According to a Citi Research report on the mining sector published Wednesday, the upcoming 2013 earnings season “is likely to be critical in defining the year ahead.” Citi Research analysts Heath R. Jansen et al. suggest that all of the fundamentals and technicals seem to be lining up for a bull run in European mining stocks. as long as balance sheets keep improving as management continues to sweeten the sweeten the pot for investors with stock buybacks and dividends.

Show me the cash

Given relatively high commodities prices over the last 12 months, Jansen and colleagues expect 2013 mining sector earnings to be strong and a likely catalyst for further share price appreciation. “We are forecasting the large mining companies to report strong YoY increases in cash flows, rising from a negative US$13.1b (aggregate of big 4 miners) in 2012 to a positive US$14.7b in 2013. Citi is expecting mining managements to reaffirm their prudent capex plans with overall expectations of a cut back in capex of 16.2%.”

mining stocks Diversified miners

Mining stocks: Dividend increases and cost reductions

Improved cash flows and reduced capex means cash is piling up fast at mining companies. The Citi reports suggests that companies will be distributing a good chunk of that cash via increased dividends. The analysts also highlight the possibility of reduced costs also providing positive momentum. “We are expecting an aggregate dividend growth of 5.9% y/y with the highest growth from Rio Tinto plc (ADR) (NYSE:RIO) (LON:RIO) (+10.8%). Costs could provide upside, with the mining companies focusing on cost we think that we could see upside surprise against expectations especially coupled with EM currencies, the biggest upside surprise could be in BHP Billiton Limited (ADR) (NYSE:BHP) (LON:BLT).”

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mining stocks divdend expectations

Citi picks in Euro mining sector

Jansen and his Citi Research colleagues are generally bullish on the large cap Euro mining sector. Their top buy recommendation is Rio Tinto plc (ADR) (NYSE:RIO) (LON:RIO), and their least favorite company in the sector is Anglo American plc (LON:AAL).

“We believe the large diversified miners will outperform the sector in 2014; we favour Rio Tinto (NYSE:RIO) (LON:RIO)(part of Citi Focus List Europe), BHP Billiton Limited (ADR) (NYSE:BHP) (LON:BLT) and Glencore Xstrata PLC (LON:GLEN). We have Sell ratings on Antofagasta plc (LON:ANTO) (OTCMKTS:ANFGY), First Quantum Minerals Limited (TSE:FM) (LON:FMQ), Nyrstar NV (EBR:NYR) (OTCMKTS:NYRSF), New World Resource Corp (CVE:NW), African Barrick Gold PLC (LON:ABG) (OTCMKTS:ABGLF), Assore, Fresnillo Plc (LON:FRES), Hochschild Mining Plc (LON:HOC) (OTCMKTS:HCHDF), Petropavlovsk PLC (LON:POG) (OTCMKTS:PPLKY) and Randgold Resources Ltd. (ADR) (NASDAQ:GOLD). We remain underweight the gold and base metals stocks, and our least favoured large-cap miner is Anglo American.”