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BHP, Rio, other resource companies’ earnings expected to soar

Based on the analysis undertaken by The Australian of the nation’s 20 largest resources companies, a substantial increase in profits could be realised in the coming year as commodity prices remain higher and corporations continue to reduce their costs and spending.

The resources sector has acted as a significant drag on the market in the last two years as commodity prices have fallen and signs of slowing demand from countries such as China have increased considerably. The result was tarnished earnings reports, which led to enormous asset write-downs such as those announced by Rio Tinto (ASX: RIO) and Newcrest Mining (ASX: NCM).

These write-downs heavily impacted the combined Australian dollar earnings of the top 20 resources companies, which was reportedly around $7.3 billion from $25.6 billion a year earlier. In contrast, it is estimated that the combined earnings could be just under $36 billion next year, aided by stronger commodity prices (which are showing resilience at current levels), a fall in the Australian currency and enormous cost cutting initiatives that have been undertaken by companies.

In particular, iron ore has been one of the key drivers behind the more optimistic forecasts. Whilst the ASX 200 Resources Index has climbed over 20% since June 25, the price tag on iron ore has climbed around 27% in that time, which has caused heavyweight companies such as BHP Billiton (ASX: BHP), Rio Tinto and Fortescue Metals Group (ASX: FMG) to also soar.

Foolish takeaway

The shares in each of these companies have climbed 19%, 27% and 59%, respectively. Whilst BHP delivered a 2012-13 profit of $10.6 billion, it has been forecast that the miner will achieve a profit of $15.2 billion for the 2013-14 year. Likewise, Rio Tinto lost $2.88 billion and has been forecast to deliver a $10.9 billion profit for the next year, whilst Fortescue is expected to reach a profit of $2.87 billion – up from the $1.7 billion achieved in 2012-13.

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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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Returns as of 6th October 2020

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