Mining machinery BERENBERG EQUITY RESEARCH Process plant exposure

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BERENBERG EQUITY RESEARCH
Mining machinery
Process plant exposure
preferable to mining
operations
Alexander Virgo
Analyst
+44 20 3207 7856
[email protected]
Chris Armstrong
Specialist Sales
+44 20 3207 7809
[email protected]
Kaj Alftan
Specialist Sales
+44 20 3207 7879
[email protected]
2 July 2013
Capital Goods & Industrial Engineering
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Mining machinery
Capital Goods & Industrial Engineering
Table of contents
Process plant exposure preferable to mining operations
4
The changing face of mining investment
7
Focus on brownfield investment favours mining equipment
11
Opex budgets favour process plant exposure
16
Equipment characteristics: consumables vs spares and service
20
Assessing portfolio exposure
25
Atlas Copco: Good aftermarket exposure, but fool’s gold?
29
Metso: Grinding a strong position; diamond in the rough
30
Sandvik: Underperformance belies breadth of portfolio
31
Weir: Strongest aftermarket revenue exposure
32
Disclosures in respect of section 34b of the German Securities
Trading Act (Wertpapierhandelsgesetz – WpHG)
33
Contacts: Investment Banking
37
Mining machinery
Capital Goods & Industrial Engineering
Process plant exposure preferable to mining operations
● Investors should seek exposure to mining equipment suppliers with
high exposure to the fast-growing maintenance capex budgets
of the miners. Process plant equipment offers more high-margin
aftermarket business and greater stability than mining
operations. In this light, we reiterate our Buy recommendations on
Metso and Sandvik and highlight Weir as favourably exposed. We
retain concerns over investors’ faith in the robustness of Atlas
Copco’s business. Analysis of feasibility studies and equipment
operating costs supports our preference for process plant exposure.
● Mining capex emphasis shifting fast to maintenance:
Maintenance capex has grown at a 29% CAGR since 2009 and is
expected to grow at a 27% CAGR 2012-14E as capex budgets are
refocused towards maintenance capex and away from expansion
projects. Expansion capex is expected to decline 23% and 38% in
2013E and 2014E. Greenfield investment over the last 5-8 years has
seen significant growth in the installed base of equipment, which
miners now need to optimise and maintain, to the benefit of both
revenue growth and profitability of the original equipment suppliers.
● Shift from greenfield to brownfield expansion more beneficial
for mining equipment suppliers: The likes of Sandvik and Atlas
Copco can still see original equipment orders as brownfield
expansion projects generally focus on extending mining
operations for existing processing plants. Despite brownfield
investment typically being 20-25% of the greenfield capex required for
equivalent mine production, mining equipment procurement can
be similar in absolute terms, reflecting no need for new
infrastructure or process plant.
● Opex budgets favour process plant exposure: High utilisation rates
(90%+) and consequent requirements for equipment availability
(95%+) mean the process plant generally offers more favourable
aftermarket revenue streams for equipment suppliers – Metso and
Weir are best positioned. Process plant equipment on average requires
2x the level of wear parts of mining equipment in normal production,
while spare parts (ie maintenance) are also typically 2x mining
equipment requirements through the life of the mine. Low headcount
and high fixed costs of process plants make mining operations the
first point of focus for miners in terms of cost savings, suggesting
Atlas Copco’s portfolio could actually be at greater risk in the near
term.
● Preference for process equipment exposure supported by
analysis of equipment operating characteristics: Equipment with
the highest ratio of stay-in-business capital (defined as spare parts,
wear parts and replacement capex) to initial capex is the most
attractive from a product portfolio standpoint. Pumps, cyclones and
grinding mills exhibit the best characteristics, favouring Metso
and Weir; Sandvik, too, though to a lesser degree.
● Portfolio assessment points to Weir and Metso as best positioned
in terms of high-margin aftermarket business and exposure to process
plant equipment across balanced minerals exposure. Sandvik benefits
from some exposure to process equipment, while its Systems business
offers stability, albeit at lower margins. Atlas Copco has the highest
product exposure to mining operations, particularly gold, but benefits
from high aftermarket exposure and a broad non-mining portfolio.
4
Atlas Copco AB
Sell
Current price
Price target
SEK 162.50
SEK 165.00
01/07/2013 Stockholm Close
Metso Oyj
Buy
Current price
Price target
EUR 26.09
EUR 38.00
01/07/2013 Helsinki Close
Sandvik AB
Buy
Current price
Price target
SEK 80.90
SEK 115.00
01/07/2013 Stockholm Close
Weir Group plc
Hold
Current price
Price target
GBp 2,187
GBp 2,515
01/07/2013 London Close
Rating system: Relative
2 July 2013
Alexander Virgo
Analyst
+44 20 3207 7856
[email protected]
Chris Armstrong
Specialist Sales
+44 20 3207 7809
[email protected]
Mining machinery
Capital Goods & Industrial Engineering
Summary of key stock exposure and recommendations
Rating
TOP PICKS
Sandvik
 Systems business more robust, but margin-dilutive; 45% aftermarket/consumables
 -22% ytd is worst performance in coverage. Trading on 9x 2014E P/E vs 14x average
Metso
 Among most favourable portfolio exposures: process plant, consumables and spares
 -18% ytd performance. Trading on <10x 2014E P/E; demerger adds to upside potential
Weir
 Mining >50% sales; balanced minerals exposure and best aftersales revenue streams
 Investors still concerned about Oil & Gas. 10% off ytd high; 12x 2014E P/E
Buy SEK115
42% upside
Buy €38
46% upside
Hold 2,515p
15% upside
LEAST PREFERRED
Atlas Copco
 56% aftermarket exposure, of which 23% consumables, but 31% sales to gold
 Still viewed as “safe haven”; question robustness of mining operations exposure
Figure 1: Mining capex is becoming more focused
on optimising, maintaining and sustaining the
recent growth in the installed base
Sell SEK165
2% upside
Figure 2: Process plant equipment captures the
largest share of the operating budgets, with high
levels of spare and wear part requirements
100%
100%
80%
80%
60%
60%
40%
40%
20%
20%
0%
2008
2009
2010
2011
Expansion & exploration
0%
2012 2013E 2014E
Copper
Sustaining
Mining
Iron ore
Process
Coal
Transport
Other
Source: Company data, Bloomberg
Source: Project feasibility studies
Figure 3: Process equipment exhibits the highest
ratios of through-life capital requirements
compared to initial unit cost, which is optimal for
the original equipment supplier
Figure 4: High aftermarket exposure to process
plant equipment combined with balanced mineral
exposure represents the most attractive exposure
from a stock perspective
100%
FLSmidth, Metso, Weir
15 :1
Atlas Copco, Sandvik, Joy, Caterpillar, Metso
Gyratory crushers
13 :1
Sandvik, FLSmidth, Metso
Grinding mill, SAG
13 :1
FLSmidth, Metso, Outotec
Stackers, conveyor
5 :1
Sandvik, Caterpillar, FLSmidth, Metso
Mill drives, gearless
5 :1
ABB, Siemens, FLSmidth, GE
Cyclones
39 :1
FLSmidth, Metso, Weir, KSB, Outotec
Slurry pumps
25 :1
FLSmidth, Metso, Weir, KSB
Electric motors
19 :1
ABB, Siemens, GE
Screens
13 :1
Atlas Copco, Sandvik, Metso,
