By: Rob Wertheimer
Most folks don’t think of CAT as a growth stock these days. We see revenues as bouncing back up to normal, based on a look at major end market histories. But most investors see earnings as a peak, after a ten-year recovery in the broader economy since 2008, and we haven’t had a question on structural outgrowth since roughly 2012.
There is a remarkable ongoing example of growth above global GDP in mining right now, though. Komatsu seems to be reaping more of the opportunity than CAT, but the underlying driver is the point of our note today. So, what’s happening? The degradation and exhaustion of quality mineral resources means more machines are needed to extract minerals.
Indonesian coal is 2-3 percent of global mined value, but almost 20 percent of recent equipment shipments. The country represents 9 percent of the surface equipment installed base. Ten years ago, Indonesia was 5 percent; years of extra spend have raised up the country’s share of the installed base. So, what’s remarkable about that 20 percent? Indonesia produces only 6 percent of global coal, and coal is only 40 percent or so of typical surface mining equipment. In dollars, Indonesian coal is 2-3 percent of global mined mineral value. Equipment spend is 5x or 10x overweight.
It soaks up 20 percent of global equipment because the resource quality is poor and getting rapidly worse. No deposit of coal is perfectly flat under an even surface layer of dirt. Removing the overburden, or waste rock/dirt above the mineral is called stripping. In Indonesia, Komatsu says the strip ratio, or volume of dirt above the coal, was about 5.5 in 2002, and rose to over 10 by 2012, as shipments of mining equipment exploded upward. Coal production more than tripled over that time. To make that tangible, if 2002 Indonesia had 100 trucks hauling coal and 400 hauling the dirt above coal, the tripled production means by 2012 you’d need 300 trucks hauling coal, but 3,000 hauling dirt.
The same thing happens over a slower scale for every mine and mineral in the world. As a former Joy Global CEO noted to us once, nobody ever starts a mine at the deep end. Mining targets the easy, exposed minerals first, then shallow, quality deposits, then deeper and deeper deposits, or more and more remote deposits, both of which are at issue in Indonesia. Copper ore grades were 3% percent in 1980 and under 2% percent now. That’s 3 truckloads for the same output as what used to be 2, and with the demands for copper growing. Gold is more dramatic. The highest grades are on the order of 20 grams per ton, or 0.002%. The average grade is ~1.1 grams per ton, and the average undeveloped resource is 0.66 grams per ton, or a 40% higher equipment need.
Sharp volatility may be a better lens than structural growth, but over time resources do deplete. Indonesia, and other global miners, also seems to have deferred the expensive and non-producing stripping during the industrial downturn of 2012-2016. That helped keep equipment and parts spend below normal, accentuating the trough. And that means more catch-up spend now, and some stranded resources. Time will tell if global miners have done the same, but certainly cash flow was the focus through the difficult past five years.