The South32 Ltd (ASX: S32) share price has dropped heavily over the last few months. It's down 28% since the end of May 2022.
The company is a diversified miner, compared to many others on the ASX that focus on one or two commodities. South32 produces bauxite, alumina, aluminium, copper, silver, lead, zinc, nickel, metallurgical coal, and manganese from its operations in Australia, southern Africa, and South America.
With resource-producing businesses, a key part of the money-making equation is the relevant resource price. Whether the price of a commodity is a few dollars higher or not, it doesn't change how much it costs to produce it. That means a higher price for the commodity can largely translate into higher profit for the business (after paying more to the government, of course).
But, the same can also be said when commodity prices go down. Costs are essentially the same, but the revenue for that production is lower, leading to a larger fall in percentage terms for the net profit after tax (NPAT).
There are a lot of different resource price movements going on within the South32 portfolio, but some resource prices are down recently, such as iron and copper.
Is the South32 share price an opportunity?
A recent episode of Livewire's 'buy hold sell' covered South32. It featured the experts of Plato Investment Management's Dr Don Hamson and Wheelhouse Partners' Alastair MacLeod.
Hamson called the business a buy, though it was "pretty marginal". He said that Plato likes it more than BHP Group Ltd (ASX: BHP)because of its commodity mix. However, he said that it "probably will come back a little bit because costs are rising".
But, MacLeod had an opposite rating on the business. He actually called it a sell. However, he acknowledged that "there's a lot to like about S32" including its net cash position and the fact it has cheaper mining costs than more than half the industry in many of the commodities it produces.
He referred to something that impressive long-term compounding investor Peter Lynch once said, which could be applied to South32. MacLeod explained to Livewire's Ally Selby:
…one of his sayings was that when the PE is low for these deeply cyclical businesses, it's actually time to be selling. And the PE is about seven and a half times. It's contrary to all the other stocks in the market where you'd be looking for a low PE. And I think in this case, because of that cyclicality and risk to earnings, I don't think you're quite as compensated from a dividend perspective as you are with BHP. So with South32, it would be a sell.
South32 snapshot
It may also be worth knowing about the potential dividend from South32.
According to CMC Markets, South32 is expected to pay an annual dividend of 21.7 cents per share in FY23. That would translate into a grossed-up dividend yield of 8.6% in the new financial year, at the current South32 share price.
