BHP Billiton and Rio Tinto feared to hit rock bottom

Despite being giants in the mining industry, both BHP Billiton and Rio Tinto are suffering from losses in what could be dubbed as one of the worst years for the mining industry.

Over the last 12 months, Rio Tinto's shares have declined by as much as 27 percent excluding dividends, while BHP Billiton's shares have fallen by a staggering 43 percent in the last 12 months. These two are among the worst performing companies in the FTSE 100 market, which has likewise only gained under one percent excluding dividends. To respond to the fall of commodity prices, both miners opted to cut costs to try and maintain profit margins while sales come under pressure.

The ‘perfect storm’ for BHP Billiton

Just recently, BHP Billiton sacked 380 employees from its Olympic Dam mine in South Australia, cutting its workforce to about only 3,500. The move was expected since the strong U.S. dollar and slower demand for copper are pointing to a surplus of material, leading to a slump in metal prices and hammering the miner's profitability.

Analysts expect BHP Billiton to report a 49 percent fall in earnings for 2014-2015. But the fall in prices has not yet hit rock bottom, as analysts still anticipate a further 36 percent decline in full-year earnings per share for 2016.

Rio Tinto to cut more costs

Rio Tinto shocked the market last week when it announced a target savings of US$1 billion [AU$1.35 billion] for 2015 — an increase of US$250 million [AU$339 billion] from its previous goal. To achieve such an ambitious goal, the miner must watch every single penny, including those related to safety equipment. The management has also slashed capital spending by US$2.5 billion [AU$3.39 billion] over the next two years.

In spite of this, the giant miner looks to be wasting cash, as Rio Tinto is halfway through a US$2 billion [AU$1.7 billion] share repurchase program. With the demand for iron ore continuing to decline, it would seem more prudent to hold cash rather than buy back stocks.

Citi estimates Rio Tinto's earnings per share to slide a further 52 percent this year. With a forward P/E of 16.3, the company's valuation still looks expensive for investors.

Further price slides

It looks like the suffering mining sector isn't set to recover any time soon, with China recently devaluing its currency in a bid to make its products less expensive in global markets and boost its exports. This means that imports from BHP Billiton, Rio Tinto and other foreign mining companies would then become more expensive. Hence, investors are advised to avoid miners for now.

Yet there is a bit of silver lining to the mining industry, as Russian nickel miner Amur Minerals (London AIM: AMC) is one of the very few miners that posted a fivefold gain this year, thanks to the approval of its production license and a string of positive news for shareholders. While the price of the stock might be driven more by sentiment rather than technical analysis of the mining sector, Amur Minerals is still a stock to watch out for as the next phase of its Kun-Manie nickel copper sulphide project goes underway.

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