Joy Global (NYSE: JOY ) shares are down over 15% so far this year, as weak mining markets have hampered its top and bottom lines. Fiscal 2013 was a tough one, and next year doesn't appear like it will be much better. However, if you watch mining stocks, it's worth reading a bit deeper into Joy's results to see both the positive and negative trends taking shape.
Copper, a bright spot
In the company's fiscal 2014 conference call, Edward Doheny, Executive Vice President at Joy, stated that "global copper markets continue to see the strongest commodity fundamentals." That's good news for companies like Freeport-McMoRan Copper & Gold (NYSE: FCX ) , Southern Copper (NYSE: SCCO ) , Rio Tinto (NYSE: RIO ) , and BHP Billiton (NYSE: BHP ) . Southern Copper and Freeport-McMoRan both have large copper reserves and notable exposure to the metal. More diversified BHP Billiton and Rio Tinto provide less exposure, but copper still makes up a notable part of each company's business.
Joy expects copper consumption to be up 3.6% in 2013 and highlights a 30% drop in copper inventory levels since the start of the year. And it's still seeing solid demand for its mining equipment out of South America. So, this quartet should be well situated for growth on the copper front as we start the new year.
Iron ore and metallurgical coal
Doheny sees iron ore prices holding, but is quick to point out that "a lot of capacity has been added." So, even though iron ore demand is reasonably strong, with steel production up about 4%, new supply could keep prices weak in 2014. That's bad news for iron ore miners like BHP Billiton and Rio Tinto. Both companies have notable exposure to the steel industry.
In fact, not only does the pair mine for iron ore, but they are also producers of metallurgical coal. Met coal is used in the steel making process. And on that front, Joy's Doheny provides a notable insight: "We know where we put in a lot of our longwall systems around the world. And so we know we have some high productivity, low-cost [met coal] production coming online in 2014."
So while weak met prices are leading to mine closures, new mines could easily make up for that. This, in turn, could keep met coal prices weak in 2014. So while copper is good news for BHP and Rio, iron ore and met could be bad news for the giant diversified miners.
A thermal rebound?
Joy's Doheny believes that thermal coal is "bouncing around the bottom" and sees "some opportunities probably more in thermal coal in the second half of the year." That will be good news for thermal coal focused companies like Cloud Peak Energy (NYSE: CLD ) , but also for more diversified Peabody Energy (NYSE: BTU ) . In fact, even Rio and BHP will benefit from an uptick in thermal coal, since they both have modest exposure to the fuel.
That said, Cloud Peak is the most focused on thermal coal. It operates out of the ultra-cheap Powder River Basin (PRB) in the United States and is working to increase its export business. Peabody, meanwhile, gets about half of its sales from U.S. thermal coal (from the PRB and similarly cheap Illinois Basin) and also mines for thermal coal in its Aussie business. Unfortunately for Peabody, though, it also mines met coal out of Australia. So Joy Global's outlook isn't totally positive for the coal giant.
Doheny notes that "In the last 24 months, we've seen over 25 new CEOs at mining companies take over with a focus on cost reduction and returns to shareholders after years of focus on growth and investment." That's clearly been bad news for Joy's business, but it highlights changes taking place in the mining industry that will, eventually, lead to higher commodity prices again. Right now, copper and thermal coal seem furthest along in the correction process.
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