Joy Global (JOYG) is a leading builder of mining equipment especially needed for the mining of coal. Unfortunately it's not owned by the Stone Fox Capital portfolios, but they do provide a great insight into the world commodity markets.
JOYG reported a strong quarter (see here) and, more importantly, talked about 'some slowing' in global commodity demand, but reiterated that demand remains at historical highs. The key takeaway is that prices for met coal, iron ore, and copper remain at elevated levels and mining capacity is above 90%. Therefore, the active prospect list is growing very fast. In essence, JOYG speaks of a marker that has taken a pause before it journeys higher. Little did they know that the ISM Manufacturing report released a couple of hours later would unleash a big rally in the markets.
New orders were up 51% over last year. Backlog increased to $1.8B from $1.5B on October 30, 2009. More importantly, guidance was raised to between $4.1 and $4.15 up from an analyst estimate of $4.01.
Steel production is expected to be down in the 2H of the year, but the amount of increase in coal demand in Asia Pacific is simply astonishing - over 94 gigawatts to come online this year alone.
It was interesting to hear them talk about copper prices over $3, considering copper trades in the mid $3.40s today. JOYG talks a bullish game but they've also downplayed the reality of a very bullish end market. Copper wouldn't be this high if end demand was faltering. JOYG now trades at 15x estimates so it isn't a cheap equipment company.
While Terex (NYSE:TEX) is basically out of the mining business, they are much cheaper to us if demand is really this strong. Construction spending will follow and I'd bet that because of leverage, both companies would likely make $6 eps at the same time. JOYG trades at $60 and TEX trades at $20.
Highlights from the earnings report:
International commodity markets are being influenced by near term slowing from China and from declining momentum of industrial production in the U.S. and other developed countries. China’s steel output is expected to be down 4-6 percent in the second half, after being up 18 percent through the first half. U.S. steel production is expected to decline to 66-68 percent capacity utilization in the second half, after reaching 75 percent utilization in May. Even with the anticipated declines, the second half run rates for steel production would remain near record levels in China and well above last year in the U.S.
Copper imports into China have been impacted by significant reductions in Shanghai exchange stocks, and are running about 4 percent below their twelve month average. China slowing is being offset by increased demand in the rest of the world, and this is providing support to pricing. Copper prices have remained above $3.00 per pound since late 2009, and the forward curve remains above this level for several more years. As a result, customers are proceeding with copper expansion projects in North and South America and Australia, and with future green field projects in Central Africa and Mongolia.
Future demand will continue to be driven by 94 gigawatts of new coal-fired power generating capacity scheduled to come on line in Asia Pacific during 2010. These additions will increase regional coal consumption by up to 350-400 million metric tons.
The longer view in the U.S. market is supported by 18 gigawatts of new power generating capacity under construction that is scheduled to come on line by the end of 2012 and burn an additional 70-80 million tons of coal. (Who knew the US was growing coal plants?)
Global mining is operating at capacity utilization rates of over 90 percent, and the little amount of excess capacity is often compromised by declining ore grades and production disruptions. The tightness of the market is supportive of pricing that is moving beyond the marginal cost of production to levels high enough to be an incentive for new capacity. In combination, the industry fundamentals create a compelling case for adding capacity to meet future demand.
Despite some near term slowing, new original equipment requirements are being added to the active prospect list at a faster rate than bookings, and therefore those prospect lists have expanded by more than 20 percent since the first of the year, in line with customers’ actual capital expenditures to date.
We believe we are well positioned to have a strong finish to this year, and our cost control and process efficiency efforts are continuing to gain momentum. Our fourth quarter shipments are in production, and we now expect to end our fiscal 2010 with revenues between $3.35 and $3.4 billion, which narrows the guidance to the upper end of the prior range of $3.3 to $3.4 billion. We expect profitability on those revenues to be better than previously guided, and now expect our earnings per fully diluted share for fiscal 2010 to be between $4.10 and $4.15, up from our prior guidance of $3.85 to $4.00.
Disclosure: Author is long TEX