Commodities & Metals

Mining Win: Joy Today, Joy Ahead (JOYG, CAT, BUCY, BHP, VALE, RIO, XSRAY, AAUKY)

The demand for metals and minerals of all kinds is pushing up sales and profits in the makers of the equipment used to extract the commodities. Joy Global, Inc. (NASDAQ: JOYG) reported earnings for its fourth fiscal quarter, and the company’s results and guidance are driving its shares higher this morning.

Joy Global reported EPS of $1.39 for the quarter, compared with estimates of $1.16. Profit rose from $124 million in the same period a year ago to $146.3 million this year, a boost of 18%. Revenue also rose 8.9%, to $1.05 billion, compared with estimates of $922.8 million. Competitor Caterpillar Inc. (NYSE: CAT) earlier reported better-than-expected earnings for its quarter ended in September, although Bucyrus Interntional, Inc. (NASDAQ: BUCY) missed earnings estimates in its most recent quarter. Bucyrus has agreed to be acquired by Caterpillar in a deal worth $7.6 billion.

For 2011, Joy Global projected EPS of $5-$5.30 on revenue between $3.9 and $4.1 billion. Previous estimates from analysts had projected 2011 EPS of $4.79 on revenue of $3.86 billion.

Joy Global’s CEO told the Financial Times that the equipment maker is “entering the earlier stages of another multiyear expansion of the industry.”  Miners including BHP Billiton Ltd. (NYSE: BHP), Vale SA (NYSE: VALE), Rio Tinto plc (NYSE: RIO), Xstrata plc (OTC: XSRAY), and Anglo American plc (OTC: AAUKY) expect to invest as much as $120 billion in 2011 to boost production.

Even better for the mining equipment makers is that the miners are front-loading orders for new equipment in an attempt to guarantee delivery of new equipment and to get better pricing. Some miners are also agreeing to longer-term supply contracts with equipment makers in exchange for the guarantees and pricing.

Investors are piling into the sector, expecting higher profits and, perhaps even better, more mergers and acquisitions of both publicly-traded and private equipment manufacturers.

The danger to all this growth, at least from the miners point of view, is that costs will rise almost uncontrollably. Wages, inflation, and long lead times to develop new supplies could combine to constrain their response the greater demand. That will drive commodities prices even higher. Miners remember all too well the problems that occurred in 2008,leading to their inability to acquire the huge tires they needed for the enormous ore trucks. For want of a nail…

So while the miners might struggle a bit, the equipment makers, like Joy Global, are expected to prosper. The company’s stock is up about 8% following its earnings report, while Caterpillar stock is up about 3%.

Paul Ausick