60%
40%
20%
0%
Systems
Consumables
Aftermarket
Original equipment
Source: Berenberg equity research
Source: Berenberg equity research
5
Coal
Iron
Base
Weir
16 :1
Mobile crushing plants
Sandvik
Cone crushers
100%
80%
60%
40%
20%
0%
80%
Weir
FLSmidth, Metso, Outotec
Sandvik
35 :1
Metso
Grinding mill, rod & ball
Metso
Manufacturer
Atlas
SIB:initial
Atlas
Ratio
Equipment
Copper
PMG
Other
Mining machinery
Capital Goods & Industrial Engineering
Figure 5: Mapping the equipment suppliers’ exposure to the mining processes and their key characteristics
Exploration
Development
Extraction
Materials Handling
Comminution
5% greenfield capital
65% greenfield capital
2% greenfield capital
10% greenfield capital
6% greenfield capital
6% sustaining capex
3% operating costs
Exploration for
mineral resources
- remote sensing
- geophysical test
- samples
- feasibility studies
Drilling & modelling
of the ore body
- selection of right
mining technique
- capital investment
in mine infrastructure
54% sustaining capex
Refining
6% greenfield capital
6% greenfield capital
40% sustaining capex
37% operating costs
Mining of the ore body
- rock breaking
- surface mining
- underground mining
Separation
40% operating costs
Mined minerals transport
to processing site
- loaders, trucks, trains
- conveyor systems
8% operating costs
Materials are crushed &
Flotation, leaching,
ground to achieve grades sedimentation, filtration
- grinders, rollers
- pumps, vortices, cyclones
Refining to increase
mineral concentration
Sandvik (Buy, SEK115)
Atlas Copco (Sell, SEK165)
Boart Longyear (n/r)
Furukawa (n/r)
Komatsu (n/r)
Joy Global (n/r)
Caterpillar (n/r)
Volvo (Buy, SEK116)
Metso (Buy, €38)
FL Smidth (n/r)
Outotec (n/r)
Citic Heavy (n/r)
Terex (n/r)
Weir (Hold, 2,515p)
KSB (Hold, €450)
Sigdo Koppers (n/r)
One Steel (n/r)
GE Mining (n/r)
Citic Heavy
ABB (drives, process automation, plant construction) (Hold, CHF20.8)
Siemens (drives) (Buy, €94.5)
SKF (bearings, condition monitoring) (Buy, SEK185)
85% availability
95% availability
80% utilisation
90% utilisation
Hourly operating cost components (ex operator costs)
MRO parts
MRO labour
Energy
Tyres
Wear parts
Source: Company data; for disclosures, historical price targets and rating changes pertaining to the companies included in this table, please visit our disclosure listing page on our website at: https://www.berenberg.de/cgibin/compliance.cgi?rm=comp_start&lang=englisch
6
Mining machinery
Capital Goods & Industrial Engineering
The changing face of mining investment
Focus on maintenance capex and brownfield expansion
Debottlenecking or expanding existing mining operations is cheaper and more
capital-efficient than starting from scratch, and miners’ capex guidance reflects
a more cautious approach to capital allocation in the medium term than we
have seen since the 2008/09 recovery. Since the middle of 2012, miners have
been returning to an enduring theme of asset efficiency and process
optimisation – brownfield investment.
Top 5 miners: expansion capex (US$bn)
60
50
40
30
20
10
0
2008
2009
2010
2011
2012
2013E 2014E
Total
Anglo American
Xstrata
Rio Tinto
Vale
BHP
Source: Company data inc. guidance
 Significant headwinds for new orders for equipment suppliers but this is well known
The significant investment made in new mining projects over the last 5-8 years
has had a consequent effect on the capital required to sustain that investment,
meaning operating budgets and maintenance capital requirements have
increased. This should provide a larger addressable wallet for equipment
suppliers in terms of aftersales support. Company guidance would suggest
maintenance capex growth of 35% and 24% in 2013E and 2014E respectively.
Top 5 miners: maintenance capex (US$bn)
35
30
25
20
15
10
5
0
2008
2009
2010
2011
2012
2013E 2014E
Total
Anglo American
Xstrata
Rio Tinto
Vale
BHP
Source: Company data inc. guidance
 Positive implications for suppliers with high aftermarket exposure and offering ways to
improve operational efficiency
Capex growth expectations (yoy)
Investors have been focused on the end of the mining super-cycle for some
time, but expectations are now low in terms of capex development. Consensus
is 6-7% below company capex guidance for 2013E/14E, but assuming
scepticism is reserved for expansion plans (and maintenance capex guidance is
accepted), expectations for expansion capex declines in 2013E and 2014E are
more than 20% and 40% respectively.
60%
40%
20%
0%
-20%
-40%
-60%
2009
2010
2011
2012
Expansion & exploration
Top 5 consensus
2013E 2014E 2015E
Sustaining
Global listed capex
Source: Company data inc. guidance
 Consensus expectations for capex growth are already low
Shift from expansion to asset optimisation
With the return of uncertainty to the macro environment, falling commodity prices and
questions being raised in the near term around Chinese growth in particular, miners are
scaling back expansion plans and focusing on maximising the efficiency of their existing
assets. Expansion, where it comes, is being pursued through brownfield investment in
existing assets, rather than breaking new ground in greenfield projects. Maintenance – or
stay-in-business (SIB) – capex continues to grow, driven in part by the significant
investment in expansion and new assets over the last 5-8 years.
Following the huge government stimulus in China in 2010 and the strong rebound in
the resources sector, miners returned to significant capital investment (Figure 6). The
top five1 alone spent over $165bn of expansionary capex over the 2010-12 period. As
the macro environment became more uncertain through 2012 and commodity prices
began to fall, questions were raised over the extent of expansion on the supply side.
Calls from shareholders for tighter capital management have been backed up with
changes in top management at a number of the major miners. Capital allocation has
become focused on reducing the operating cost per tonne rather than developing new
assets.
Greenfield expansion is expensive: it typically requires significant investment in
infrastructure such as roads, railways and ports as well as considerable time spent
building and constructing the mine before it can even begin production. Technical
1
BHP Billiton, Rio Tinto, Anglo American, Vale and GlencoreXstrata.
7
Expansion, where it is
happening, is being pursued
through brownfield projects,
while maintenance capex
continues to grow, servicing an
increased installed base and
targeting asset efficiency
Mining machinery
Capital Goods & Industrial Engineering
reports, pre-feasibility studies, bankable feasibility studies (on the basis of which
“go/no-go” decisions are made) and planning/permitting often taken 3-5 years before
ground can even be broken on a new mine. It might take another 2-4 years before the
first product is shipped from the mine and revenue begins to come in. Brownfield
investment is often less than 20% of the costs of a new mine of equivalent capacity.
SIB investment can be made to optimise the method of mining, from investing in new,
more efficient drilling, loading and hauling equipment, automating the hauling process
(Rio Tinto’s autonomous trucks in the Pilbara save more than AUD100,000 per year,
per truck in driver costs – there are over 150 trucks in the system and drivers are
typically hired on a 2.25:1 ratio to account for double shifts and changeover efficiency)
or shortening the haulage distance (to reduce fuel costs).
