dieharder, page-118

PREVIEW-Battling BHP and Rio to post record profits
Thu Aug 14, 2008 9:09 AM BST

* What: BHP Billiton H2 earnings; Rio Tinto H1 results

* When: BHP (Aug 18), Rio (Aug 26)

* China-led commodities boom to generate record profits

By James Regan

SYDNEY, Aug 14 (Reuters) - Mining giants BHP Billiton and Rio Tinto should post record half-year profits as they reap the benefits of an industrial commodities boom, and are likely to use the results to bolster their arguments in a $123 billion takeover stand-off.

Both are also likely to outline big expansions in key profit sectors such as copper and iron ore, where analysts predict higher prices next year on the back of strong demand for imported raw materials from China's industrial sector.

Consenus figures based on forecasts by 20 analysts and provided by BHP point to a 12 percent rise in annual net profit to $15.4 billion, suggesting second-half profit will have risen 30 percent to $9.4 billion from $7.2 billion previously.

Analysts polled by Reuters Estimates forecast Rio's January-June underlying profit will have risen 40 percent to $5.2 billion. BHP's financial year ends June 30, while Rio follows the calendar year.

The more-diversified BHP will see a $5 billion-plus boost to earnings before interest and tax (EBIT) from strong oil prices denied to Rio, which is not in the oil business, as well as up to $1.5 billion in EBIT from its manganese business.

BHP has also said it will see $465 million in EBIT via forward copper sales, known as provisional pricing, in the half versus a $240 million loss in the previous half.

Rio, meanwhile, should get a lift from one-off sales of 15 million tonnes of iron ore into the lucrative spot market, which was paying double the contract price during the half-year thanks to demand from Chinese steel mills.

FLAGGING COSTS

London Metal Exchange copper rose by as much a third, or $1 a pound in January-June. Each 1 cent rise in the price of copper on average adds $25 million in total net profit, according to BHP guidance.

Already flagging added costs for everything from digging a new nickel mine in Australia to paying more for truck fuel in Chile, the world's largest and third-biggest mining groups more than compensated with billions of dollars in additional sales in January-June, according to analysts.

Much of the added expenses came from a big fall in the U.S. dollar -- down 10 percent against the Australian dollar and 14 percent against the rand.

On the plus side for Rio, one-offs after selling its Cortez Hills, Greens Creek and Kintyre projects should contribute a further $1.46 billion, according to Matthew Whittall, an analyst with CLSA Asia-Pacific Markets in Hong Kong.

If the forecasts are accurate, BHP CEO Marius Kloppers is expected to seize on the higher figures to bolster his argument for BHP's unsolicited offer of 3.4 shares for every Rio share, currently worth $123 billion and roundly rejected as too cheap by his Rio counterpart Tom Albanese.

"In this environment, neither CEO wants to be having to explain a result below expectations," said Whittall.

The European Union is due to give its anti-competition ruling on Dec. 9, a key date in the long-running takeover saga.

By then, with China replenishing inventories of raw materials, particularly copper, Citigroup metals analyst Clarke Wilkins said he expects to see another rally in metals prices.

The costs of a February strike at BHP's Colombian nickel mine and an abrupt halt in June of a nickel smelter in Australia after commercial gas supplies dried up should weigh on BHP's second half, as will third-quarter flooding in the Bowen Basin collieries in Australia that curtailed coal production.

But Ken West, a partner at Perennial Growth Management, said investors' focus was on a outlook on the supply-demand balance for iron ore, which until now was tipped in favour of suppliers.

"There's a faint emergence of a more balanced market," he said. "That's the backdrop that will keep us all sober with respect to the outlook," he said.

After rising more than 80 percent this year, CLSA's Whittall forecasts a more modest 10 percent hike for iron ore next year. ($1=A$1.14) (Editing by Ian Geoghegan)