Mining capex is expected to fall 5% year on year in 2014, according to a Citi industry survey, compared to double digit declines for the last three years. Combined with falling commodities production (to provide some much needed price support) this adds to the price risk that the mining equipment and aftermarket sectors are currently facing, and it may even be too optimistic.
“Our own mining capex model (based on >40 mining companies worldwide) points to a 8% Y/Y decline in 2013E, followed by a 12% Y/Y decline in 2014E and 16% decline in 2015E,” write Citi analysts Natalia Mamaeva and Timothy Thein. “We maintain our view that the market still underestimates the extent of downside, especially in 2014E and 2015E as miners are still working through long-lead-time capital projects.”
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Falling mining capex puts pressure on equipment prices
Citi’s survey found that mining equipment prices are expected to fall 1.8% over the next year, compared to the 4.4% decline predicted during the third quarter survey, but there is a limit to the upside. A full 71% of those surveyed said they wouldn’t accept any equipment price increases. Aftermarket spending is expected to creep up by about 1%.
“Sandvik AB (STO:SAND) (OTCMKTS:SDVKY) CEO sees price pressure in both equipment and aftermarket and did not get price increases through as a year ago. Metso Oyj (ADR) (OTCMKTS:MXCYY) (HEL:MEO1V) also alluded to pricing pressure with the overall pricing picture flat (both on equipment and services) with smaller price increases this year than in the past,” write Mamaeva and Thein. “Boart Longyear Ltd. (ASX:BLY) (OTCMKTS:BOARF) indicated CY13 drilling services price pressure is high single-digit and likely to increase in 1H14 given weak rig utilization.”
US mining companies more expensive than Europe, Japan
Mining companies are trading at a PE of 13.6x worldwide, but US companies are the expensive at 16x, compared to 14.1x for European companies and 12.4 for Japanese firms. It’s also important to look into the composition of commodities exposure for each company before deciding where to invest since production growth (and therefore capex and price risk) isn’t uniform across different commodities.
Mamaeva and Thein like FLSmidth & Co. A/S (CPH:FLS) (OTCMKTS:FLIDY) and Electrolux AB (ADR) (OTCMKTS:ELUXY), rating both as Buys, and warn against Atlas Copco AB (STO:ATCO-A) (STO:ATCO-B) and Metso Oyj (ADR) (OTCMKTS:MXCYY) (HEL:MEO1V), which they rate as Sell.