Should You Buy South32 Shares?

What Happened to the South32 Ltd Share Price?

Today marked the first trading day for South32 Ltd [ASX:S32], the independent mining company newly spun out of BHP Billiton Ltd [ASX:BHP].

South32 spent today trading in a wide range — between $2.01 and $2.22 per share — before closing at $2.05. That price puts a $10.9 billion price tag on the company.

Today’s wide trading range reflects the vast differences of opinion about the value of South32’s assets.

Why Did This Happen to S32 Shares?

This new firm represents about 10% of the value of ‘old’ BHP. Thanks to the demerger, BHP has gifted all shareholders a stake in South32. That means if you own BHP shares, you should examine South32 and decide whether to hold, sell or buy more S32 shares.

South32 provides exposure to the silver, aluminium, manganese, zinc, nickel and lead markets. That’s a nice diverse spread of potentially attractive metals. What’s more, South32 is a cash-generative business with a strong, flexible balance sheet and an experienced management team.

But an investment in South32 is by no means low-risk. As you can see in the chart below, around 29% of South32’s earnings come from South Africa. That exposes shareholders to the risks of doing business in Africa.

south32

Source: South32 Ltd

What Now for South32 Ltd?

There are many factors at work driving South32’s share price up and down. The fact that BHP has ‘gifted’ South32 shares to its investors may put S32 shares into the hands of some unnatural holders. If they sell blindly, the share price will suffer.

On the other hand, index-hugging institutional investors will have to buy the stock to keep their portfolios on track with the Aussie benchmark S&P/ASX 200 [ASX:XJO]. That buying pressure could support the S32 stock price.

Between those factors and the gyrations of the commodity markets, South32’s share price may be volatile for some time. But if you believe the metals space is oversold and due for an upswing, now could prove a good time to invest in what looks like a well-run company with diverse, attractive operations.

For deeper analysis on the Aussie stock market and global economy, keep an eye out for my essays in Money Morning — Australia’s biggest free daily financial e-letter.

Cheers, Tim Dohrmann
Editor, Money Morning

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