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Challenging conditions reflected in Joy Global’s Q3 2014 results

World Coal,

Joy Global, a company that manufactures and services mining equipment for both opencast and underground mining, has seen its earnings affected by the continued downturn in the coal mining industry.

The company reported weaker-than-expected Q3 2014 earnings results and blamed top- and bottom-line misses on a struggling thermal coal landscape. With oversupply of coal that Joy says could last well into 2015, the company has also lowered its full year forecast.

The company reported an increase in bookings for mining equipment of 33% – totalling US$ 923 million. However, consolidated net sales fell 34% to US$ 876 million. Operating profit for Q3 totalled US$ 119 million – compared to US$ 274 million in Q3 2013. Net income came in at US$ 71.3 million for the quarter – a steep 61% plunge compared to the same period a year ago.

Ted Doheny, Joy Global president and CEO, put a positive spin on the earnings statements, explaining that in his view, the company was executing “well in a challenging commodity market environment.”

“We continue to see stability in our core service business and have achieved another quarter of solid cash generation which enabled further progress on our share repurchase programme,” Doheny continued. “Additionally, we are encouraged about the recent acquisition of Mining Technologies International Inc. (MTI) and product development projects that position the company for long-term growth in underground hard rock mining. Overall, we executed according to plan in the third quarter and took several positive steps to advance our business strategy."

Yet the market facing Joy Global is indeed challenging – or, as Forbes put it, “joyless”. The company’s statement cited the geopolitical situation in Ukraine, as well as production cuts in China headwinds as contributing to the decreased earnings. Joy Global also noted “Warm winter weather in Europe along with elevated global coal inventories compounded an already oversupplied seaborne market and have driven prices towards US$ 70/t.”

Back home for Joy Global in the US market, and conditions don’t fare much better: “The US thermal coal market continues to face challenging conditions despite 4% economic growth in the US during Q2,” the company said. “US coal production is still lagging behind last year as depressed prices, cooler than normal summer weather, and decreased export activity has weighed on overall demand.”

The company added: “Despite improving global economic conditions that should drive demand, market dynamics are such that prices for most major commodities remain depressed with marginal upside potential over the near-term. Investments in mining capacity over the last several years will be maximised, leveraged up, or shut down as miners' capital expenditures will be focused on products and services that improve mine productivity and lower costs.”

"Despite the depressed commodity pricing environment and oversupplied markets, our performance remains solid and we continue to see stability in our core service business," continued Doheny.

The company’s CEO said that there were some positives to be found in the Chinese coal market, as miners in the Asian behemoth are increasingly seeking mechanisation and improvement in technologies. He also said that Joy Global would continue to incest in the construction of a new service centre in Russia, which would bring surface and underground repair and rebuild capabilities to the Novokuznetsk region.

Despite Joy Global’s mostly less-than-enthusiastic outlook, others in the industry see a turnaround in sight for the thermal coal. In an industry note titled “like a phoenix, thermal coal rises from the ashes,” Citi analyst Ivan Szpakowski recently wrote, “After a difficult past eight months for coal, we expect prices to rally through year-end. Our bullish view towards the September-December period is not new, but recent developments have only increased our conviction, and we believe that entering September, now is the time to open a position.”

Edited from various sources by Sam Dodson

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