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Mining Equipment Rebound? We Disagree.

|Includes:ATLCF, ATLCY, ATLKF, ATLKY, Caterpillar Inc. (CAT), JOY, SDVKF, SDVKY

May 30, 2014

Prepared by the L&C Mining Team:

Michael Williams

Nathan Yates, MSF

Special thanks to:

Jiamin (Jamie) Zha

Mingchao (Carl) Zhang, MSF

Read Across List

Atlas Copco (ATCO)

Caterpillar (NYSE:CAT)

Joy Global (NYSE:JOY)



LangeNote: Mining Equipment Rebound?

A competitor of ours recently called a bottom in the mining equipment market. While the rate of order/revenue decline has plateaued, an ascent into positive y/y territory isn't imminent.

A Steep Decline - Following the heady days of 2011 and early 2012, mining equipment manufacturers like Atlas Copco, Caterpillar, Joy Global and Sandvik had a long way to fall. New equipment demand nearly ground to a halt last year. See pages 2-3 for historical information.

Bottomed Out - We think the U.S. coal sector capex will trough this year (6-7%), but Big 4 (capex BHP Billiton, Glencore Xstrata, Rio Tinto and Vale) has further to fall. The Big 4 miners are still actively engaged in non-core asset divestitures and mine closures.

'15 Mining Equipment Spending Won't Skyrocket - We predict that mining companies won't go on a spending spree next year, although MRO and rebuild activity should increase 10%+. Coal companies' priority #1 will be rebuilding cash positions. Priority #2 will be debt repayment.

Coal Industry Risk - The EPA will release new emissions standards for existing power plants in June. If they're extremely strict, U.S. thermal coal producers will suffer…as will their capex. Thermal coal fundamentals are otherwise good heading into the summer burn season-the biggest burn period of the year. The met coal market stinks, though.

Take-away: We prefer ATCO and CAT on a relative basis over JOY and SDVKF due to their diversified end markets. We aren't prepared to recommend any of these companies on an absolute basis, though, because the regulatory environment is unclear and mining capex will remain limited. Our forthcoming full report on mining capex, complete with company-by-company forecasts, will provide further guidance on investment opportunities.

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ATCO: Data from Mining & Rock Technique. JOY: Data from period ending 1 month later. Example Dec 2013 actually January 2014. SDVKF: Data from Mining division.


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ATCO: Data from Mining & Rock Technique. CAT: Data from Mining division. JOY: Data from period ending 1 month later. Example Dec 2013 actually January 2014. SDVKF: Data from Mining division.

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Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.