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Once upon a time there were mining giants. They mined huge amounts of different ores all over the world. In order to get their mining done, the giants needed the help of elves. WRONG STORY! They needed that help of other giants. One of them was a giant Caterpillar. The Caterpillar became very rich and famous by serving the mining giants, but when times were tough for the mining giants, the Caterpillar giant’s took a beating.
Well, we can all see by now that I am neither an Aesop nor a Tolkien. I had better just tell the tale without metaphorical splendor.
Primarily, this story is about the heavy equipment giant, Caterpillar (NYSE:CAT), but, in part, it is also about the mining giant, BHP Billiton (LSE:BLT).
Caterpillar shares lost more nearly five points after releasing its third quarter results this week, dropping 6% from 89.17 to 83.76 on Wednesday. The company reported a 44% decline in Q3 earnings. CAT trimmed its expectations for the full-year EPS from $6.50 to $5.50. CEO Doug Oberhelman indicated that pricing competition was on the increase as demand from the mining industry has waned. The demand for equipment is lower because the demand for mining product is down. Olberhelman said that “Any expansion (of the mining industry) in the near term is dead. It’s over. It’s not going to happen.”
Over at BHP, production increased in each division except manganese year-on-year. However, production was down from the previous quarter in each mining sector except coal, indicating a current trend of the same lower demands that Caterpillar is seeing. CEO Andrew Mackenzie said something so subtle that many observers may have missed it. “Our pursuit of productivity gains and operating excellence is already yielding strong results.” That’s corporate speak for “We are cutting costs in order to remain profitable.” Mackenzie repeated his veiled comments later in his report, saying that “Active management of our portfolio has also delivered significant value for our shareholders.” BHP has cut $2.7 billion in operating cost this year and plans an additional 25% in capex and exploration costs. Shareholders should be pleased, because responding to these difficult times by focusing on operating excellence, productivity gains, and portfolio management prepare the company for greater profitability should market demand increase again. Plus, those activities allow the company to squeeze out some profit during the present conditions.
Oberhelman has to deal with managing the reality that his company’s success is in landing lucrative contracts with mining giants. That’s difficult to do when the demand for ore is down and your competitors are fighting so keep their businesses profitable as well. Brien Lundin, Editor at Gold Newsletter, observed that, “Caterpillar’s earnings are closely related to the health of the commodity markets, as the company is dominant in equipping the mining industry.” He also indicated that, since Caterpillar is a “lagging indicator,” that this might be a good time to watch the mining stocks to determine the best time to invest in CAT.
Finally, in an interesting turn of events, the BBC reported early this morning that CAT if moving forward on a £7 million investment in its manufacturing operations in Northern Ireland, creating 100 new jobs. At the same time, it is closing factories and reducing its workforce elsewhere, including facilities in places like Sudbury, Ontario, the site of one of the world’s largest nickle mining operations.
Having said all that, the biggest takeaway from this story is to watch for investment opportunities in CAT by tracking its stock and by monitoring the mining sector. The assumption is that the mining sector, over all, is going to be stalled for several months, if not years. Regardless of were CAT shares go during that time – and I think they will hold steady, at least in the short term – if the demand for ore increases and miners begin to ramp up production, CAT’s shares are bound to follow.
