BHP Billiton Limited (ADR) (BHP), Joy Global Inc. (JOY), Caterpillar Inc. (CAT): What’s Good For Miners Now Is Bad For Mining Equipment Makers

In its second quarter analyst meeting, BHP Billiton Limited (ADR) (NYSE:BHP) noted that demand for mining equipment is low, which generally precedes reduced supply. This is another good sign for currently struggling miners like BHP Billiton Limited (ADR) (NYSE:BHP), but a bad thing for companies like Joy Global Inc. (NYSE:JOY) and Caterpillar Inc. (NYSE:CAT).

A bad year for a good company

BHP Billiton Limited (ADR) (NYSE:BHP) reported weak fiscal 2013 results, with the top line falling about 9% and the bottom line plummeting nearly 30% compared to fiscal 2012. Weak iron ore, coal, and copper prices were the main drags. That said, the financially strong company, where debt makes up just about 30% of the capital structure, has continued to invest and was able to increase production at these businesses.

Moreover, BHP Billiton Limited (ADR) (NYSE:BHP) has refocused around cost savings. In addition to focusing spending on only the most advantageous projects, thus reducing its overall capital spending, it is also working to reduce costs and increase efficiency at existing operations. For example, cost containment actions taken at the company’s Queensland metallurgical coal facility have returned that facility to profitability despite the particularly difficult met coal market right now.

Although a U.S. government inquiry into the company’s business practices is a concern that investors need to watch, BHP Billiton Limited (ADR) (NYSE:BHP) is a relatively low risk option in the mining space. For example, even though fiscal 2013 was a bad year, the company still earned around $2 a share. As supply and demand get back in line, BHP Billiton Limited (ADR) (NYSE:BHP)’s ability to keep investing through the ebb of the business cycle will set it up for solid long-term performance when pricing improves.

More troubled
The industry wide trend toward reducing costs and, for companies with less financial strength, reducing production, however, is bad news for mining equipment companies. That trend has clearly shown up at two big players in the space. Caterpillar Inc. (NYSE:CAT), for example, reported second quarter earnings that were down over 40% compared to 2012. The biggest impact came from a an over 30% drop in sales within the company’s Resource Industries segment—in other words, miners.

And it doesn’t look like things will get any better. The company expects industry wide spending in the mining industry to be down between 5% and 10% this year and as much as 20% next year. This segment is likely to remain a drag on earnings. Notably, the company lowered its earnings guidance for 2013.