MELBOURNE/LONDON Aggressive cost cutting, volume growth and stable commodity prices will drive a rise in half-year profits for the world's biggest miners, paving the way for healthy dividend hikes now and anticipated capital returns in 2015.
The latest round of results could tempt investors back into the sector, analysts say, after steering clear amid fears of cooling growth in China and a yet-to-occur slump in iron ore prices.
Top miners BHP Billiton (BHP.AX)(BLT.L), Rio Tinto (RIO.AX)(RIO.L) and Brazil's Vale (VALE5.SA) are expected to book solid growth in cash flows, having slammed the brakes on building new mines 18 months ago and embarked instead on massive cost cuts and debt repayments.
"Cash flows have been negative because they've been spending on projects and developments. You want to start to see a sign that that's starting to reverse," said Darko Kuzmanovic, a portfolio manager at Caledonia Investments in Sydney.
"Hopefully that's the catalyst for people to be more comfortable with these names and start thinking about investing in them, because they don't look particularly expensive."
Expectations are growing that Rio Tinto, the first of the big five miners to report, will come up with the fattest dividend increase, as the company has said it would beat its target for $2 billion in cost cuts.
The most bullish analysts are looking for a 15 percent rise in Rio Tinto's annual dividend to $1.92, compared with the consensus view for 8 percent growth to $1.81.
"In our view the company has leapfrogged the peer group to become the most shareholder friendly company of the large miners," Credit Suisse said in a February 3 note.
BHP Billiton, reporting its first-half results, may want to signal it is in the best position to launch a share buyback later this year, as cash flows surge on higher output of iron ore, copper and petroleum, lower operating costs and lower capital spending.
BHP typically holds its interim dividend steady or raises it one cent from its final dividend the previous year. However the consensus is for a 3 cent increase on the final dividend from last year to 62 cents, which would be 9 percent more than the first-half dividend last year, analysts said.
"The market's getting more excited now because we're 12 to 18 months into the austerity program. As balance sheets degear, the potential for returns goes up, and that's where the market's fixation is right now," said UBS analyst Glyn Lawcock in Sydney.
For commodities trading giant and miner Glencore Xstrata (GLEN.L), the key to rewarding shareholders will be the sale of its Las Bambas copper project in Peru, which it offered to sell to ease China's concerns about its takeover of Xstrata.
Las Bambas is expected to fetch more than $5 billion if a sale goes ahead. However as the sale process drags on, with only one Chinese consortium led by Minmetals in the running, speculation has grown that Glencore may keep the mine.
"In our view retaining the asset would push back the potential for special dividends by as much as two years," London-based Investec said in a January 30 research note.
Rio Tinto (Feb 13)
Rio Tinto, the world no.2 iron ore miner behind Vale, is expected to report a 32 percent rise in second-half profit to $5.49 billion, based on Reuters calculations off the consensus forecast of $9.72 billion for the full year.
Investors will be looking out for any sign that Rio may beat its own target for a further $1 billion in costs to be slashed this year, which would take cumulative cost savings over two years to more than $5 billion by the end of 2014 under Chief Executive Sam Walsh, who took the helm a year ago.
Analysts see Rio taking further writedowns, possibly up to $2 billion, on its loss-making aluminum business, including the Gove alumina refinery which the company is shutting down.
Anglo American (AAL.L) (Feb 14)
Anglo, the smallest of the big five, is expected to report a drop in operating profit of about 9 percent to $5.64 billion for the year, with earnings per share expected to dip by almost a quarter to $1.81, according to analysts' consensus.
Not only has Anglo been hit by weaker prices for some of its commodities, but it has also faced production difficulties in iron ore and platinum, a division hit by miners strikes in South Africa.
The focus will be on the progress made on a turnaround plan that Chief Executive Mark Cutifani rolled out last year, an update on Anglo's Minas Rio iron ore project in Brazil, and potential writedowns on its coal, diamonds and nickel businesses.
BHP Billiton (Feb 18)
Top global miner BHP is expected to report an 18 percent rise in first-half attributable profit excluding one-offs to $6.925 billion, helped by iron ore prices that held up more strongly than expected in the second half of last year.
The company, favored by some investors over Rio as its growing petroleum division means it is less dependent on iron ore, will be closely watched for progress on cost-cutting, and trimming net debt from $27.5 billion as of July 31.
UBS analyst Lawcock said BHP may be in a stronger position than Rio Tinto to start returning capital through a special dividend or buyback and could move as early as August.
Vale (Feb 26)
Vale SA, which is rated a buy or strong buy by 11 out of 11 analysts, according to Thomson Reuters I/B/E/S, is expected to report a 59 percent jump to $3 billion in fourth-quarter underlying earnings, driven by cost cutting, asset sales and iron ore prices .IO62-CNI=SI that averaged 12 percent more in the fourth quarter than a year ago.
However the Brazilian giant is expected to post an overall loss of between $5.47 billion and $6.2 billion in the quarter as a result of an agreement with the Brazilian government to pay disputed back taxes on foreign operations.
The charge will be around $9 billion, according to a February 7 note from Banco BTG Pactual in Rio de Janeiro.
Glencore Xstrata (March 4)
Commodities trader and miner Glencore is forecast to report a rise in headline full-year profit to $3.76 billion, boosted by higher output of copper, its biggest earner, as it lodges its first set of annual earnings since the takeover of Xstrata.
It has not published proforma numbers combining the two groups, so there are no ready comparisons for consensus forecasts.
The focus will be on any update on the sale of Las Bambas, the performance of its trading division in a tough environment, and progress on cost-cutting and meeting its target of more than $2 billion in synergies from the Xstrata acquisition.
(Additional reporting by Jeb Blount in Rio de Janeiro; Editing by Richard Pullin)