Throughout the earnings report, JOYG talks about record demand for equipment and commodities and a limited supply whether due to lower ore grades or delayed mine expansions from the financial crisis. Regardless of the reasons, it appears that mining companies are finally moving forward with plans helping JOYG reach records in bookings and shipments.
Considering that our models are big investors in coal and copper stocks, its always interesting to see their outlook on those markets. They see limited excess mining capacity today and hence see strong fundamentals even in a slower economic growth environment.
Also interesting is not only the data on China restocking, but the increased coal demand expected from Japan and the rest of Asia. Japan is shifting the nuclear volumes to coal and SouthEast Asia is adding some 35 GW of new coal-fired power that will limit their ability to export supplies to China. This all adds up to huge benefits for the recently closed merger between Alpha Natural Resources (ANR) and Massey Energy (MEE). The combined ANR will have major export capacity and the size to be a market driver.
Some highlights from the JOYG PR:
- Second quarter bookings increased 46 percent to $1.5 billion and net sales increased 19 percent to $1.1 billion, compared to the same period last year.
- Operating income of $234 million was 22 percent of sales, compared to operating income of $181 million, or 20 percent of sales, in the second quarter of fiscal 2010. Net income for the second quarter was $162 million or $1.52 per fully diluted share, compared to $120 million or $1.15 per share in the second quarter of last year.
- “As a result of the strong market fundamentals and improved throughput from Operational Excellence, we are able to raise our guidance for the full year and now expect revenues to be $4.1 to $4.3 billion, up from $4.0 to $4.2 billion previously. We expect to get similar operating leverage on the incremental revenues, and therefore are raising our guidance for fully diluted earnings per share, which we now expect to be $5.30 to $5.60, up from $5.10 to $5.40 previously. This guidance does not include costs related to the LeTourneau acquisition. LeTourneau is expected to close by the end of June, and it will be immediately accretive excluding transaction costs and the higher level of purchase accounting charges typically experienced in the first 12 months,” said Sutherlin.
- Power generation in China during the first four months of this year is up 12 percent from last year, and steel production is up 7 percent. Both power generators and steel makers have been reluctant to buy coal at prices that were elevated by the Australian flooding earlier this year, and therefore coal stockpiles have been depleted. The national average of coal stockpiles at power plants in China reached a yearly low of 13 to 14 days of supply in April. These low stockpiles are occurring at a seasonal period in which stockpiles are normally replenished going into the summer cooling season, and this is creating concerns about growing power shortages this summer. In addition, drought conditions in China are reducing hydro generation by 15 to 20 percent, and this should increase coal burn for replacement power generation. Although domestic coal production is up 11 percent year to date in China, this increase is in line with consumption increases and is not enough to reduce imports. As a result, imports are expected to increase for the remainder of the year. There was some evidence of that in April, with coal imports into China up 23 percent from the prior month.
- India’s demand for seaborne coal also remains strong. India plans to double its rate of growth in power generating capacity between 2010 and 2012, with 78 GW planned to come on line during this period. India imported 70 million tonnes of coal last year, and this is expected to grow to 140 million tonnes by 2012.
- Japan is now an additional factor in seaborne coal demand. The damage to nuclear plants in Japan as a result of the earthquake has caused the indefinite shutdown of roughly 7 GW of electricity generation. An additional 6 GW of coal-fired generation is already planned to come on line between 2011 and 2020, and it is likely that previously shuttered coal plants will be reinstated to replace the lost generation from nuclear power. Supply constraints will add further pressure to the seaborne markets. The Southeast Asian countries of Indonesia, Thailand, Vietnam and Malaysia are constructing 35 GW of new coal-fired power generating capacity, and this will redirect more of their seaborne capacity to domestic consumption.
- Copper fundamentals are among the strongest of all commodities. Demand has broadened with recovery in the industrial sector of the developed economies, but China remains the major consumer of global demand. China copper imports have slowed this year, but inventories at the Shanghai Futures Exchange have dropped by half, which indicates that China is going through another cycle of de-stocking. China has a history of moving between periods of de-stocking and re-stocking, and it is expected that re-stocking will return in the second half of this year. In addition, China’s multi-year program to build out the electricity grid in the western provinces is expected to add 20 percent to its copper demand, and overall China demand is expected to grow 7 percent this year.
Disclosure: Long ANR, FCX, PUDA in client and personal accounts. These stocks will benefit from any growing demand in coal or copper. Please review the disclosure page.