South32 Ltd (ASX: S32) is no exception. The miner’s shares have fallen 5.2% to $1.29 after hitting a fresh low of $1.265 earlier.

South32 made its debut on the ASX in May this year after being demerged from BHP Billiton Limited (ASX: BHP). It floated at $2.13 and quickly ascended to $2.45, but it’s been all downhill since then.

Like most other mining stocks, South32 has been dragged down by fears of slowing global economic growth. This has had a profound impact on commodity prices which has, in turn, impacted South32’s overall earnings. Although it has slashed costs in a bid to offset this impact, it so far has not been enough.

What’s more, hopes that South32 would become a takeover target have also been dashed, especially given the concerns regarding the debt levels of Glencore, which had been considered a likely suitor. It’s likely that this has also weighed on the stock’s performance.

Should you buy?

Commodity businesses rely on solid commodity prices to maintain reasonable earnings strength. South32’s parent entity BHP Billiton is also struggling under the weight of falling commodity prices, as are Rio Tinto Limited (ASX: RIO) and Fortescue Metals Group Limited (ASX: FMG).

However, just as falling commodity prices can drag a company lower, stronger commodity prices can drastically improve their performances. Given its capacity to improve operating efficiencies of many of its assets considerably, South32 could be a good bet for long-term investors.

In saying that however, I’m not buying the stock – not yet, at least. Although commodity prices are sitting at multi-year lows, I’m not confident enough to suggest the rout has found a floor. Chinese growth seems destined to continue slowing down which will impact the global growth rate and demand for resources, which could see prices fall even further from here.

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Motley Fool contributor Ryan Newman has no position in any stocks mentioned. Unless otherwise noted, the author does not have a position in any stocks mentioned by the author in the comments below. You can follow Ryan on Twitter @ASXvalueinvest.

The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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