On the process side, optimising the crushing system, ensuring correct and efficient
screens are in place and improving the wear life of the plant equipment can considerably
enhance the throughput of the mill circuit and reduce the cost per tonne. Brownfield
and maintenance investment typically sees much quicker payback – often within 12-18
months. Significant recent new mine development has led to an increase in the installed
base of equipment and equipment waiting commissioning, suggesting the requirement
for SIB capex is higher, and miners’ guidance reflects this shift (Figure 7).
Figure 6: Annual capex – top five miners ($m)
Figure 7: Expansion vs maintenance capex
80,000
70,000
60,000
50,000
40,000
30,000
20,000
10,000
0
100%
80%
60%
40%
20%
0%
2008 2009 2010 2011 2012 2013E 2014E
BHP
Vale
Rio Tinto
Xstrata
2008
Anglo American
2009
2010
2011
2012 2013E 2014E
Expansion & exploration
Source: Company data, including guidance
Sustaining
Source: Company data, including guidance
The last three years have seen significant increases in expansion capex, from the top five
miners (Figure 8) and from the mining industry as a whole. Capex grew at a 30% CAGR
from 2009-12, but guidance suggests it is likely to shrink considerably over the next two
years. On the maintenance side, growth since 2009 has also been strong (29% CAGR),
and is expected to continue to develop over the next two years, reflecting the greater
focus on brownfield investment, SIB capex and the larger installed base (Figure 9).
Figure 8: Expansion capex – top five ($bn)
Figure 9: Maintenance capex – top five ($bn)
40
60
30
40
20
20
10
0
0
2008
2009
2010
BHP
Rio Tinto
Anglo American
2011
2012
2008
2013E 2014E
2009
2010
BHP
Rio Tinto
Anglo American
Vale
Xstrata
Total
Source: Company data
Source: Company data
8
2011
2012
Vale
Xstrata
Total
2013E 2014E
Mining machinery
Capital Goods & Industrial Engineering
Much of the focus on brownfield investment is a result of the escalation in costs of both
starting a new project and operating the assets once they are in place. The cost of new
projects combined with the falling commodity prices forces miners to consider new
options for capital deployment and they look for the quicker, more certain returns that
are available from plant optimisation and operational efficiencies.
Figure 10: Capital intensity ($/t)
Figure 11: Mine capital cost escalation (yoy)
Capital intensity - copper
1985-2011 green & brownfield projects
2012-2015 greenfield projects in construction
2016-2020 greenfield unapproved
Xstrata brownfield
Xstrata greenfield
2011 $/t
7,700
14,970
18,600
8,920
13,315
40%
30%
20%
10%
0%
2004 2005 2006 2007 2008 2009 2010 2011
Source: Xstrata
Source: Xstrata
Consensus expectations have already adjusted
Declines in mining capex have been consensus for some time now, though the
magnitude has varied. At the beginning of 2012, consensus expected mining capex to
decline by 9% in the year and actually it ended up growing by almost 20%. Expectations
for 2013E and 2014E have been for around a 7-8% decline in each year for most of the
last 18 months; however, consensus remains, on average, 6-7% below company
guidance (top five miners). Assuming the scepticism is connected with expansionary
rather than maintenance capex, consensus is already discounting significant declines.
The top five miners currently guide for $72bn capex in 2013E and another $61bn in
2014E, which compares to consensus expectations of $68bn and $56bn respectively
(Figure 12). On average, consensus expectations are 6-7% below company guidance for
both years, except for Rio Tinto, with 2014E showing a marginally larger differential
overall (Figure 13). This suggests the capex of the top five miners will decline by
between 17% (company guidance) and 23% (consensus) over the next two years (2014
versus 2012).
Figure 12: Capex guidance vs consensus ($m)
Figure 13: Capex guidance vs consensus (%)
80,000
70,000
60,000
50,000
40,000
30,000
20,000
10,000
0
10%
5%
0%
-5%
-10%
-15%
2013E
2014E
Guidance
BHP
Vale
Rio Tinto
2013E
2014E
-20%
BHP
Consensus
Xstrata
VLE
RTO
Anglo American
XTA
2013E
Source: Company data, Bloomberg
Source: Company data, Bloomberg
If we look beyond the top five at the broader group of listed companies, consensus
expects overall capex to decline 6%/8% in 2013E/14E and 12% in 2015E (Figure 14).
The evolution of that expectation has also not changed significantly in the last 12
months, suggesting that consensus is already bearish on expansionary capex.
We do not know the split in consensus expectations between expansion and
maintenance capex, but it seems more likely that company guidance on maintenance
capex will be taken as accurate, with scepticism largely retained for expansion plans.
9
2014E
AA
Total
Mining machinery
Capital Goods & Industrial Engineering
This implies consensus is even more bearish on expansionary capex than the overall
data would imply (Figure 15).
Figure 14: Consensus mining capex growth
Figure 15: Implied consensus capex ($m)
60%
80,000
70,000
60,000
50,000
40,000
30,000
20,000
10,000
0
40%
20%
0%
-20%
-40%
-60%
2009
2010
2011
2012 2013E 2014E 2015E
2008 2009 2010 2011 2012 2013E 2014E
Expansion & exploration
Sustaining
Top 5 consensus
Global listed capex
Expansion & exploration
Source: Company data, Bloomberg
Sustaining
Source: Company data, Bloomberg
Considerable number of projects approved but yet to start
Just because commodity prices have softened, it does not mean miners will
automatically take a hatchet to all expansion plans. New approvals are unlikely, but it is
worth noting that there is a considerable pipeline of projects which have been approved
but which have outstanding capex expected to be spent in the coming years (Figure 16
and Figure 17).
Typically, if a “go/no-go” decision has been taken following extensive feasibility studies,
long lead-time equipment and capital commitments have already been made to the
extent that cancelling or changing them would incur considerable cost. But recent news
articles suggest that if the commodity prices fall far enough, miners are willing to change
projects already in process. Barrick Gold has recently announced it is rescheduling and
slowing down construction of the Pascua-Lama mine in Chile and Argentina. In this
particular instance, ore is now expected to be available from Chile by mid-2016 (as
opposed to H2 2014 originally), so Barrick Gold is also rescheduling construction of the
processing plant in Argentina. It is worth emphasising it has not cancelled the project
outright.
Figure 16: Rio Tinto: approved project capex vs
remaining spend ($m)
Figure 17: Vale: approved project capex vs
remaining spend ($m)
25,000
40,000
35,000
30,000
25,000
20,000
15,000
10,000
5,000
0
20,000
15,000
10,000
5,000
0
Iron ore
Copper Aluminium
Approved
Other
Iron ore
Remaining
Copper
Approved
Source: Company data
Source: Company data
10
Coal
Remaining
Other
Mining machinery
Capital Goods & Industrial Engineering
Focus on brownfield investment favours mining equipment
Mining operations often capture more of brownfield
investment; maintenance benefits both mining and process
Mining operations (drills, shovels, trucks etc) often account for more of the
budget for brownfield investment, when expansion plans are driven by the
need to sustain throughput for existing processing plants. Mining operation
capex also tends to continue beyond the initial outlay, as truck fleets etc are
built up, whereas the process plant is built prior to production commencing.
