BHP, Rio Set to ‘Bounce Back’ to Record Profits on Recovery

Jan. 27 (Bloomberg) -- BHP Billiton Ltd. and Rio Tinto Group, the world’s biggest and third-largest mining companies, are set to return to record profits faster than estimated because of a quicker rebound in the global economy.

Brokers have increased London-based Rio’s 2010 earnings estimates and Melbourne-based BHP’s fiscal 2011 predictions by more than $1 billion in the past four weeks, according to Bloomberg data. Rio’s shares may gain 14 percent in the next 12 months and BHP’s almost 10 percent, according to the data.

The World Bank has raised its forecast for global growth in 2010 as the economy in China, the world’s biggest consumer of metals, expands at the fastest rate in three years. UBS AG and Citigroup Inc. are among brokers who’ve boosted profit estimates for BHP and Rio after they reported record iron ore output.

This year “is just about in the bag in terms of earnings,” said Ken West, who helps manage in Melbourne the equivalent of $1.9 billion at Perennial Investment Partners Ltd., including Rio and BHP shares. There’s no reason why profit at BHP and Rio shouldn’t be “bouncing back to those pre-global financial crisis earnings levels,” he said.

BHP declined 1 percent and Rio fell 1.1 percent in London trading yesterday. BHP spokeswoman Kelly Quirke and Rio spokesman Tony Shaffer declined to comment.

Rio may have net income of $9.3 billion in 2010, according to the median of 12 analyst estimates compiled by Bloomberg. That would beat its record in 2006 of $7.4 billion. BHP may report profit of $16 billion in fiscal 2011, according to 13 analyst estimates, beating 2008’s record $15.4 billion. BHP reports earnings on Feb. 10 and Rio on Feb. 11.

‘Picking Up’

Mining company profits plunged after the global financial crisis struck in 2008. Now, Rio, BHP and South Korea’s Posco, Asia’s most profitable steelmaker, are raising production as demand from carmakers and builders rebounds.

Alcoa Inc. the largest U.S. aluminum maker, expects earnings to improve this year and Freeport-McMoRan Copper & Gold Inc., the world’s largest publicly traded copper producer, posted fourth-quarter profit that topped analysts’ estimates.

“We are hearing from not just Rio but other companies, demand is picking up,” Glyn Lawcock, managing director of resources research at UBS AG in Sydney, said in an interview on Bloomberg TV after Rio’s production report Jan. 14. He’s forecasting a 10 to 15 percent gain in Rio’s stock this year.

BHP may report profit of $18 billion in fiscal 2011, according to UBS. BHP reported second-quarter output Jan. 20.

‘Volatile Year’

To be sure, the World Bank said the global recovery may lose momentum in the second half of the year as stimulus programs wind down and unemployment persists. Stocks fell in Asia and Europe last week after Chinese regulators told some of the nation’s banks to limit lending. Asian stocks had the biggest weekly drop since March on concern the pace of economic growth will prompt central banks from China to India to curb price increases. Australian mining stocks fell amid concern the nation may raise taxes on mining projects.

“We expect another volatile year in 2010 as the removal of fiscal and monetary stimulus in the U.S., Europe and Asia is likely to be accompanied by a period of relatively weak growth,” Deutsche Bank AG analysts led by Paul Young said in a report this month.

Steel output in China, the largest maker, rose to a record last year as government stimulus spending boosted demand from builders and automakers. Copper production also rose to a record. A stimulus-driven rebound is helping boost confidence in the global economy as equity markets rally from last year’s low and industrial production rises worldwide.

‘Faster Turnaround’

“Throughout 2009, China has surprised on the upside every reporting period,” said Grant Craighead, managing director of Sydney-based Stock Resource. “Whatever the consensus view was amongst economists China always came in a bit stronger.”

There may be a faster turnaround in China as infrastructure spending improves the demand for BHP’s products and drives spot prices higher, Royal Bank of Scotland Group Plc. analysts led by Warren Edney said in a report. Edney is forecasting BHP will report profit of $16.1 billion in the 12 months ending June 30, 2011.

The global steel market will grow by 9.2 percent in 2010 on rising demand from the U.S., Japan and Europe, the World Steel Association has said. Domestic demand will continue to grow driven by housing, automakers, shipbuilding and machinery, the China Iron & Steel Association said Jan. 22.