Could You See 50% Returns From BHP Billiton plc, Rio Tinto plc And Anglo American plc?

Roland Head explains why profits could be higher than expected this year at BHP Billiton plc (LON:BLT), Rio Tinto plc (LON:RIO) and Anglo American plc (LON:AAL).

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

Shares in FTSE 100 mega miners BHP Billiton (LSE: BLT), Rio Tinto (LSE: RIO) and Anglo American (LSE: AAL) have all posted double-digit gains over the last month, despite BHP and Rio cutting their dividends.

What’s behind this optimism? One possible reason is that investors were mostly reassured by each firm’s 2015 results. There were no nasty surprises. Even the dividend cuts gained some respect as prudent and sensible decisions.

However, visibility of future profits remains very poor. In this article I’ll explain just why this is and why these miners’ profits could be much higher — or lower — than expected in 2016.

Small numbers with a big impact?

Stashed away at the very end of each miner’s annual results presentation is an explanation of how changes in commodity prices and exchange rates would affect the firm’s profits.

For example, BHP says that if the price of iron ore rises by $1/tonne, then all else being equal, the group’s 2016 net profit will rise by $147m. Given that BHP is only expected to report a net profit of $873m in 2016, it’s clear that a small improvement in the price of iron ore could give a big boost to profits.

Exchange rates are also very important as Anglo American’s results from last year show.

Falling commodity prices caused Anglo’s underlying operating profit to drop by $4.2bn in 2015. However, weaker currencies in the countries where Anglo’s mines are located provided a $1.8bn boost to underlying operating profit.

Overall, Anglo’s underlying operating profit fell by 55% to $2.2bn. But if exchange rates had remained unchanged while commodity prices fell, then this profit figure would have fallen by 97% to just $190m!

Predicting the future

Rio Tinto’s sensitivities table includes nine different parameters. BHP specifies eight, while Anglo specifies 14. In reality, there are many more on top of these core figures.

The problem is that in real life, these figures don’t move in isolation. As Rio Tinto explains in its notes: “The relationship between currencies and commodity prices is a complex one and movements in exchange rates can affect movements in commodity prices and vice versa.”

For example, big swings in the price of iron ore may affect the strength of the Australian dollar. The oil price affects the cost of operations, but the local price of fuel in each country may also be influenced by exchange rates.

On top of this, the prices of different commodities will often move in opposite directions at the same time. Coal may get cheaper, while iron ore and gold might rise in price.

It’s clear that miners’ profits are a very complex mixture of moving parts. They’re also fairly unpredictable.

I suspect that the profits reported by these three firms in 2016 will be very different to current market forecasts. It’s simply not possible to predict that far in the future.

If you’re not convinced, then remember that over the last 12 months, the consensus forecast for BHP’s 2016 earnings per share has fallen from $1.59 per share to just $0.18 per share. Similar declines have affected forecasts for Rio Tinto and Anglo American.

I suspect 2016 will be full of surprises for mining investors. Big gains are possible if market conditions improve.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Roland Head owns shares of Rio Tinto, BHP Billiton and Anglo American. The Motley Fool UK has recommended Rio Tinto. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Investing Articles

6 stocks that Fools have been buying!

Our Foolish freelancers are putting their money where their mouths are and buying these stocks in recent weeks.

Read more »

Google office headquarters
Investing Articles

1 reason I like buying S&P 500 shares – and 1 reason I don’t

Will this investor try to improve his potential returns by focusing more on S&P 500 shares instead of British ones?…

Read more »

Young woman holding up three fingers
Investing Articles

3 SIPP mistakes to avoid

Our writer explains a trio of potentially costly errors he tries to avoid making when investing his SIPP, on an…

Read more »

Smiling white woman holding iPhone with Airpods in ear
Investing Articles

Here’s how (and why) I’d start buying shares with £25 a week

Our writer uses his investment experience and current approach to explain how he would start buying shares on a limited…

Read more »

Aerial shot showing an aircraft shadow flying over an idyllic beach
Investing Articles

Here’s my 5-step approach to earning passive income of £500 a month

Christopher Ruane explains the handful of steps he uses to target hundreds of pounds in passive income each month.

Read more »

Investing Articles

2 UK shares I’ve been buying this week

From a value perspective, UK shares look attractive. But two in particular have been attracting Stephen Wright’s attention over the…

Read more »

Investing Articles

A lifelong second income for just £10 a week? Here’s how!

With a simple, structured approach to buying blue-chip dividend shares at attractive prices, our writer's building a second income for…

Read more »

Investing Articles

Here’s how I’d use a £20k Stocks and Shares ISA to help build generational wealth

Discover how our writer would aim to turn a £20k Stocks and Shares ISA into a sizeable nest egg by…

Read more »