Capex budget: greenfield vs. brownfield
100%
80%
60%
40%
20%
0%
Copper
Iron ore
Greenfield
Contingency
Indirect costs
Process
Copper
Brownfield
Owner costs
Infrastructure
Mining
Source: Project feasibility studies
 The current focus on brownfield investment is more likely to favour mining equipment
suppliers, particularly hauling and conveying, rather than process equipment suppliers
Moving underground generally requires more mining equipment and
infrastructure investment in both greenfield and brownfield projects. If the
underground mine is a development of an existing open pit mine site, then the
process plant is already in place and virtually all the capital is allocated to
mining equipment and bulk material handling systems.
Capex budget: greenfield vs. brownfield
100%
80%
60%
40%
20%
0%
Open pit
Owner costs
Infrastructure
Mining
U/ground
Indirect costs
Process
Source: Project feasibility studies
 Large-scale brownfield capex can still generate new equipment orders for suppliers such
as Atlas Copco, Sandvik and Caterpillar
Vale 2013 SIB capex composition (US$m)
SIB capex can take a number of forms and appears to focus as much on
equipment replacement as it does on operational enhancements. Projects can
be very specific (replacement or addition of a ball mill, for example) or
focused much more generally on process systems and infrastructure.
 Companies that can offer quick payback on upgraded equipment or which can help
capture process efficiency savings should benefit from this trend; eg Weir, Metso, ABB
3000
2500
2000
1500
1000
500
0
Other
Iron ore
Base metals
Coal
Equipment replacement Ops enhancement
Source: Company data
Focus on brownfield changes the dynamics for equipment demand
The nature of brownfield investment, focused on sustaining and developing existing
mine sites, means infrastructure and overheads account for less of the budget and more
of the capital is focused on equipment, particularly mining equipment.
Figure 18: Greenfield copper investment split
Mining
Process
Infrastructure
Indirect costs
Owner costs
Contingency
Figure 19: Brownfield copper investment split
Mining
Source: Project feasibility studies
Process
Infrastructure
Source: Project feasibility studies
Brownfield capex might be some 20% of the cost of greenfield investment, but the
proportion allocated to equipment could be 50% in mining operations and another 2025% in the mill circuit.
We have examined feasibility studies, which are conducted for up to three years prior to
the “go/no-go” decision on a new mining investment, to understand where the capital is
11
Indirect costs
Mining machinery
Capital Goods & Industrial Engineering
allocated across different types of mine (open pit versus underground), different
minerals (copper, iron ore, coal) and different levels of investment (greenfield versus
brownfield).
Starting with copper, the difference in scale between greenfield and brownfield
investment is clear from the data in Figure 20, and underpins the data displayed in the
pie charts in the previous two figures. The annual production intended at each of the
three greenfield projects cited here ranges from 300ktpa to 84mtpa (thousand or million
tonnes per annum), and initial investment is between $5.5bn and $6.5bn. By contrast,
brownfield investment in the two projects examined came to less than $1bn. What is
most striking from a mining equipment supplier’s perspective (such as that of Atlas
Copco or Sandvik) is that the capex budget allocated to mining equipment in brownfield
projects can in some cases exceed a greenfield opportunity (compare the first US project
to the Alaskan and South American projects in Figure 20).
On the process equipment side, the proportion of the capital outlay allocated does not
appear to change significantly (about 25%), which means brownfield investment does
not necessarily favour process equipment suppliers. However, miners do not need to
undertake feasibility studies on the same scale to add a grinding circuit, optimise a
process plant or invest in concentration plants as they would when looking to break new
ground and develop new mining operations.
2012 capex by mineral
Sources: McKinsey
Figure 20: Sample copper mine capex budgets ($m)
7,000
6,000
5,000
4,000
3,000
2,000
1,000
0
Mongolia
Alaska
Greenfield
Contingency
Indirect costs
Process
S America
US
US
Brownfield
Owner costs
Infrastructure
Mining
Source: Project feasibility studies
Looking at iron ore projects, a similar picture emerges to that described above for
copper. Mining equipment can account for almost double the proportion of the budget
for brownfield iron ore projects (Figure 22) compared to greenfield (Figure 21). On the
process side, again, proportions remain relatively similar. A process plant is designed for
a certain level of throughput, and brownfield investment typically involves expanding
the mining operations to sustain that level of design throughput for the existing plant.
Only if the expansion plans are likely to significantly improve the output of the mine
would the miner consider adding to the mill circuit. Instead, brownfield investment
from a process standpoint focuses more on plant optimisation, ensuring equipment is
up to date, well maintained and operating efficiently. This capital is smaller and
frequently related to the operating cost budget, which we will discuss in greater detail in
the next section.
12
Despite a smaller overall
capital outlay, more of a
brownfield project’s capital
can be allocated to mining
equipment,
favouring
suppliers such as Caterpillar,
Komatsu, Atlas Copco and
Sandvik
Mining machinery
Capital Goods & Industrial Engineering
Figure 21: Greenfield iron ore investment split
Figure 22: Brownfield iron ore investment split
Mining
Process
Infrastructure
Mining
Process
Indirect costs
Owner costs
Contingency
Indirect costs
Contingency
Source: Project feasibility studies
Source: Project feasibility studies
The iron ore projects for which we found details were smaller in scale than the copper
projects examined earlier, but still provide a good cross-section (although we could not
find sufficient details on brownfield projects). From a greenfield perspective, the
process plant for iron ore projects accounts for a much larger share than mine
equipment (compared to copper) in the projects we examined. The intended production
of each project ranged from 10mtpa to 68mtpa (Figure 23). Mining equipment budgets
appear largely to vary in proportion to the scale of the project.
Figure 23: Sample iron ore mine capex budgets ($m)
3,500
3,000
2,500
2,000
1,500
1,000
500
0
S Africa
Finland
Contingency
Indirect costs
Process
Australia
Canada
Greenfield
Owner costs
Infrastructure
Mining
Source: Project feasibility studies
Moving underground certainly favours extraction and haulage
Coal was the only mineral for which we were able to obtain good comparable details for
both open pit and underground mining projects. Moving mining operations
underground is intuitively a more expensive business than open cast mining, and the
project data we found supports this intuition. In fact, for the projects we looked at, the
mining equipment share of the capex budget essentially doubled with underground
mining (Figure 24).
Looking at brownfield investment for underground coal operations shows mining
equipment accounting for up to 50% of the capital outlay, with process plant investment
accounting for 20-25% (Figure 25). The reasons for this have been discussed with
respect to iron ore and copper, but the additional factor is that coal tends to be much
harder and more abrasive to mine, so the equipment required at the mine face has to be
able to cope with the harsher environment, which inevitably means greater expense per
unit.
