The Motley Fool

Why the South32 share price fell 16% in August

August was a volatile month on the ASX for many companies. Not only did we have the ‘tweeter-in-chief’ President Donald Trump cause multiple stock market panics with the on-again, off-again trade war tariffs, it was also earnings season for many ASX companies – in which the winners were spectacularly rewarded, and the losers spectacularly punished.

South32 Ltd (ASX: S32) was definitely one of the latter, with its shares tanking 6% immediately after the company reported earnings and leaving a total share price loss in August of 15.9%.

So why is this resources giant suddenly on the nose for so many investors? And (most importantly) is South32 a buy at these levels?

What does South32 do?

South32 is often viewed as the orphan of its big brother BHP Group Ltd (ASX: BHP), due to the fact that BHP spun-off South32 back in 2015 as its own company, comprised of assets that weren’t part of BHP’s ‘core’ portfolio of iron ore, thermal coal, petroleum and copper. Today, South32 is a diversified miner with assets across the nickel, manganese, lead, and silver industries.

What did South32’s earnings tell us?

Part of the reason South32 shares have tanked was the 2019 earnings the company reported, which included a significant 18% drop in earnings as well as a revenue slump and a reduced dividend.

The company is not particularly bullish for the coming financial year either, predicting ongoing weakness in Chinese demand and further drops in nickel production for FY20.

Is South32 a buy at these prices?

It is difficult to predict what future commodity markets will hold in store for resource plays like South32, but I don’t see significant upside over the next year or two for this company, especially if things get worse in the Sino–US trade war. Saying this, bearish slumps like we’re seeing with South32 shares are often the best times to buy in hindsight, as resource stocks live and die by commodity pricing (and typical investors only want to pile in on an upswing).

Foolish takeaway

I think we are starting to see some value in South32 shares, but I’ll personally be waiting for a better discount on this one. Variables and uncertainties in the global economy make it difficult to say whether the current price is cheap for a long-term buy, so I’d prefer to wait for a screaming bargain on South32 before jumping in.

These shares here are looking much better to me right now.

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Motley Fool contributor Sebastian Bowen has no position in any of the 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 Scott Phillips.

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