Since being spun out of BHP Billiton Limited (ASX: BHP) in May 2015, the South32 Ltd (ASX: S32) share price has collapsed.
When South32 hit the ASX boards in May, its shares were sold for $2.13 apiece, giving the company a market capitalisation of $11.3 billion. Fast-forward less than a year and the South32 share price is just $0.885 and the company is worth around $4.80 billion, according to Google Finance.
In the year ended 30 June 2015, South32 revealed a 58% fall in pro forma earnings per share, despite a 220 basis point (2.2%) increase in its return on invested capital (ROIC), from 4% to 6.2%.
Unfortunately, sharp declines in commodity prices have flooded share markets with negative sentiment towards resources shares, like South32. But it's easy to see why South32 has been caught in the mess.
The Commodity Metals Price Index shown above includes the copper, aluminium, iron ore, tin, nickel, zinc, lead and uranium prices. South32's two most valuable products are coal and aluminium.
Given its slim profit margins, the recent mid-teen percentage falls in both aluminium and coal prices could place further pressure on South32's profits in the near future.
Foolish takeaway
Given the recent falls in key commodity prices and more concerns out of China – the world's biggest consumer of raw materials – the outlook for South32 appears tough, in my opinion. Therefore, it may be best kept on your watchlist, for now.
