Will These Iron Ore Stocks Rise After Their Earnings Releases?

Masam is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

I have pulled out another set of two Australian miners and I’m sure readers will believing I have been obsessed with Australian companies. However, this time around, the two companies that I have picked out are heavy weight mining companies. Since iron ore prices saw a historic rally in post September period, I am assuming that American investors will definitely want to have a look at the earnings preview of these three iron ore players:

BHP Billiton )

The Street forecasts H1-13 underlying Net Profit After Tax (NPAT) (it is interesting to note that Australian accounting standards require the companies to use the word NPAT as a substitute for Net Profit, Therefore, investors should understand that Net Profit and NPAT is one and the same thing) of US$5.63 billion, up 3% h/h and down 43% y/y. The loss will be the third consecutive half yearly loss. The net debt at 31 December 2012 is expected to increase to US$27.6 billion up from US$23.5 billion at the end of the June half year 2012.

The individual businesses are expected to have mixed results; the Street forecasts the iron ore divisions to report a half year EBIT of US$4.85 billion, down 37% y/y and highlighting the impact of the sharp drop in the iron ore prices during the December half year 2012 as production was largely unchanged y/y. The base metals business is expected to report a half year EBIT of US$1.99 billion, up 21% y/y reflecting the return to higher grades and improved utilization. The Petroleum division is expected to report a half year EBIT of US$2.74 billion, down 30% y/y. An improvement in earnings is expected from the Onshore US business, with an expected EBIT loss of US$112 million, compared to a loss of US$289 million in the June half year 2012. Onshore US EBITDA is expected to improve 35% h/h to US$715 million, despite significant Depreciation & Amortization charges and poor free cash flow from the business. The Energy Coal business is expected to report a half year EBIT of US$253 million, down from US$787 million y/y, while the Met coal business is expected to remain barely profitable. The aluminum business is expected report weak earnings for a third consecutive quarter, with a loss of US$235 million.

In late 2012, BHP drew attention to the need for cost outs in the face of weakening commodity prices (excluding iron ore) in 2013 as a means to drive earnings growth and share price performance. BHP is guiding flat year on year costs in nominal terms in 2013. The market has not rewarded BHP for this and would appreciate greater clarity on the dollar millions of potential cost outs. In addition with this in mind, the Street does not expect any new capital initiatives.

Fortescue Metals Group : FSUMF)

The Street forecasts FMG to report H1-13 EBITDA of US$909 million, down 40% y/y and down 33% h/h. The underlying earnings are forecasted to be US$340m, down 44% h/h. We do not anticipate FMG’s result to be a material catalyst as FMG has already effectively provided their revenue (through volume and realized prices) as well as costs in their quarterly production reports. In addition, production and CAPex guidance to 115Mtpa (Mt per annum) by the end of CY2013 has been well flagged.

Foolish Bottom-Line

This earnings season will be marked by declining NPAT YoY. This is perfectly exhibited by the earnings preview of these three companies. In the face of tempering commodity prices in 2013, it will not be wrong to say that earnings growth will become more leveraged to costs out. In these circumstances, experts expect the resources sector to focus heavily on OPex and CAPex to improve profitability and free cash flow.


AnalystX has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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