Shareholders in Rio Tinto (ASX: RIO) and BHP (ASX: BHP) are readying themselves for a dive in profits as the companies battle with lower commodity prices and huge costs.
According to analysts, BHP shareholders will be hardest hit when its full-year report is released later this month, tipping a 26% drop in profits. Market consensus is that the company will report a profit of just US$12.5 billion compared to US$17.1 billion last year.
Meanwhile Rio's shares aren't going to be spared when the company's releases its half-year report tomorrow. Although revenue is expected to climb slightly when compared to first-half 2012, underlying earnings are expected to drop between 18% and 18.6% to between US$4.2 billion and US$ 4.3 billion. EBITDA is also expected to drop by 5% when compared to the previous corresponding period (pcp).
Lower earnings forecasts are largely the result of poor commodity prices and costs of repairing a huge landslide at Kennecott's Bingham Canyon Mine. However, tomorrow's report will focus largely on the miners' cost reduction, capital expenditure guidance and the sale of a number of key assets.
Deutsche Bank predicts about half of the $2 billion of the cost savings targeted by CEO Sam Walsh will be met. Citi says a major focus of the report will be the sales of Rio's stake in Iron Ore of Canada (IOC), thermal coal mines and its aluminium business.
However, a number of Rio's potential suitors have today pulled out of the sale for Rio's IOC stake, including Apollo, Blackstone and Glencore. Rio said the second round bids were below the company's target price but indicated that Canada's largest diversified mining company, Teck Resources is still a potential buyer.
Foolish takeaway
The price of iron ore is expected to fall as more projects come online between now and 2015, this will lower the spot price of the steel making ingredient throughout Asia and beyond. Investors should take caution before making the commitment to buy stocks in pure plays like Atlas Iron (ASX: AGO) or Fortescue (ASX: FMG). Instead, investors could avoid the risk and look beyond mining stocks to receive better dividends and safety.
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More reading
- Mining profits expected to fall
- Twiggy Forrest says China growth is strong
- BHP profit expected to drop 26%
Motley Fool contributor Owen Raszkiewicz does not have a financial interest in any of the mentioned companies.
