Joy Global Offers Insight into Commodities Environment: How to Profit

Volatile Mining and Commodities SectorsAs evidence of the difficult times being experienced in the mining industry, Joy Global Inc. (JOY), a Milwaukee-based company that’s one of the top manufacturers of surface and underground mining equipment, reported a double-digit decline in sales, bookings, and earnings.

Commodities and Mining Sectors Struggling

Whether it’s for coal, iron ore, oil sands, copper, gold, or other precious metal, the entire industry is struggling. It’s a tough environment for resource investors.

In its first fiscal quarter of 2015, Joy Global saw its total sales decline 16% comparatively to $700 million, with bookings down 19% from the year-ago quarter and earnings per share halved to $0.24 from $0.48 one year ago.

Company management noted several global trends as reasons for the difficult business conditions.

Obviously, weaker commodity prices were one factor. The company also cited an improvement in European business conditions last year, but this has tapered off and is now stagnant. Joy Global noted strength in the U.S. economy in the second half of 2014, but the business is now facing major headwinds, most notably due to weaker activity in the energy patch.

The company expects U.S. coal production to decline some 50 million tons this year, with U.S. coal exports expected to decline eight percent.

Joy Global significantly reduced its sales expectations and earnings-per-share (EPS) outlook for this fiscal year. The stock just bounced off its 52-week low.

Joy Global Offers Insight into Cyclical Commodities Business

Up until the middle of 2011, Joy Global had been an excellent wealth creator for shareholders, climbing and falling with gold prices. The company’s situation is a good reminder of the highly cyclical nature of the commodities business. (See “Oil Stocks: Top Value Sector for Investors Right Now.”)

But not only are commodity prices volatile and unpredictable in the long run, so are the underlying companies operating within the industry. This is why, over time, it’s worthwhile to only allocate a small portion of an overall portfolio to resources—particularly precious metals, which consistently experience periods of extreme price volatility.

Investing in Precious Metals

Naturally, when the cycle is hot, there’s good money to be made in growing precious metals producers. In recent history, when precious metal prices turned, production costs rose significantly, creating a double-whammy of negative conditions affecting the industry.

There are excellent operators in the gold and silver business, including stocks like Goldcorp Inc. (GG), Silver Wheaton Corp. (SLW), Barrick Gold Corporation (ABX), Yamana Gold Inc. (AUY), and Newmont Mining Corporation (NEM).

But even the rosiest of discoveries or the most plentiful of reserves won’t light a lasting fire under a resource company’s share price unless there is a favorable commodity price environment to go along with it. In many ways, institutions are transient investors within the sector, willing only to jump on the bandwagon—if one exists.

In terms of large-cap speculating in one precious metals company over another, the real bet is still whether the underlying commodity is going to appreciate (or depreciate) in price.

Therefore, speculators within the precious metals sector may just be better served via the two following lower-risk investment strategies: investors may play the sector by speculating in an exchange-traded fund (ETF) or a derivative instrument making an indirect bet on underlying spot prices. With precious metals, the only thing that matters is timing.