FTSE Mining Companies due to Report Earnings

This week sees the FTSE mining sector come under scrutiny as key industry players reveal earnings results.

When major UK-listed banks reported results early this month, HSBC’s share price shot up on the back of greatly-improved earnings. The news also had a positive knock-on effect across the entire banking sector.

As Kazakhmys reports half-year results, and BHP Billiton – already in the news due to its hostile takeover bid for Potash – announces full-year earnings, can we expect heightened levels of volatility in the mining sector?

Global recovery and risk appetite

In contrast to defensive shares such as food and drug retailers, mining stocks are typically cyclical and will tend to have a strong positive correlation with broader economic growth. This correlation is stronger still due to the global nature of mining; while the UK’s FTSE 100 index contains a number of huge mining firms, including the world’s largest miner, BHP Billiton, the companies themselves operate on a global level and rely on demand for raw materials from across the world, particularly from emerging markets.

As such, China is an increasingly important market for the larger mining firms, with earnings for the sector likely to be heavily linked to activity in the Chinese construction market. Broadly speaking, China has continued to develop its infrastructure, but such growth has been tempered by the government’s interventions aimed at preventing overheating in the economy. Nevertheless, earlier this month China was announced to have overtaken Japan as the world’s second largest economy, with growth levels still well above government targets.

Furthermore, the past weeks have seen risk markets stuck in something of a rut, whereas safe-haven assets, including gold, have performed comparatively strongly. Better-than-expected earnings for miners may well, therefore, see higher levels of short-term upside than they would have in more generally upbeat market conditions.

Copper prices

Kazakhmys is primarily a copper miner, meaning its earnings will be directly affected by the price of the metal. Earlier this month, September Copper futures were trading at around $3.40 per pound, towards the top of a 52-week, high-low range of $2.46 to $3.66 per pound. This would indicate the copper miners could expect strong earnings.

However, copper prices have certainly not followed a straightforwardly positive trajectory. Indeed, current prices are similar to levels reached at the end of 2009, and in May 2010 prices were well below $3 per pound. The inconsistent prices of this important metal may well prove to have hit earnings for miners over the past half a year.

Australian election factor

One of the key news stories that has been affecting the mining sector over recent months is the proposed A$10.5 billion tax on resources. The tax has been widely opposed by mining firms with interests in Australia – notably BHP Billiton.

The Australian general election has proved inconclusive, with neither the ruling Labor party (who initially proposed the tax) nor the opposition (who broadly speaking oppose it) having won outright. This has led to speculation that the tax may be abolished, either by Labor looking to woo independents or, should they secure power, by the Liberal party which is ideologically opposed to the tax. Combined with forthcoming earnings results, this story may well cause further volatility in the sector.

Take a position...

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Updated: 25/08/10

The above comments do not constitute investment advice and IG Markets accepts no responsibility for any use that may be made of them.