BHP and Rio earnings forecasts slashed

MINING giants Rio Tinto and BHP Billiton have had their earnings estimates slashed by up to 45 per cent, as analysts downgrade forecasts because of low metal prices and softer demand. Merrill Lynch said in a report on declining metal prices that Rio's 2009 profit could be around $4 billion -- 45 per cent lower than its previous estimate. The broker also tipped that BHP, the world's largest mining company, could hit a profit of about $8.8 billion in the year to June 30 -- 17 per cent lower than earlier estimates. Plunging base metal prices and concern about weakening demand -- particularly in Australia's top export commodities, iron ore and coal -- are proving a challenge for miners. Goldman Sachs analyst Neil Goodwill noted last week that debt-laden Rio had a major dependence on iron ore earnings. "Rio looks OK using our forecast commodity prices but if we use scenarios of weaker prices, then Rio may struggle," he said. "The earnings sensitivity to a 10 per cent fall in the iron ore price is $US852 million and the sensitivity to a US12c a pound fall in aluminium is $US739 million. If both end up this much below our forecast, it would wipe out half the forecast earnings." In a separate note on Rio recently, Mr Goodwill maintained a "hold" recommendation because he was "cautious and nervous" on the miner given the current steel production output being achieved by Asian and European steel mills. "The overriding key issue for the iron ore space is the outlook for price and volume in 2010 and 2011. We are not yet convinced that fundamentals in iron ore have turned," he said. Fat Prophets analyst Gavin Wendt said it was widely expected in the market that Rio's and BHP's earnings would be lower, based on easing metal prices. He said that with the consensus of a 30 per cent fall in iron ore contract prices, Rio would be harder hit than BHP because its earnings were more leveraged to the steelmaking product. "The performance of most commodities has been at the bottom end of expectations," he said. Rio is struggling to convince shareholders to approve Chinalco's $US19.5 billion bid for 18.8 per cent of the mining major and a strategic stake in key assets. Chief executive Tom Albanese stepped up efforts last week to win investor support after Chinalco spoke to Canberra officials to convince the Australian Government that despite being state-owned, it acted independently of the Chinese Government. Rio is pushing the deal as it also engages with China to win new ore contracts, with analysts tipping up to a 30 per cent price fall. Macquarie Bank analyst Jim Lennon said in a report published yesterday that the spot price of iron ore was now trading at a discount of about 40 per cent to the Australian benchmark, having fallen to only a 20 per cent discount a month ago. "This suggests more downward pressure on prices in the annual benchmark negotiations," he said. "With steelmakers looking to cut production again, iron ore purchases have been reduced, and there are reports of distress sales and offers by iron ore traders." Mr Lennon said a review of production plans by steel producers worldwide for the first quarter of 2009 indicated a massive decline was under way. source：www.theaustralian.news.com.au