Why the South32 Ltd share price has rocketed 36% in 2016

Credit: iStock

Shares of South32 Ltd (ASX: S32) have enjoyed a remarkable rebound in 2016.

In the time that the S&P/ASX 200 (Index: ^AXJO) (ASX: XJO) has lost a little over 5%, the miner’s share price has surged more than 35% to its current price of $1.44. That also compares to a 6.3% decline for BHP Billiton Limited (ASX: BHP), from which it was spun-out of almost 12 months ago.

From the chart below, it can be seen that the shares traded flat early in February – right around the time the ASX itself hit a two-and-a-half-year low.

Source: Google Finance

Source: Google Finance

Part of South32’s gain can likely be attributed to the miner’s stated plans to restructure operations and reduce operating costs, which will include a reduction in employees across a number of its businesses.

This will result in more one-off expenses in the full-year results, while the miner could also be forced to put some of its cash towards paying down debt in order to protect its credit rating. While that may be the case, it seems investors are happy about the long-term savings that will be achieved by the company.

The renewed interest in South32’s shares since early February could also be attributed to a rebound in the prices of several commodities. However, this is something investors need to be very cautious of; South32 has no control over commodity prices and, although they have rebounded recently, this has likely been caused by temporary factors.

In other words, commodity prices may have rebounded but that mightn’t last for long. South32 still isn’t cheap, per se, and a reversal in commodity prices could certainly drag its shares lower again.

For that reason, it may be worth considering other investment opportunities outside of the resources sector, including The Motley Fool's top 3 blue chips for 2016. These 3 'new breed' shares pay fully franked dividends AND offer the very real prospect of significant capital appreciation. Simply click here to gain access to this comprehensive FREE investment report.

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Motley Fool contributor Ryan Newman has no position in any stocks mentioned. 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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