The South32 Ltd (ASX: S32) share price has rewarded investors handsomely over the last 4 months. After hitting $3.09 in December, its lowest price in over a year, South32 has rebounded over 20% in the near four months since, hovering around $3.76 at the time of writing. This doesn't include the special dividend that was paid out in February either.
So why do I still like the South32 share price, despite the recent surge?
South32 was spun out of mining giant BHP Group Ltd (ASX: BHP) in 2015. This stemmed from BHP's CEO Andrew Mackenzie pursuing a refocusing strategy for the company by focusing 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 Ltd. BHP shareholders at the time were issued one South32 share for every BHP share they owned.
Although this backstory seems to paint South32 as the half of the company that BHP didn't want, South32 has proved to be more than able to stand on its own two feet. The latest annual results show that the company was able to increase underlying earnings by 16%, which translates to an increase of underlying earnings-per-share of 20%. This was achieved by a combination of record production levels, cost-cutting programs and higher commodity prices.
Aluminium (including alumina) and manganese account for over 65% of South32's earnings, and the company is producing these commodities at record levels and projected to increase by an additional 7% of today's levels by 2020. Additionally, South32 has successfully increased its operating margins from 36% to 38% compared to the same period last year. The combination of rising production with falling costs is impressive and a major reason why I still like the South32 share price.
Foolish takeaway
If you are seeking diversified exposure to commodities outside the iron-ore focused BHP and Rio Tinto Limited (ASX: RIO), I think South32 would be a fantastic place to start. With its current numbers and projected growth, the company's future looks bright and I believe will result in continued stock appreciation and above-inflation dividend growth in the years ahead.
