Joy Global Issues Fourth-Quarter Results; Warns of Slower Growth in Demand for Mining Equipment

Mining-equipment maker Joy Global (JOY) reported mixed fourth-quarter results Wednesday, and its outlook for mining equipment demand and commodity prices, in general, left investors in a selling mood. We are sticking with our fair value estimate for Joy Global, however.

Fourth-quarter organic revenue jumped about 18%, core operating income increased about 24%, and organic bookings advanced 22% from the same period a year ago. Adjusted income from continuing operations per diluted share came in at $1.82, below consensus expectations of $1.86 per share but up about 32% from last year’s quarter. Orders for surface mining equipment jumped nearly 50% from the same period a year ago, while purchases of underground mining machinery advanced 2.5% from the year-ago quarter. Strength was evident both for original equipment as mining companies continue to increase production at existing mines and bring new lines on line and for aftermarket parts thanks to a larger operating fleet and higher volumes, but management indicated a slowdown in new orders may be on the horizon. Including the recent acquisition of LeTourneau Mining, total bookings increased over 33% in the quarter.

Looking ahead, Joy Global expects commodity demand to remain sluggish in the near term, though this should be mitigated by restocking of commodities and aided by industrial inventories that remain at low levels. However, management anticipates a squeezing out of high-marginal-cost mines, which will likely impact aftermarket demand as older machines are parked. Joy Global was also quite cautious on original equipment demand, indicating that a leveling of original equipment orders may occur if current macroeconomic conditions persist and customers scale back plans for new projects. As for 2012 guidance, management expects to achieve between $7.00 and $7.40 per diluted share in earnings and $5.3 billion to $5.5 billion in sales; the mid-points of the ranges were about in line with consensus expectations.

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In its press release, Joy Global produced its opinion on the outlook for the market, which we have reproduced for you below:

Market Outlook

Commodity demand is correlated to economic trends, and slowing global growth is tempering the demand for mined commodities. Spot prices for coal, copper and iron ore are down from their highs earlier this year by as much as 20 percent. However, these numbers need interpretation. First, de-stocking has reduced commodity imports below end-use demand, and set the stage for subsequent re-stocking. China’s imports of both copper and coal were reduced earlier this year as stock levels were reduced by rising prices and tightening credit. India’s imports of seaborne coal have been similarly reduced, and this has lowered stock levels at power generating plants to the lowest levels in three years. Steel production in China is down over 15 percent since the summer as trader inventories were forced down by tight credit policies. With better pricing and more constructive credit policies, commodity demand is expected to see improvement from restocking. Secondly, reduced prices will have a greater effect on the higher marginal cost producers. It is estimated that 15 percent of the combined volume of seaborne and China domestic iron ore has a production cost of $140 per metric tonne or higher. As iron ore spot prices dropped from their highs of $190 per dry metric tonne earlier this year to their lows of $117 in October, high cost producers from China and India were forced out of the market and prices have since stabilized at around $140. The result is a better market for the larger, better capitalized and more efficient mines.

Mining companies generally expect today’s sluggish demand to return to strong growth well before the lead time to bring new mine production on line. This view is based on a number of factors. For one, global industrial capacity utilization has remained in the mid-70 percent range as economies slowed. Conversely, industrial capacity utilization in 2009 dropped below end-use demand to generate cash from inventory reduction. Today’s industrial sector inventories remain at historically low levels in days of supply, and inventory reduction is not expected to be an additional drag on commodity demand.

The global mining industry currently operates with little available excess capacity. Although down from earlier peaks, current spot prices for coal, copper and iron ore are up by 50 to 75 percent over the past two years and provide sufficient returns to justify continued mine expansion by all but the highest cost producers. A positive longer term outlook combined with stronger balance sheets and substantial cash on hand allows mining companies to continue making strategic investment decisions despite near term uncertainty. Miners remain focused on deploying capital expenditures to generate organic growth throughout the cycle. As a result, a number of major mining companies have announced increased capital expenditure budgets for 2012, and they continue to receive Board approvals of major green field projects.

Although the China economy has been slowing, it continues to signal a soft landing. The growth in Gross Domestic Product was 9.1 percent in the third quarter, which is down only modestly from the 9.7 percent peak earlier this year. Inflation as measured by the Consumer Price Index was down to 4.2 percent in November from 5.5 percent in October. October saw the fastest growth in Chinese manufacturing output in six months, and there was further improvement in November. Coal imports reached a record level in September and are expected to remain strong for the balance of the year as stockpiles are rebuilt for the winter heating season. China copper consumption should be up 8 percent this year and could reach 7 million metric tonnes, driving imports to a 17-month high in October. And finally, China’s 12^th Five Year Plan calls for $840 billion U.S. dollars to be spent on investments in power generation and the electricity grid, and this will add support to long term commodity demand in China.

India has become a significant importer of seaborne coal, and its imports are expected to reach 200 million metric tonnes over the next few years. The government target of 660 million tonnes for coal production this year should easily be missed by more than 100 million tonnes. Coal India, Ltd.’s 8 percent production decline in the third quarter is part of this miss. As a result, coal stockpiles at power plants are down 30 percent and power cuts are possible.

In the U.S. coal market, production has mostly been linked to export demand. Exports of U.S. coal are up over 50 percent from last year, and should reach 100 million tons by year end. This would be the highest volume of exports since 1992, and as a result coal production is up while stockpiles at utilities have declined to 148 million tons. The average price of Central Appalachian coal is up 15 percent from last year and mining customers are investing in mine and port expansions to increase exports based on the long-term outlook for seaborne demand.

Copper markets continue to be subject to disruptions and long-term declining ore grades, which keeps the market in a supply deficit. Disruptions have become routine and are predictable at 5 to 6 percent of volume. As a result, copper production should be flat with last year, creating a supply deficit of around 250 thousand tonnes. This should keep copper prices above $3.50 per pound, with significant long term opportunity to the upside. This outlook and long lead time for mine expansion keeps a large number of copper projects in development.