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Is the South32 share price in the buy zone?

Sebastian Bowen
Buy stocks

The South32 Ltd (ASX: S32) share price has been on something of a rollercoaster over the past 12 months. This time last year, South32 was trading for around $3.75 before making an all-time high of $4.28 in October. This was not to last, however, with the company’s shares crashing back down towards the $3 mark by Christmas (not very merry for shareholders). Towards March of this year, the share price recovered somewhat, but has since fallen back and is now trading around the $3.22 level.

A refresher on South32

South32 was spun out of mining giant BHP Group Ltd (ASX: BHP) in 2015 as a result of BHP’s CEO Andrew Mackenzie pursuing a refocusing strategy on BHP’s four commodity ‘pillars’ of iron ore, oil, copper, and coal. These commodities represented BHP’s most cost-efficient assets and the commodities outside of this core portfolio (mainly aluminium, manganese, nickel, silver and lead) were spun off into South32. BHP shareholders at the time were issued one South32 share for every BHP share they owned.

In a way, this makes South32 one of the more diverse mining companies on the ASX. Giants like Rio Tinto Ltd (ASX: RIO) and Fortescue Metals Group Ltd (ASX: FMG) are ‘purer’ commodity plays, as the vast majority of their earnings rise and fall on the price of one commodity – iron ore. Although aluminium (including alumina) and manganese account for over 65% of South32’s earnings, silver can be a counter-cyclical commodity due to its ‘precious metal’ status and South 32’s silver exposure is a positive, in my opinion.

Is the share price in the buy zone?

At current prices, South32 is paying a 4.41% dividend yield (6.3% with franking), which is pretty good for a resource company (BHP is currently yielding 3.88%). I would consider South32 to be a useful diversified resource stock to have in an income portfolio. Personally, I would be waiting on a further price discount to open a position. Resource stocks are notoriously volatile and somewhere closer to the $3 mark would have my attention.

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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.

The Motley Fool's purpose is to help the world invest, better. Click here now for your free subscription to Take Stock, The Motley Fool's free investing newsletter. Packed with stock ideas and investing advice, it is essential reading for anyone looking to build and grow their wealth in the years ahead. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson. 2019