BHP’s profit expected to drop 26%

The extent of the fall in the mining sector should be highlighted as companies release earnings reports.

The extent of the mining sector’s fall is set to be highlighted when heavyweights BHP Billiton (ASX: BHP) and Rio Tinto (ASX: RIO) release their respective financial reports this month. It is expected that both companies’ profits will be significantly lower than those recognised in previous corresponding periods.

When BHP’s full year profit report is released on August 20, it is expected that the company’s profits will have fallen by up to 26%, with the market anticipating the recognised profit to be just US$12.5 billion compared to last year’s US$17.1 billion.

Although the company ramped up its production of iron ore for the year, diminished global demand for the commodity – and thus, a lower selling price – will offset much of the gains made from increased supplies. Lower earnings from coal, aluminium, nickel and petroleum will further add to the pain.

However, despite the significantly lower profits, it is still anticipated that the company’s annual dividend will increase to around US$1.17 per share compared to last year’s US$1.12 per share, according to Citi. This is due to the company’s progressive dividend policy, whereby the company has introduced a heavy focus on shareholder returns and ensuring long-term sustainability.

The market also awaits an update from the company regarding its intentions for the Jansen potash project in Canada, which came under the spotlight last week.

Meanwhile, Rio’s interim report is due out this Thursday. Analysts are expecting the company’s earnings to be between US$4.23 billion and US$4.3 billion, as compared to the US$5.2 billion recognised in the previous corresponding period.

Foolish takeaway

The mining boom seems well and truly a thing of the past. Recognising this, both Rio and BHP have vowed to significantly reduce costs by divesting in non-core projects and reducing unnecessary capital spending.

Shares in both companies have fallen heavily over the last two years, however, neither register as bargains due to the volatility remaining in the sector. With commodity prices continuing to fall, investors would be wise to remain on the sidelines until either company can provide a clearer perspective on future prospects.

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Motley Fool contributor Ryan Newman does not own shares in any of the companies mentioned in this article.

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