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A Modern Pick-and-Shovel Play

You've heard the cliche -- it wasn't the prospectors who made it big out West, but the folks who sold them picks and shovels. Well, between the Southern Copper (NYSE: PCU  ) stopper, African power shortages, Canadian tax hikes, and Australian flooding, mining remains a challenging business worldwide. At the same time, mined materials such as iron ore, metallurgical coal, and potash are seeing incredibly high demand today.

In addition to the acute issues mentioned above, industrywide cost inflation has also proved insidious. Given this backdrop, it would be most Foolish, in my view, to keep at least one eye on the firms selling the modern analogue of picks and shovels: draglines, blasthole drills, plow systems, and other mainstays of large-scale mining operations.

Bucyrus International (Nasdaq: BUCY  ) , which offers both big-ticket equipment and aftermarket services to miners like BHP Billiton (NYSE: BHP  ) and Anglo American (Nasdaq: AAUK  ) , just reported some big numbers for its fourth quarter and fiscal year. Quarterly sales lifted 166%, and fiscal 2007's revenue also more than doubled. Operating earnings gains were restrained by a large increase in overhead expenses, however. For the year, operating margins fell three full percentage points.

Though it's still smaller than competitor Joy Global (Nasdaq: JOYG  ) , Bucyrus's mid-2007 acquisition of a German underground mining equipment firm doubled the size of the company. This move shored up the business's position in China and other BRIC countries. The tie-up also helps to explain both the firm's revenue ramp and its cost crunch.

Selling, general, and administrative (SG&A) expenses invariably inflate temporarily after a merger, because of legal, severance, and other one-time costs. For that reason, I'm not worried about the leaner margins, so long as they prove temporary. If pressures persist, we'll need to dig for deeper problems.

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Related Tickers

7/8/2011 4:00 PM
BUCY.DL $92.00 Down +0.00 +0.00%
Bucyrus Internatio… CAPS Rating: *****
AAUK $16.12 Down +0.00 +0.00%
Anglo American CAPS Rating: ****
BHP $34.94 Down -0.08 -0.24%
BHP Billiton CAPS Rating: ***
JOY $27.88 Up +0.01 +0.04%
Joy Global CAPS Rating: ****
PCU $31.38 Down +0.00 +0.00%
Southern Copper CAPS Rating: ****