13
Infrastructure
Mining machinery
Capital Goods & Industrial Engineering
Figure 24: Greenfield coal investment split
Figure 25: Brownfield
investment split
underground
coal
100%
80%
60%
40%
20%
0%
Open pit
U/ground
Mining
Process
Infrastructure
Indirect costs
Owner costs
Source: Project feasibility studies
Mining
Process
Infrastructure
Indirect costs
Owner costs
Source: Project feasibility studies
Mining equipment capex is concentrated on trucks
The bulk of the cost in mining operations lies with the loading and haulage system,
whether that is traditional shovel and truck operations or in-pit crushing and conveying
(IPCC). As can be seen from examining the equipment procurement list for the two
largest projects we examined – the new copper mine at Oyu Tolgoi in Mongolia and the
potential Pebble mine, also copper, in Alaska (Figure 26) – over 50% of the capex
budget for mining equipment lies with trucks, and another 10-20% with shovels. A good
proportion of the balance lies with ancillary trucks, excavators, dozers and graders, with
perhaps 5% associated with drills. This mix is relatively consistent if we examine
brownfield expansion projects as well.
Figure 26: Composition of mining equipment
spend at two open cast copper mines ($m)
Mining
equipment
capital
outlay
is
dominated by trucks and
loading equipment –
favouring
Caterpillar,
Komatsu and Joy Global
Figure 27: Composition of process plant
procurement at Oyu Tolgoi and Pebble ($m)
500
400
300
200
100
0
600
400
200
0
Oyu Tolgoi
Pebble
Oyu Tolgoi
Pebble
Drills
Shovels
Crushers
Mills
Trucks
Ancillary trucks
Flotation circuit
Pumps & cyclones
Excavators
Other
Drives
Other
Source: Company data, feasibility studies
Source: Company data, feasibility studies
Looking at the composition of the process plant at both projects shows a much more
fragmented bill of materials (Figure 27). Typically, the cost of building a new process
plant is about equally weighted between procurement, steel and labour. The individual
equipment – such as crushers, mills, pumps and drives – can still be expensive (primary
crushers or semi-autogenous grinding (SAG) mills can cost $15m or more) but there are
fewer of them; or in the case of pumps and drives, there can be high volumes, but prices
are below $1m each.
The initial outlay on mining truck fleets may be relatively limited (to, say, 10-12 trucks)
and the fleet is built up over time, whereas the process plant has to be finished and
commissioned before product can be shipped from the mine. This means that mining
equipment capex can be extended over a longer time period and delivery schedules can
14
Process plant bill of
materials is much more
fragmented and the more
expensive items are fewer
in volume
Mining machinery
Capital Goods & Industrial Engineering
provide good visibility for the equipment suppliers. Process equipment is generally
associated with longer lead times and takes longer to deliver and install.
Because of the size of the outlay on trucks and the cost of transporting the ore to the
mill circuit, the option of IPCC systems is being considered. This generally includes a
semi-mobile crusher and then long conveyor belt systems to transport the crushed ore
to the mill circuit; however, IPCC systems tend to be suitable only if the crusher can
stay in place for extended periods of time – moving it and the associated conveyor belts
is expensive (can be over 30% of initial capex).
Sustaining capex focuses on both equipment replacement and
operations enhancement
Examining specific examples of sustaining capex shows that the replacement of
equipment and operational enhancement are the two main drivers, both of which offer
scope for equipment suppliers to generate orders in a market where overall capex is
declining.
Vale’s main initiatives for its sustaining capex in 2013 have been summarised in Figure
28. The company is expecting to spend $2.4bn on projects in iron ore, of which $600m
is allocated to operational enhancements and c$1bn is allocated to equipment
replacement, or 25% and 40% of the total respectively. For base metals, Vale expects to
spend $1.4bn in sustaining capex this year, of which 35% is on operational
enhancements and 15% on equipment replacement. Clearly, the various allocations are
driven by the needs of the assets in operation in those minerals, but it is helpful to think
about the magnitudes of investment that will be undertaken even in a declining capex
environment.
Freeport McMoRan (FCX) has been even more specific about its brownfield
development projects (Figure 29), illustrating how the lines are somewhat blurred
between brownfield and maintenance, but the combined investment of c$7bn is
expected to increase production by over 40% (from 2012) by 2016. The sulphur dioxide
furnace rebuild would fall more into maintenance or SIB capex, but is expected to
increase annual copper production at the Tenke mine by 50% as it also includes the
addition of a second sulphuric acid plant. The Cerro Verde project earthworks are a
more typical brownfield investment, focused on adding 600m lbs (from c400m lbs
currently) to annual production by developing new open pit mining operations for the
existing plant.
Figure 28: Vale: focus of sustaining capex ($m)
Figure 29: Freeport McMoRan brownfield
investment to 2016 ($m)
3000
5000
2500
4000
2000
3000
1500
2000
1000
1000
500
0
Sulphur
Dioxide furnace
0
Iron ore
Ops enhancement
Base metals
Coal
Equipment replacement
To date
Other
Source: Company data
Earthworks
Outstanding
Source: Company data, feasibility studies
The last brownfield investment project for FCX flies in the face of the brownfield
project analysis conducted earlier in the section as it is totally focused on adding a new
ball mill and flotation circuit to the existing plant at the Morenci mine, which will
increase production by c50%.
15
Ball mill
Mining machinery
Capital Goods & Industrial Engineering
Opex budgets favour process plant exposure
Operating budgets favour suppliers exposed to the process
plant, due to high utilisation rates and availability needs
Although the proportion of operating costs associated with mining operations
and processing appear similar, the reality is that fuel and labour account for
the greatest portions of the operating budget. Longer life, greater utilisation
rates and higher availability requirements make process equipment more
appealing in terms of both consumables and spares exposure.
 This favours Weir and Metso over Atlas Copco and Sandvik within our coverage
Typical operating costs by process
100%
80%
60%
40%
20%
0%
Copper
Mining
Process
Iron ore
Transport
Coal
Other
Source: Project feasibility studies
universe, with their greater exposure to the mill circuit
Mining operation costs are driven by fuel, labour and a concentration of large
equipment with high initial costs. Draglines, shovels and trucks have high
initial costs and expensive annual maintenance, while the consumables
component associated with drilling and loading is relatively low.
Mining process: operating cost breakdown
100%
80%
60%
40%
20%
0%
Copper
 High headcount (equipment operators) and intensive maintenance schedules offer scope
for cost savings. Consumables are a relatively low proportion of the budget, which means
price sensitivity should be low
Process costs are characterised by high energy demands but maintenanceintensive equipment that is required to run at 95% availability to sustain 90%
utilisation rates. The expense incurred in not running at design capacity or
switching on and off tends to mean cost savings are sought elsewhere.
Coal
Hauling
Haulage support
Loading
Blasting
Drilling
Other
Source: Project feasibility studies
Processing: operating cost breakdown
100%
80%
60%
40%
20%
0%
Copper
 Underlines the strong positioning of the portfolios of Weir and Metso
Iron ore
Coal
Energy
Labour
Consumables - mech
Consumables - chem
Repairs
Other
Source: Project feasibility studies
Energy costs mask true share of operating costs; availability is key
Although clearly the mineral, the grade, the mining system, the location and many other
factors affect the set-up of a mine, the operating budgets for mining operations and
process operations appear relatively similar (Figure 30), except when mining operations
are underground. However, energy and labour (operation and maintenance) account for
more of the costs of mining operations than they do for processing.
