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Key points
- ASX 200 mining shares are seen to be safer bets due to high commodity prices and strong balance sheets
- But Goldman Sachs warns that miners may take a more conservative stance on dividends and capital returns
- Given high expectations on both these fronts, the sector could be vulnerable to a sell-off
Our large ASX mining shares are seen as a bastion of strength during these volatile times, but a top broker is warning that they could disappoint this reporting season.
This isn't what investors want to hear as many are on tenterhooks ahead of this month's profit announcements.
The US$251 billion collapse in the Meta Platforms Inc (NASDAQ: FB) share price underscores the anxiety. In contrast, high commodity prices and balance sheets overflowing with cash have made S&P/ASX 200 Index (ASX: XJO) mining shares a safe haven of sorts.
Earnings growth largely locked in for ASX 200 mining shares
But there's a risk that our bulk miners may not meet investors' expectations when they turn in their profit report cards, warned Goldman Sachs.
The issue isn't so much with profit growth. Thanks to the quarterly updates by ASX 200 mining shares, there should be few surprises.
In fact, Goldman Sachs is forecasting ASX bulk miners to deliver a circa 45% uplift in earnings before interest, tax, depreciation and amortisation (EBITDA) for the 2021 December reporting period compared to the same time last year.
The broker is tipping a further circa 10% increase in EBITDA for 2022, both estimates are market cap weighted.
Areas to watch this reporting season
However, there is still plenty of room for the sector to surprise – both in a good and bad way. Some of the things that could catch investors off guard are costs, production growth, capital expenditure, dividends and capital returns.
It's the last two that may be of particular interest as the bar of expectation is set high. Many are expecting big cash handouts from the excess cash sitting on balance sheets.
"Although capital returns should be strong, we think those companies that are reporting interim/1H results will likely take a conservative approach to the dividend based on uncertainty on costs and the China outlook," cautioned Goldman.
"The Dec Q results saw significant operating cost inflation from higher input prices and labour shortages (FX is the only tailwind) and a large build in working capital from higher commodity prices and logistics challenges."
The broker is tipping that the average payout for the sector is approximately 50% of earnings per share (EPS). This puts the average dividend yield at around 8%.
ASX 200 mining shares to buy
But Goldman believes that the rise in operating expenses is likely to persist into 2023. Further, the growth in capital expenditure will be the next talking point for the market.
"Overall we think CY22 opex and capex guidance (and even production) may be an area of disappointment for the sector relative to expectations," added Goldman.
This doesn't mean there aren't strong buys among ASX 200 mining shares. The broker's "conviction" buys are the South32 Ltd (ASX: S32) share price and Iluka Resources Limited (ASX: ILU) share price.
Outside of its conviction list, the Rio Tinto Limited (ASX: RIO) share price and the Champion Iron Ltd (ASX: CIA) share price are also rated as "buys".
