FTSE Mining Companies due to Report Earnings
This week sees the FTSE mining sector come under scrutiny as key industry players reveal earnings results.
When major UK-listed banks reported results early this month, HSBC's share price shot up on the back of vastly-improved earnings figures. As Antofagasta and Kazakhmys report half-year results, and BHP Billiton – already in focus due to its hostile takeover bid for Potash – announces full-year earnings, can we expect similar volatility in the mining sector?
Global recovery and risk appetite
In contrast to defensive, non-cyclical stocks such as food and drug retailers, mining stocks are typically cyclical and will tend to have a strong positive correlation with broader economic growth. This is especially true due to the global nature of mining; while the UK’s FTSE 100 index contains a number of mining giants, including the world’s largest miner, BHP Billiton, the companies themselves operate globally and rely on demand for raw materials from across the globe, particularly emerging markets.
As such, China is an increasingly important market for the larger mining firms, with earnings for the sector likely to be heavily linked to activity in the Chinese construction market. Broadly speaking, China has continued to develop its infrastructure, but such growth has been tempered by the government’s interventions to prevent economic overheating. Nevertheless, earlier this month China was announced to have overtaken Japan as the world’s second largest economy, with growth levels still above government targets.
The past weeks have seen risk markets stuck in something of a rut, whereas safe-haven assets, including gold, have performed comparatively strongly. Better-than-expected earnings for miners may well, therefore, see higher levels of short-term upside than they would have in more favourable market conditions.
Copper prices
Antofagasta and Kazakhmys are both primarily copper miners, meaning their earnings will be directly affected by the price of the metal. Earlier this month, September Copper futures were trading at around $3.40 per pound, towards the top of a 52-week, high-low range of $2.46 to $3.66 per pound. This would indicate the copper miners could expect strong earnings.
On the other hand, however, copper prices have certainly not followed a straightforwardly positive trajectory. Indeed, current prices are similar to levels reached at the end of 2009, and in May 2010 prices were well below $3 per pound. The inconsistent prices of this important metal may well prove to have hit earnings for miners over the past half a year.
Australian election factor
One of the key stories that has affected the mining sector over recent months is the proposed A$10.5 billion tax on resources. Unsurprisingly, the tax has been widely opposed by mining firms with interests in Australia – notably BHP Billiton.
The Australian general election has proved inconclusive, with neither the ruling Labor party (who initially proposed the tax) nor the opposition (who broadly speaking oppose it) having won outright. This has led to speculation that the tax may be abolished, either by Labor looking to woo independents or, should they secure power, by the Liberal party which is ideologically opposed to the tax. Combined with forthcoming earnings results, this story may well cause further volatility in the sector.
Back your view...
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Updated: 23/08/10
The above comments do not constitute investment advice and IG Index accepts no responsibility for any use that may be made of them.
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