If anyone has read anything I've ever written about ASX resources or mining shares, they'll probably know that this isn't a sector I'm too fond of investing in. But could I make an exception for the South32 Ltd (ASX: S32) share price?
My general distaste for miners can be summed up by the following: I don't like companies that are price takers.
Most ASX shares have almost total control over what they can sell of whatever goods or services they produce. Of course, most companies are influenced in this arena by what the market will actually accept.
Millions of us will cough up the considerable expense of purchasing an iPhone from Apple every few years – a price Apple has complete control over. But we obviously wouldn't do so if Apple tried to charge us $800,000 for that phone.
But when it comes to mining shares, that discretion is lost. Take an iron ore miner like Fortescue Metals Group Limited (ASX: FMG). Fortescue is one of the biggest miners in the world and is currently worth more than $70 billion. But Fortescue still has no choice but to sell its iron ore at whatever the current market price is (presently around US$126 per tonne).
If the company tried to sell a tonne of iron ore for US$150 right now, its customers would simply buy a tonne of the same product from someone else.
What's more, most commodities are highly cyclical, with prices typically moving up and down in line with the global economy. This makes most miners a poor investment in my view. It's very difficult for a miner to compound its earnings over time if it has no control over what it can sell its products for.
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Why would I choose the South32 share price over most ASX mining stocks?
It's for this reason that I have almost zero exposure to resources (or energy) shares in my own portfolio.
But if I had to choose a miner to buy today, the South32 share price would be at the top of the list.
Well, South32 has something that most miners don't – a diverse earnings base.
Most mining companies specialise in one commodity or mineral. They might earn some money on the side from byproducts that are often mined alongside their primary resource. For example, gold mines often have significant copper or silver deposits lying alongside the gold. But on the whole, most miners are a one-trick pony.
South32 is not.
According to the South32 FY23 annual report, 41% of South32's earnings for the 2023 financial year came from metallurgical coal, 19% from manganese, 13% from copper, 11% from nickel, 8% from aluminium, alumina and bauxite, and 8% from silver, lead and zinc.
All of these commodities are industrial in nature, but each has its own applications, pricing cycles and supply and demand factors.
This makes South32 a rather unique resources share on the ASX. This diversification somewhat helps to shield the company from the volatility of the commodity cycle and lends strength in my view. That nullifies one of the major concerns I would have investing in a mining stock.
As such, if I had to pick a mining stock for my portfolio, I would go with South32.