Figure 30: Typical operating budget split (open
cast mines)
Figure 31: Operating cost per tonne ($/t) and
proportion of life of mine costs (copper mine)
30
25
20
15
10
5
0
100%
80%
60%
40%
20%
0%
Copper
Mining
Process
Iron ore
Transport
Coal
Other
Source: Project feasibility studies
Source: Project feasibility studies
High utilisation rates in the process plant, which demand higher equipment availability,
drive a different mix of operating costs within the process plant. With coal, the harder
16
40%
35%
30%
25%
20%
15%
10%
5%
0%
Mining machinery
Capital Goods & Industrial Engineering
and more abrasive environment means the mining process accounts for a greater
proportion of the costs, while for copper and iron ore the material needs to be
processed (rather than washed, as with coal) and refined before it can be shipped,
meaning the process costs are a greater proportion of the operating budget. Labour and
transport of the product to port clearly also command a reasonable share of the
operating costs.
Looking in more detail at some of the components of the Pumpkin Hollow copper
project in the US, which has both open pit and underground operations, the cost of
underground mining is some 5-6x more than open pit, though in this case the lower
volumes mined underground mean the latter accounts for a lower proportion of costs
than the open pit operations through the life of mine (LoM; see Figure 31). On a per
tonne basis, therefore, the process and mining costs are still relatively similar.
One critical element where the processing and mining do differ, though, is in utilisation
and availability. The former represents the utilisation rates of the equipment – essentially
how many hours a year it operates. Typically, mining equipment operates on a 12-hour
shift basis, with two shifts a day, and for 350-360 days a year, to account for holidays,
weather and scheduled maintenance, which implies utilisation rates of c80%. A process
plant operates 365 days a year, 24 hours a day, and utilisation rates are typically 90%.
Availability is defined as whether a piece of equipment is serviceable and able to be
used. The higher utilisation requirements in process plants mean the equipment has to
run at c95% availability, while mining equipment tends to run at availability rates of
c85%. The expense of unscheduled failure in the process plant (where the feed is
relatively constant and the rest of the plant has to stop) is much greater than if, perhaps,
a drill or truck is non-operational for slightly longer than anticipated. The stockpile of
ore-to-be-processed provides a buffer between the mining operations and the process
plant.
Intuitively, this means process plant equipment is more critical from a maintenance and
uptime standpoint, which should favour the equipment suppliers most exposed to it,
such as Weir and Metso.
Opex budgets of mining operations dominated by fuel and labour
The most striking (and again, somewhat intuitive) conclusion from examining the
detailed cost components of the operating budgets is that energy is the largest cost,
whether in the form of electrical drives to run the shovels or diesel to run the trucks.
Spares (6% of costs) and maintenance (25%) are clearly important components of
mining operating costs, but labour and other overheads also account for meaningful
proportions (Figure 32). Our research suggested that there is scope to lengthen
maintenance schedules, shorten shifts and cut headcount in mining operations as a way
of mitigating price declines in the refined product. This has been confirmed by recent
announcements in the Australian mining sector, with GlencoreXstrata, Peabody and
Aquila announcing a combined 1,000 job cuts as well as production reductions in the
last couple of weeks.
Looking at the mining operations in a different way, and breaking the costs down by the
different operations (Figure 33), we can see that haulage (ie trucks) accounts for the
largest share of the costs, driven by the fuel required. Drilling (4-5% of operating costs)
is a relatively small proportion, though clearly has a high proportion of consumables
associated with it.
Mining equipment life, as we shall see in the next section in more detail, varies between
12,000 and 72,000 hours (or c2-6 years) before full rebuild is required, though this
depends on the individual mine characteristics, abrasiveness and hardness etc of the ore.
Scheduled maintenance typically happens once a year, where the equipment may be out
of use for up to a couple of days. Mines employ maintenance personnel specialising in
some of the more complex equipment, typically employing 1-2 maintenance engineers
17
Mining machinery
Capital Goods & Industrial Engineering
for every 2-3 operators (Pebble plans for 1:1 operators:mechanics in open pit
operations), as the labour content of the maintenance costs of these machines is also a
large component of the operating costs (Figure 32).
Figure 32: Components of mining operating
costs for typical open cast mines
Figure 33: Components of mining operating
costs showing haulage, drilling, blasting etc
100%
80%
60%
40%
20%
0%
100%
80%
60%
40%
20%
Copper
0%
Copper
Iron ore
Coal
Coal
Hauling
Haulage support
Blasting
Other
Energy
Spares
Maintenance
Loading
Explosives
Labour
Other
Drilling
Source: Project feasibility studies
Source: Project feasibility studies
The one element our cost analysis has excluded, as the costs vary significantly by region,
is the cost of actually operating the equipment – the operator him, or her, self. Most of
the mining operations, excluding Rio Tinto’s autonomous truck operations in the
Pilbara, are still manually executed, with a typical ratio of between two and three
operators per machine, to account for double shifts, illness and accidents. This
additional labour cost (and it could be AUD100,000/head) is a key difference with the
processing costs, where fewer personnel are required to run, monitor and maintain the
plant.
Our conversations with mine operators during the course of this research suggest that
drilling operations may continue if the loading and hauling operations slow, particularly
in underground mining. However, generally we believe mining operations are slowed,
and stockpiles run at lower levels to enable the mine owner to maintain the process
plant at optimal rates while reducing operating costs overall, as evidenced by the recent
headcount reductions in the Australian coal-mining business.
Processing operating costs driven by high availability requirements
Energy is also a large component of process plant operating costs, but the critical items
remain the consumables, both mechanical and chemical, and the maintenance (Figure
34). Process plants are generally run 365 days a year, 24 hours a day, and so utilisation
rates are 90% or higher, requiring high levels of equipment availability (Figure 35).
Figure 35: Comparison of availability and
utilisation rates for mining and processing
Energy
Labour
Consumables - mech
Consumables - chem
Repairs
Other
Mining equip.
Source: Project feasibility studies
Source: Project feasibility studies
18
Availability
Coal
Utilisation
Iron ore
Utilisation
Copper
400
390
380
370
360
350
340
Availability
100%
95%
90%
85%
80%
75%
70%
100%
80%
60%
40%
20%
0%
Process equip.
Days used/yr
Figure 34: Components of process operating
costs for different minerals
Mining machinery
Capital Goods & Industrial Engineering
While all assets are better operating than not, from a cost effectiveness standpoint,
process plants have such a high fixed cost base that generally the optimal situation for
them to be generating the best cost per tonne milled or processed is for them to be
operating at design capacity. Coal plants, which generally simply wash the product, are
perhaps the exception to this, but iron, copper, gold and other metals where there is a
continuous process make it difficult to vary either the speed or the volume of the
process, which would generally require a similar energy input almost regardless of the
volume throughput. The energy saved by running a mill slightly slower is insignificant
compared to that required to overcome the inertia in stopping and starting.
In running the plant, consumables take different forms, all of which provide a more or
less continuous stream of aftermarket business for the equipment suppliers:

grinding media inside the mills (steel rods, balls etc), the use of which is driven
by the abrasiveness of the ore and the throughput of the mill;

liners for the inside of the mills and slurry pumps, which are also subject to the
abrasiveness of the ore and the plant throughput; and

chemicals (flocculants), which are used as catalysts or reagents in the refining
process and which are also calculated on a per tonne basis.
