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South32 Ltd shares crash: Is it a bargain?

Credit: South 32

South32 Ltd (ASX: S32) shares yesterday finished trading at $1.19, an incredible $1.27 or 52% below their all-time high of $2.45 hit shortly after listing in May this year.

Why?

South32 was formed earlier this year when BHP Billiton Limited (ASX: BHP) decided to form a new company to hold its unloved alumina, aluminium, energy and metallurgical coal, manganese, nickel, lead, silver and zinc operations. Unfortunately for BHP, and now South 32 shareholders, the assets spun out of the old BHP appear to be now even less valuable than when they were combined with BHP’s iron ore and copper operations.

As my colleague Mike King noted earlier this week, things are not looking good for South32’s profits this half-year: “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 multi-year record lows.”

What now?

Some considered South32 to be a takeover target following its demerger from BHP, however this is becoming less likely by the day with most major mining companies around the world feeling the pinch. Analysts rate the company either a Hold or Buy at current prices, noting that the group’s net tangible assets at last count represented over double the company’s market capitalisation, however the opinion is fiercely divided on when a dividend will be announced and how much it’ll be for.

Australian analysts expect a dividend of up to 8 cents per share in the 12 months to June 30 2016, which would represent a yield of 6.7% fully franked or 10% grossed up!

My bet is that net profit (mainly from the impact of writedowns) and South32’s dividend will come in lower than analysts think, potentially pushing the share price even lower following the group’s half-year report in early 2016.

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Motley Fool contributor Andrew Mudie has no position in any stocks mentioned. You can find Andrew on Twitter @andrewmudie

Unless otherwise noted, the author does not have a position in any stocks mentioned by the author in the comments below. 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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