Mining profits expected to fall

Weaker commodity prices and concerns over China are more than offsetting the lower dollar.

Analysts are forecasting a bleak reporting season for our miners, particularly heavy weights BHP Billiton (ASX: BHP) and Rio Tinto (ASX: RIO).  

A number of concerns are plaguing the resources sector, including concerns over Chinese growth, high labour and construction costs and oversupply putting downward pressure on prices.

Rio relies on iron ore as a major source of revenue with some analysts estimating its draws more than 80% of revenue from the steelmaking ingredient. Although it will be the driver of huge revenues when the company releases its interim report on Thursday, it is also its number one weakness.

Mining

Source: Indexmundi.com

Despite the iron ore price remaining strong during Rio’s half year to June 30, analysts are expecting underlying earnings of US$4.23 billion, down 18.6% from US$5.2 billion in previous corresponding period. Even bullish expectations are tipping a much lower six months, with Deutsche Bank equity analysts expecting US$4.3 billion.

According to The Australian, Rio’s dependence on the steel-making ingredient will come under more scrutiny as iron ore is expected to post a net profit after tax of $US 4.51 billion and will actually be more than underlying profit. The reduction will come from losses in its aluminium, thermal coal and uranium businesses and will put its long-term sustainability under the spotlight.

Focuses of this week’s report will include CEO Sam Walsh’s cost cutting agenda, the ramp up of the Pilbara expansion project and its interim dividend, which is expected to match last year’s final dividend of US 83.5 cents.

On August 20, BHP will report for its full year and analysts are expecting a slowdown in commodity prices to hit hard. Lower earnings from petroleum, coal, nickel and aluminium will add to the poor iron ore prices experienced in the first half of FY13. Profit is expected to drop 26% from above US$17 billion to around US$12.5 billion.

Foolish takeaway

Miners look comparatively cheap against the banks, big retailers and Telstra (ASX: TLS). However, the recent realisation of lower commodity prices and uncertainty surrounding the demand from Asia are making an investment in resources shares look costly. There may be money to be made in the short term but in the medium to long term, commodity prices are expected to drop even further, which does not bode well for any of our miners.

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Motley Fool contributor Owen Raszkiewicz does not have a financial interest in any of the mentioned companies. 

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