On top of this is the cost of maintaining and repairing (both scheduled and on an ad
hoc basis) the equipment to ensure the high availability and utilisation rates are
sustained. The manpower required to implement, monitor and sustain the plant is much
lower, per tonne processed and in absolute terms, than that required for the mining
operations – the employee base associated with the processing operations of an
integrated copper mine and plant, processing perhaps 70,000 tonnes per day, might be
less than 15% of the manpower required to drill, load and haul the required feed
tonnage of ore. The Alaskan Pebble project plans for over 500 open pit operations
employees (50:50 operators:mechanics) compared to c75 process plant personnel.
Our examination of the cost saving plans of the major miners and our conversations
during the course of this research show that there are certainly savings to be made in
terms of negotiating with suppliers of consumables, running lower inventories and
ensuring automation is used where possible. However, the scope for making immediate,
and reversible, savings in the processing plant is more limited compared to the mining
operations, supporting our thesis that the more defensive exposure lies here rather than
closer to the mine face.
19
Mining machinery
Capital Goods & Industrial Engineering
Equipment characteristics: consumables vs spares and service
Longevity of service, high requirements for consumables,
spares and maintenance favour process equipment
Mining equipment demonstrates lower spare and wear part requirements as
a proportion of the overall operating costs, though this can be higher for
individual pieces of equipment. The serviceable life tends to be shorter.
Generally, the ratio of capital required to operate the equipment over its
serviceable life is lower compared to process equipment.
Mining equipment: characteristic ranges
60%
120
50%
100
40%
80
30%
60
20%
40
10%
20
0%
0
4,000
3,500
3,000
2,500
2,000
1,500
1,000
500
0
Life (hrs)
Spare parts Wear parts
Op cost ($/hr)
Source: InfoMine
 Much of the operating cost is associated with fuel and energy, while there is also the
cost of the operator to consider. Higher individual capital cost makes mining equipment
more vulnerable in periods of declining expenditure
Process equipment tends to have longer serviceable life, but requires high
volumes of spare and wear parts and frequent maintenance to deliver that
life and operate throughout it. This translates to a higher ratio of throughlife costs to initial capital cost per unit compared to mining equipment.
Process equipment: characteristic ranges
60%
120
50%
100
40%
80
30%
60
20%
40
10%
20
0%
0
Spare parts Wear parts
4,000
3,500
3,000
2,500
2,000
1,500
1,000
500
0
Life (hrs)
Op cost ($/hr)
Source: InfoMine
 Long life and high aftermarket content offer more stable, high-margin aftermarket
revenue streams for equipment suppliers
High spare and wear part content favours process plant equipment
Having examined in detail the characteristics of the operating budgets, we now look at
the individual equipment operating costs to assess the most appealing in the current
environment of restrained capital spending and investor concerns around the robustness
of the respective aftermarket businesses of the equipment suppliers. We conclude that
the preference should be for exposure to process plant equipment, driven by the high
spare and wear part content and the high availability and utilisation rates.
The key components of hourly operating costs are – excluding the operator,
maintenance parts and labour (we have aggregated the scheduled and ad hoc for ease) –
energy and then tyres and wear parts. The latter two categories are only relevant for
some types of equipment, while excluding the operator costs means we are comparing
like with like across the different processes.
From Figure 36 it is clear that the equipment with the higher content of parts and wear
parts sits, to the right of the line, in the processing plant (crushers, mills, pumps and
cyclones), while the equipment with the most favourable characteristics from an
aftermarket standpoint in the mining operations are the drills, particularly the
underground and continuous ones.
Figure 36: Key components of hourly operating costs (excluding operator)
Wear parts
Tyres
Energy
MRO labour
Source: InfoMine
20
MRO parts
Cyclones
Pumps
Mills
Crushers
Conveyors
Trucks
Loaders
Tunnel boring
machines
Roof bolters
U/ground
continuous
miners
Surface
continuous
miners
Underground
drills
Surface drills
100%
80%
60%
40%
20%
0%
Mining machinery
Capital Goods & Industrial Engineering
Mining equipment: pick your spot carefully for aftermarket business
Our analysis suggests that while mining equipment can be very expensive and may
require high levels of sustaining capital (the capital required to rebuild or replace the
equipment) and operating costs, the aftermarket opportunity associated with the initial
sale can vary from low (eg draglines) to relatively high (eg shovels or tunnel boring
machines).
Assuming a mine life of 30 years, we calculated the initial capital cost, sustaining capital
cost and operating capital cost (the latter two combined to define stay-in-business
capital, or SIB capital) on a per unit basis for each of the key pieces of equipment in
mining and process operations. We then compared the ratio of SIB capital to initial
capital on a per unit basis to establish the SIB ratio, to identify what equipment
generated the most attractive aftermarket sales opportunity (Figure 37). Using the
feasibility studies we have examined, mining operations are typically modelled on 350360 days per year, two shifts of 12 hours each, with 80% utilisation rates and 85%
equipment availability, resulting in c5,700 hours of operation per year, or 171,000 over a
30-year LoM.
Items of mining equipment with the most appealing SIB ratios are drilling rigs and
continuous mining machines (including tunnel boring machines), while shovels and
backhoe excavators also demonstrate appealing aftermarket characteristics.
Figure 37: Mining operations: SIB capital vs initial capital
Capital invested ($m)
Initial
Underground loaders (LHDs)
Shovels, hydraulic
Sustaining
Operating
Ratio
Total SIB SIB:initial
1.9
14.3
12.7
27.0
14 :1
15.9
117.0
62.3
179.3
11 :1
Continuous miners, u/ground
3.2
13.8
22.1
35.9
11 :1
Roof bolters
1.4
7.7
8.8
16.5
11 :1
19.0
48.3
162.5
210.9
11 :1
3.0
17.0
13.2
30.3
10 :1
Tunnel boring machines
Rotary blasthole drill rigs
Continuous miners, surface
4.9
20.1
29.6
49.7
10 :1
17.0
124.7
40.2
164.9
9 :1
Bucketwheel excavators
7.1
25.1
31.1
56.1
7 :1
Wheel loaders
7.7
44.0
14.9
58.9
7 :1
Shovels, cable
Backhoes, hydraulic
23.0
94.6
32.9
127.5
5 :1
Underground ore & coal haulers
1.6
3.8
4.6
8.4
5 :1
Draglines, crawler
5.5
12.5
12.1
24.5
4 :1
Trucks, rear-dump (40t-400t)
Draglines, walking
6.5
17.8
11.8
29.6
4 :1
184.5
279.6
243.9
523.5
2 :1
Source: InfoMine, Berenberg equity research
Mining operations encompass some of the largest pieces of mechanical equipment
manufactured and the operating costs are of similar magnitude, with the likes of
draglines, hydraulic shovels and large-scale hydraulic backhoe excavators costing $2,000
to $3,000 per hour to operate (excluding the actual operator!). The smaller equipment
generally costs less than $500 per hour to operate (Figure 37).
