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Caterpillar’s results show mining’s recovery still tentative

Caterpillar’s results show mining’s recovery still tentative
Caterpillar's sales are not rising in line with mining share prices

How much of a read is the market really giving us about prospects for mining shares over the next couple of years?

To be sure, share prices have risen strongly in recent months and any punter able to look at a chart can easily identify the bottom the market as having occurred in the period running across late December and early January 2016.

So far, so easy. Share prices in all major mining companies have been on the rise since then, as have those of a good many juniors too.

The feeling is that sellers have at last all been cleared out, the global economy’s still just about in growth in spite of various shocks and stutters along the way, and demand for commodities looks set to rise accordingly.

What’s more, the bear market that’s now passing was so deep that most stockpiles on the supply side have been run down too since, where possible, miners have preferred selling off existing product to incurring the costs of mining completely fresh ore.

That means that while demand for commodities is likely to hold up fairly well over the coming years, supply may be a bit patchier.

But it’s not an even picture across the industry, as iron ore remains in oversupply with the majors still cranking out high-volume low margin operations, there’s a current glut of copper, and sentiment towards nickel remains weak.

It’s in this context that Antofagasta has recently hinted that production is likely to come in at the lower end of guidance this year, and Anglo American’s results came in weaker than had been hoped, due partly to a poor performance at its Kumba iron ore division.

The paradox, of course, is that Antofagasta’s shares have risen by more than 40% this year, and Anglo’s by more than 200%.

That the caution of the commentators and company commentary hasn’t been matched by the behaviour of investors is partly accounted for by the tentatively positive economic outlook, and partly by the recent currency fluctuations involving sterling and the dollar, as the Fed remains hamstrung by Brexit and the likelihood of new stimulus from Japan.

Dollar income is simply worth more, and even if Antofagasta and Anglo are delivering lower output, they’ll nonetheless be earning more for it.

But for those frustrated by the smoke and mirrors of international economics a slightly more down-to-earth assessment of how things really are in the mining industry can be had from its major supplier, bar none.

Caterpillar, the manufacturer of bulldozers, trucks and other equipment that can be used for the breaking down and movement of earth and rock, announced its second quarter financial results on 26th July.

And Caterpillar, for one, is not yet talking of a recovery in the mining sector.

“We’re having success managing through the downturn in industries like mining and oil and gas,” said Cat chairman Doug Oberhelman in commentary accompanying the results.

Indeed, year-on-year Caterpillar’s second quarter profits per share dropped, as sales slipped from US$12.3bn to US$10.3bn.

But perhaps more significantly was Caterpillar’s statement about the future.

“World economic growth remains subdued and is not sufficient to drive improvement in most of the industries and markets we serve,” said Cat’s official statement. “Commodity prices appear to have stabilised, but at low levels. Global uncertainty continues, and the recent Brexit outcome and turmoil in Turkey add to risks.”

In consequence, added Caterpillar, full year results are likely to come in at the lower end of the guidance range.

“We’re not expecting an upturn in important industries like mining, oil and gas and rail to happen this year,” said Cat. On the contrary these industries remain “challenged.” Although when recovery does come, the company continues, it expects that it will generate “substantial incremental profit improvement.”

Having sounded that heavy note of caution though, it is still worth saying that Caterpillar’s current guidance is still in line with expectations, and that as such it ought to be being priced in by the market when it sets the price for miners.

Which brings us back to extraneous factors like currency fluctuations, monetary easing and political risk.

In the end, supply can be made to meet demand, by and large. The question is: at what price, and what’s the money that pays for it all to happen really worth?



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