- Caterpillar sees lower sales and fraud at Chinese acquisition
- Caterpillar’s machinery sales declined 1% over the past 3 months, driven by poor results in AsiaPacific and North America.
- The news of the mining slowdown hitting the top equipment manufacturer comes at the same time as the announcement of structural over reporting of profits at ERA Mining Machinery, the Chinese manufacturer bought for approx. $700m last year.
- Sources: Caterpillar press release; Wall Street Journal; Financial Times
- Bumi board favors Bakrie’s plans over Rothschild’s
- The only two directors on Bumi’s board who Nathan Rothschild wanted to stay in function have sided with the rest of the board in the support for the plan to have the Bakrie family buy the Bumi Resources assets and separate from Bumi, which would be left with the Berau assets.
- Rothschild and Bakrie have been in a dispute about the future of the London-listed miner with coal assets in Indonesia for several months. The company said this week that the decisions about the future structure of the group will not be impeded by the ongoing legal probe into financial practices at their assets.
- Sources: Financial Times; Telegraph; Wall Street Journal
Trends & Implications:
- The reduction of machinery sales at Caterpillar signals that the peak of new project development has passed. While miners raced to add capacity over the past years, many new projects are now put on hold or downsized. Although Caterpillar can expect to benefit from the forecasted rise increase of global resource requirements over the next decades, the fastest growth is over. Equipment manufacturers are a good indicator of overall growth outlook in the industry as their sales is directly linked to building of production capacity.
- Bumi’s future appears to be that of an Asian-focused coal company without strong Indonesian shareholders. The tie-up of the Vallar cash shell with powerful Indonesian miners did create a significant player in the region, but the divergent views on corporate governance between the Indonesian and European-based owners has made it impossible to run the company effectively.
2013 | Wilfred Visser | thebusinessofmining.com
“Rio Tinto’s iron-ore-driven profits set company records for the interim period but shares fell for a fourth day as investors’ flight from equities hits resources stocks hardest.
Tom Albanese, chief executive of the mining company, commented on the widening gap between miners’ rising earnings momentum and falling share prices. ‘There is a distorted set of economic drivers associated with the current uncertainties with respect to us and the European debt markets,’ he told the Financial Times. ‘You have an exaggerated diversion of ‘risk on’ to ‘risk off’ trades. It is difficult to come to any conclusions, but this is a backdrop that could persist for some time.’
… sector-wide pressures of rising costs and adverse exchange rates weighed on Rio’s profitability, contributing to earnings that missed consensus expectations. Higher costs for energy, materials and equipment lowered Rio’s underlying earnings by $479m, and exchange rates between the weak US dollar and strong Australian and Canadian dollars – currencies in which it incurs costs – reduced them by a further $810m in the first half.”
Source: Financial Times, August 4 2011
- Total increase of earnings because of price increases ($5bln) was offset by almost $3bln lower earnings because of volumes, costs and exchange rates.
- Just as Anglo American, the company gives a detailed explanation of the rising costs, providing rare details on the waiting times for various types of equipment (see outlook – page 8). The outlook shows the average delivery time for equipment currently is approx. 6-9 months higher than average.
- The impact of lost volumes because of weather impact (hurricanes & floods) in the first half of the year, often mentioned as important driver of prices, is only $245mln.
- Rio Tinto does not appear to be concerned with the current importance of iron ore as the driver of earnings. The company regards construction industry growth in China the most important metric for the economic outlook and mentions expansion of production capacity of Western Australian iron ore mines as key development priority. The company joins competitor Vale in this single-minded focus, while BHP Billiton appears to be more committed to diversify, as signalled by its acquisitions in the shale gas industry.
- The presented $26bln capex package does not yet include projects in advanced feasibility stage such as Simandou (iron ore in Guinea). The relatively conservative dividend and buy-back program does leave room for very aggressive development spending and helps the company to keep a very low gearing. So far all major miners choose to keep the gearing low despite their positive commodities market forecasts.
©2011 | Wilfred Visser | thebusinessofmining.com
“Freeport McMoran, the world’s biggest publicly traded copper producer, has predicted strong markets that could push its cash flow as high as $9bn this year compared with $6.3bn in 2010. The financial strength of Freeport, which declared a special dividend last year to clear excess cash, reflected even higher demand for copper and gold this year than last.
