South32 Ltd (ASX: S32) share price is heading even lower, losing more than 5% today, to trade around $1.22 on heavy volume.
Chairman David Crawford has defended the poor share price performance, since spinning out of BHP Billiton Limited (ASX: BHP) in May this year and beginning trading at around $2.00. Since then it’s been all downhill, thanks to falling commodities prices.
South32 has a diversified portfolio of commodities including alumina, aluminium, energy and metallurgical coal, manganese, nickel, lead, silver and zinc, with operations around the globe. But many commodities have seen their prices hammered as fears rise over growth in China – the world’s biggest consumer of many commodities.
Copper and nickel have fallen to new multi-year lows, alumina prices fell more than 10% between January and June this year, and aluminium prices are back at levels not seen since 2009. Thermal coal is just off 8-year lows, manganese has been falling since 2011 and many other commodities continue to hit new multiyear record lows.
Despite the falls, South32 increased underlying earnings last financial year to US$575 million and a profit after tax of $28 million on revenues of US$7,743 million. At the end of June 2015, South32 had US$2.02 in net tangible assets (NTA) per share, but the company could be forced to write down the value of its assets next financial year, if commodities prices don’t improve, so that NTA could be misleading. Still, that’s the equivalent of A$2.89, and the share price would still be a discount to NTA even after a 50% write-down on assets.
Banking on a recovery or a takeover?
Buying into South32 is essentially banking on a recovery in commodities price at some stage down the track. The problem is – how far away is that? CEO Graham Kerr suggested it would take two or three years for excess supply in a number of commodities to clear the system.
We’ve just had a boom in commodities for a number of years as China’s growth rocketed ahead. But with China’s growth slowing and the economy transitioning to one led by consumer consumption rather than infrastructure building, some commodities’ prices may not recover for several years.
One or two commodities could see prices surge due to rising demand, falling supply or both, but will that be enough to offset the others?
The other possibility is that another large cashed-up miner makes a play for South32, given the huge discount to its NTA. Would Rio Tinto Limited (ASX: RIO), Brazil’s Vale, China Shenhua Energy or Glencore want South32 to diversify their asset base?
Trading at just 42% of its net tangible assets per share of US$2.02 (A$2.89), today’s share price might be an opportunity, as long as the investor is willing to wait more than few years and rely on commodities prices recovering. Either that or hope for a takeover offer.