‘We have clearly seen the peak’: Sector veteran gives earnings season warning for ASX mining shares

two men in hard hats and high visibility jackets look together at a laptop screen that one of the men in holding at a mine site.two men in hard hats and high visibility jackets look together at a laptop screen that one of the men in holding at a mine site.

The iron ore price dropped below the benchmark of US$100 per tonne over the past week. This is the first time it has dropped this low in 2022. It was last around this mark in November 2021.

Falling commodity prices and increasing costs for labour, fuel, and mining processing inputs are set to impact the earnings of ASX mining shares in the near future, one expert predicts.

‘Tough reporting season’ next month

According to reporting in the Australian Financial Review (AFR), veteran mining analyst Dr Glyn Lawcock has recommended that investors go underweight on ASX mining shares ahead of a “tough reporting season” which commences next month.

Lawcock’s warning comes amid a four-month fall in commodity prices including aluminium, gold, silver, copper, zinc, nickel, and iron ore.

Downgrades on ASX mining shares

Lawcock and his team at Barrenjoey have downgraded their 2023 earnings estimates for various ASX mining shares.

They’ve dropped their forecasts for 29Metals Ltd (ASX: 29M) and Sandfire Resources Ltd (ASX: SFR) by more than 80%.

A similar downgrade has been applied to Alumina Limited (ASX: AWC).

The team also downgraded earnings estimates for South32 Ltd (ASX: S32) by 55%. Meantime, BHP Group Ltd (ASX: BHP) and Rio Tinto Limited (ASX: RIO) have been downgraded by 20% and 10% respectively.

Lawcock said:

We have clearly seen the peak in this cycle, although I’d say coal and lithium are still in a boom at the moment.

We see iron ore prices lifting into the end of 2022 on China stimulus and expectations of a better 2023 given the disappointment of 2022 in China due to lockdowns.

Lawcock said this cycle was different because “we come into this downturn with low [product] inventory and not a lot of projects under construction”.

“We don’t come into this downturn with as much supply, so I don’t think we exacerbate the downside as much this time, and we are coming into a downturn with good balance sheets.”

Resources ‘stronger than ever’ after economic chaos

Regal Funds Management chief investment officer Phil King expects the US share market to bottom over the next month or two, according to another AFR article. He thinks it will finish the year higher.

King also thinks inflation has peaked, and the market is full of great buying opportunities. But he is concerned about the Chinese economy and the flow-on effect on the iron ore price.

King said:

It causes us genuine concern because it’s the Chinese property market that has been driving the Chinese economy, and the Chinese economy has been driving the world.

King thinks resources will come out on top once the economic chaos is over.

He said: ” … even though we might see a US recession and some weakness in demand, we think the resource sector will come out the other side stronger than ever.”

The companies behind the mega ASX mining shares are due to report soon.

BHP will release its full-year results on 16 August. Fortescue’s are scheduled for 29 August.

Rio reports on a different cycle and will present its half-year results on 27 July.

The post ‘We have clearly seen the peak’: Sector veteran gives earnings season warning for ASX mining shares appeared first on The Motley Fool Australia.

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Motley Fool contributor Bronwyn Allen has positions in Alumina Ltd. and BHP Billiton Limited. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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