Richard Adkerson, Freeport’s chief executive, said destocking of copper inventories in China was helping to support the copper price. He noted China’s efforts to cool the economy but said: ‘There is a tremendous amount of spending on infrastructure and housing. China has the financial resources to continue to invest in the face of global economic conditions.’”
Source: Financial Times, July 21 2011
- Freeport says it is spending money as aggressively as possible to expand (planning to spend $2.6bln on capex this year), but still this year’s gold production is forecasted to be lower than last year’s output while copper output is increasing marginally.
- Mr. Adkerson mentions rising input costs, caused by high demand, as the key issue the industry will face over the coming years.
- The industry is facing rising input costs for fuel, power, labour & equipment while average grades of many flagship operations are falling. As a result both mining and processing costs per unit of product increase rapidly, supporting high commodity prices.
- Mining contractors and equipment manufacturers are faring well as mining companies face resource shortages (Caterpillar announced a 44% increase in profits this week). Miners are forced to pay high prices and book equipment and contracted services months in advance because of global shortages.
©2011 | Wilfred Visser | thebusinessofmining.com
“Joy Global, one of the biggest makers of mining equipment, has struck a $1.1bn deal to buy LeTourneau Technologies from Rowan Companies in a further sign of consolidation in the sector. The acquisition comes six months after Caterpillar, the biggest maker of earthmoving equipment by revenue, paid $7.6bn for Bucyrus International, a US maker of mining machinery which is Wisconsin-based Joy Global’s main rival.
By strengthening Caterpillar’s position as the top mining equipment maker, that deal put pressure on Joy Global to do a merger or acquisition in order to become a bigger player in a fast-growing global market that is estimated to be worth some $40bn annually. The two acquisitions demonstrate bullishness among heavy equipment makers about the long-term strength of commodities and extractive industries, particularly in emerging markets.”
Source: Financial Times, May 17 2011
- LeTourneau’s mining division mainly produces front-end loaders and dozers. However, most of the company’s revenues come from sales of onshore and offshore drilling equipment.
- Joy Global is broken down over P&H (mainly drills, draglines, shovels) and Joy Mining Machinery (strong in continuous mining equipment and longwall equipment).
- The acquisition of LeTourneau provides expansion of the portfolio, access to knowledge in the drilling business, and access to the strong supply chain to emerging countries. On top of this new potential Joy hopes to achieve a $40mln cost saving, which corresponds to approx. 1% of combined revenues.
- Caterpillar/Bucyrus still is about 10x the size of Joy/LeTourneau. The lack of supply capacity and the blanks in the product portfolio will make it impossible for Joy to be a one-stop shop for all equipment as Caterpillar aims to be. By strategically picking niche markets in which the company is particularly strong (e.g. longwall mining, drilling) it can compete with Caterpillar and Komatsu.
©2011 | Wilfred Visser | thebusinessofmining.com
” Caterpillar Inc.’s profit soared 91% as machinery sales increased sharply from last year. The company lifted its full-year earnings outlook again, now projecting $3.15 to $3.85 a share, up from $2.50 to $3.25, as it lifted the low end of its sales prediction by $1 billion.
‘We continue to be positive about the longer-term prospects for many of the industries we serve–like mining, energy, infrastructure, electric power and rail,’ said Chairman and Chief Executive Jim Owen. “
Source: Wall Street Journal, July 22, 2010
- Volvo, Sandvik & Atlas Copco also reported increasing profits this week, mainly driven by growth of sales in BRIC countries.
- Caterpillar announced a $700mln multi-year investment in a new line of mining shovels and capacity extension for mining trucks.
- Caterpillar mentions a range of underlying growth figures driving the increased machinery sales: US non-metals mining growth of 6%; Canadian quarry growth of 2%; US coal production growth of 3%; Latin America mining output growth of 2%; 17% mining output growth in Brazil (44% for iron ore).
- Equipment manufacturers profits decreased mainly due to reduced inventory levels of dealers. As many mining firms are more clear about the continuation of development projects after the crisis, inventory levels are picking up again.
- The established players in the equipment arena are preparing for increasing competition from emerging countries. Not only mining production is shifting to the new world, mining suppliers will face new challenges too. Sourcing of supplies and parts from across the world and gaining trust of Chinese and Russian investors will become increasingly important.
©2010 | Wilfred Visser | thebusinessofmining.com