One specific stock market sector that continues to be very challenging is the precious metals mining area. A combination of events has hit the precious metals producers: lower spot prices and rising costs being two of the main factors. It’s been the perfect storm for gold mining stocks, and the trend isn’t over yet.
And with reduced operating margins comes the big squeeze in capital expenditures. This is no more evident than in the well-known mining equipment company Joy Global Inc. (JOY), which has been under pressure on the stock market for the entire year.
Joy Global is a well-known manufacturer of mining equipment out of Milwaukee, Wisconsin. It’s been around since 1884, and like precious metals themselves, the company’s share price is volatile.
In the company’s latest earnings report for its third fiscal quarter of 2013 (ended July 26), total bookings for underground mining machinery dropped a staggering 42.6% to $361.2 million from $629.2 million in the same quarter last year.
The company reported original equipment orders fell 68%, with declines in all regions except China. Aftermarket orders fell 27%, with declines in all regions except North America. Foreign exchange hurt orders for underground mining machinery, which dropped by $71.0 million, according to the company.
Total revenues in Joy Global’s latest quarter fell five percent to $1.3 billion. As noted by the company’s management team, prices for industrial metals and bulk commodities have dropped 20% to 40% over the last 18 months.
Seaborne coal prices have fallen 17% since the beginning of the year, and China’s domestic coal prices have dropped almost 20%. With this backdrop, Joy Global says that many mines are now uneconomic, which will result in closures. Until there is a “rebalance” in the marketplace, there will be no incentive to invest in new mining capacity.
As you can see, it’s not a great time to be in this industry.
But the flip side to precious metals is oil, with prices strengthening further due to events in Syria. (See “My Two Favorite Picks in the Speculative Oil & Gas Sector.”)
Anything related to resource/commodity investing is always risky. Tides change so quickly in the resource business, and it mostly has to do with spot prices. It very much remains a risk capital stock market sector, even with large-caps.
I would not make the case for considering a company like Joy Global for investment at this time, recognizing that it does have a long history as a mining equipment innovator.
Not surprisingly, Joy Global recently announced a major new share buyback program, which seems to be a given these days when a company announces a weak quarter.
This stock is not expensively priced, and the company pays a dividend with a current yield of 1.3%. But to invest in a mining equipment manufacturer at this stage of the business cycle in precious metals is unwise. Joy Global’s management team did a very good job highlighting the company’s global challenges in its latest earnings report.
Spot gold (and silver) prices have been ticking higher lately due to geopolitical events. But there’s no need to be loading up on mining stocks, especially when the other side of the equation—costs—show no sign of easing.