Strong currencies to hit mining firms' profits

By Eric Onstad

LONDON (Reuters) - Sharply stronger currencies in metals-producing nations is wiping out much of the benefit of higher prices for mining companies, leaving their buoyant share prices vulnerable to earnings disappointment.

Currencies have shot up in major producer nations, including the top miners of iron ore, copper and platinum -- Australia, Chile and South Africa.

South Africa has seen a particularly big swing, with the rand jumping 27 percent over the past 2-1/2 months.

Since commodities are sold in dollars, a stronger currency where they are mined boosts costs and hurts margins.

Investors who have sent shares in the mining sector soaring on the back of a rebound in metals prices might be in for a rude surprise when they see the bottom line in upcoming results, as many analysts have not yet adjusted their earnings forecasts to account for the currency movements.

"If you look at consensus forecasts, there's a real risk that everybody is sitting with real weak rand forecasts," said analyst Leon Esterhuizen at RBC Capital Markets in London.

"The consensus forecasts are way out of the ballpark. They're going to have to halve them if the rand stays where it is."

STRETCHED VALUATIONS

Prices of platinum and copper, which are key for the auto and construction industries, have rebounded by 24 percent and 48 percent, respectively, this year.

Shares of mining companies have been lifted by the resurgence in underlying commodities; the UK mining index .FTNMX1770 has gained 37 percent this year, and Rio Tinto (RIO.L)(RIO.AX) has soared 87 percent.

A good deal of the revival in share prices is justified since the shares had probably overshot on the downside after the sudden collapse of demand and prices late last year, but many of the prices may not be reflecting the stronger currencies.

"Earnings momentum in the UK mining sector has stalled somewhat in the past month. Commodity prices are now drifting, plus local FX rates have gone the wrong way over the same period, making 2010 valuations look a little stretched," said analyst Michael Rawlinson of Liberum Capital.

Of the major diversified mining groups, BHP Billiton (BLT.L) looks the most expensive in terms of its price-earnings ratio of 18.8, he added in a note on Thursday.

Anglo American (AAL.L) had a PE of 14.5, based on estimated 2010 earnings assuming current spot prices, Xstrata (XTA.L) was on 14.4 and Rio Tinto at 13.7, Rawlinson added.

Companies with heavy exposure to South Africa, such as the world's biggest platinum producer, Anglo Platinum (AMSJ.J), are expected to be worst hit due to the rand's sharp moves.