The South32 Ltd (ASX:S32) share price has fallen 4.4% in 2019, offering a good buying opportunity to investors.
Background on South32
South32 was spun out of BHP in 2015 and consists of high quality metal production assets including alumina, aluminium, coal, manganese, nickel, silver, lead and zinc. The company has production assets across Australia, South Africa and in South America.
Why I think South32 is a buy
In its report for the first half of the 2019 financial year, the Aussie miner's underlying earnings per share were up 20% to US12.6 cents per share (AU18 cents). South32 sits on a price-to-earnings (P/E) ratio of 8.89x, a bargain when considering that the current P/E ratio for the ASX 200 is 17.98x.
Additionally, a 10% improvement in the price of one of the main metals that South32 produces could result in a further US$100 million to US$200 million added to the company's underlying earnings before interest and tax, which is an increase of around 10–20%. Considering that metals prices have started improving on trade deal hopes, the prospect of highly accelerated earnings is not out of scope for South 32.
South32 trades on a grossed up dividend yield of 6.5%. This is generous considering that the Reserve Bank of Australia cash rate is just 1%, and provides compensation for risk. In its quarterly report to March, the company reported that net cash had increased to US$726 million (AU$1 billion), so it has plenty of funds to continue paying dividends.
In addition, South32 has a share buyback in place, which is set to continue until September 2019. This will provide further support to a higher share price.
In the 2018 financial year, the company had a return on equity (ROE) of 13.5%. This is a healthy figure and is appealing since the company trades on a price-to-book ratio of around 1.1x. When considering the company's latest quarterly and half-year reports, ROE is set to be higher for the 2019 financial year. This will mean a higher ROE for the fourth financial year in a row. Over time, this improved performance should be reflected in the share price.
The company has a debt-to-equity ratio of just 8.7%. This is low, considering the ROE being achieved, and suggests that South32's mines are mostly funded by shareholders. This is a positive situation and suggests that the risks created by fluctuating metal prices are manageable.
South32 has continued to invest part of its growing cash pile into new and existing resources and it has announced positive results from these investments.
Foolish takeaway
South32 has a growing ROE and is set to benefit from recent improvements in metals prices. Additionally, it has low debt and plenty of cash, which the company is returning to shareholders. I think it's a buy.