Spare parts and wear parts, on average, account for c25% and 5% respectively of
operating costs, though this does vary by equipment, sometimes significantly. A drill or
continuous miner will require 10-12% of the hourly operating costs allocated to wear
parts and also figures highly (35%+) in terms of spare part requirements. The larger
equipment may also generate 5x to 6x the initial capital cost in maintenance labour costs
over the life of a mine, suggesting that suppliers which can improve this aspect of the
21
Mining machinery
Capital Goods & Industrial Engineering
operational performance of their equipment will be offering considerable cost saving
potential to their customers.
Figure 38: Mining equipment: key operating cost characteristics
3,000
Op cost ($/hr)
2,000
1,000
0
120
100
80
60
40
20
0
Life (hrs)
50%
40%
30%
20%
10%
Wear parts
Dump trucks
Wheel loaders
Roof bolters
Rotary blasthole
drill rigs
Backhoes,
hydraulic
Draglines,
crawler
Shovels,
hydraulic
Continuous miners,
surface
Bucketwheel
excavators
Shovels,
cable
Continuous miners,
u/ground
Draglines,
walking
0%
Spare parts
Source: InfoMine
Process equipment: longevity and high SIB capex appeal
Using the same simple assumptions to calculate the SIB ratios for process equipment
shows a considerable advantage from an aftermarket perspective for suppliers of
equipment into the process plant. The SIB ratios are, on average, over twice those of
mining equipment (18:1 average versus 8:1), while the higher availability and utilisation
rates could see process equipment operating for up to one-third longer over the life of
the mine (225,000 hours versus 171,000 hours).
Figure 39: Processing plant: SIB capital vs initial capital
Capital invested ($m)
Initial
Sustaining
Operating
Ratio
Total SIB
SIB:initial
Grinding mill, rod & ball
5.5
7.1
190.5
197.6
35 :1
Cone crushers
4.0
21.2
43.8
65.0
16 :1
Mobile crushing plants
1.2
8.8
9.0
17.7
15 :1
Gyratory crushers
13.0
33.5
136.5
170.0
13 :1
Grinding mill, SAG
13.5
17.6
164.2
181.7
13 :1
Stackers, conveyor
20.5
53.1
67.2
120.4
5 :1
Mill drives, gearless
18.8
24.3
72.7
97.0
5 :1
$, 000s
Cyclones
26
1.0
0.0
1.0
39 :1
Slurry pumps
84
1.6
0.6
2.1
25 :1
Electric motors
185
1.9
1.7
3.6
19 :1
Screens
403
3.5
1.9
5.4
13 :1
Source: InfoMine, Berenberg equity research
The feasibility studies show that process plant modelling typically assumes two shifts of
12 hours per day operating 365 days per year, with 90% utilisation rates and 95%
equipment availability. This translates to c7,500 hours per year and c225,000 hours over
a 30-year LoM. From an equipment perspective, due to the grinding media and liners
22
Mining machinery
Capital Goods & Industrial Engineering
required for operation, the grinding mills have one of the highest SIB ratios (Figure 39).
The most appealing long-term aftermarket opportunities, though, lie in the equipment
that generates high levels of spare parts and also “benefits” from a relatively short life.
Cyclones (6,000 hours) and pumps (12,000 hours) have to operate in highly abrasive
environments and also feature in critical parts of the process plant, meaning uptime is
critical. Over a 30-year LoM, cyclones and pumps will require replacing perhaps 20-30
times. It is also worth bearing in mind, from an equipment supplier perspective, that the
above analysis is conducted on a per unit basis – there may be 50-100 slurry pumps of
varying size in a process plant and a number of clusters of cyclones.
On average, spare parts account for 26% of operating costs, while wear parts are 10%
on average, though this is driven by the grinding mills, with 30-40% of operating costs
coming from wear parts (Figure 40). Although operating costs per hour are generally
lower than those of mining operations, particularly at the smaller end of the initial
capital cost range (pumps, cyclones, for example), the repeat aftermarket requirements
and high utilisation rates offset this over the life of the mine.
Figure 40: Process plant equipment: key operating cost characteristics
3,000
Op cost ($/hr)
2,000
1,000
0
120
100
80
60
40
20
0
Life (hrs)
Spare parts
Grinding mill,
rod & ball
Mill drives,
gearless
Grinding
mill, SAG
Slurry pumps
Stackers,
conveyor
Screens,
trommel ($, k)
Cone
crushers
Gyratory
crushers
Cyclones
70%
60%
50%
40%
30%
20%
10%
0%
Wear parts
Source: InfoMine
Scope exists for suppliers to add value by reducing costs
Given the focus on operating costs and operational efficiency, we thought it was worth
highlighting the energy costs of the various equipment, again on a per unit basis, as a
proportion of the operating costs for both mining (Figure 41) and process (Figure 42)
operations.
For some of the larger equipment, energy costs account for over 50% of operating
costs; in extreme cases (gearless mill drives and electric motors), energy accounts for
nearly 80% of operating costs. Much of this is unavoidable, though we have already
shown examples of where truck operations can be optimised, for example, to reduce
fuel costs. However, it does illustrate that for equipment suppliers that can improve – or
offer systems which can improve – energy efficiency, the value-add to the mine operator
is clearly there.
23
Mining machinery
Capital Goods & Industrial Engineering
Source: InfoMine
Cyclones
Grinding mill, rod
& ball
Slurry pumps
Gyratory crushers
Grinding mill,
SAG
Screens, trommel
($, k)
Cone crushers
Stackers, conveyor
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%
Mill drives,
gearless
Roof bolters
Tunnel boring
machines
Bucketwheel
excavators
Continuous
miners, u/ground
Shovels, cable
Draglines, walking
Continuous
miners, surface
Shovels, hydraulic
Wheel loaders
Draglines, crawler
Backhoes,
hydraulic
Rotary blasthole
drill rigs
Trucks, rear-dump
(40t-400t)
60%
50%
40%
30%
20%
10%
0%
Figure 42: Process equipment: energy as a
percentage of operating costs
Electric motors,
AC
Figure 41: Mining equipment: energy as a
percentage of operating costs
Source: InfoMine
We repeat the analysis for maintenance labour costs, showing maintenance cost versus
initial capital costs for key mining equipment (Figure 43) and key process equipment
(Figure 44). On average, maintenance labour costs for mining equipment can account
for c35% of overall operating costs, while for process equipment it is higher at c45%.
Compared to the initial capital cost, the maintenance labour costs are c5x the initial
capital costs for mining equipment but nearly 12x on average for process equipment.
The most maintenance labour-intensive items (in terms of the cost of labour compared
to initial capital costs) are pumps (23x), motors (20x) and grinding mills (20x) among
process equipment, while tunnel boring machines (10x) and roof bolters (13x) are the
most maintenance labour-intensive of the mining operations machines. For
manufacturers of these pieces of equipment, there is considerable potential to add value
by reducing the maintenance labour costs, and provide on-site or near-site engineers to
reduce the cost to the mine operator or access additional share of the operating budget.
160
140
120
100
80
60
40
20
0
50
1
0
Grinding ball
mill
Gyratory
crushers
Dump trucks
Draglines
Rotary blasthole
drills
Hydraulic
shovels
Tunnel borers
Roof bolters
0
2
Source: InfoMine, Berenberg equity research
Source: InfoMine, Berenberg equity research
24
Initial capital
Cyclones
100
3
Screens
LoM maintenance
Motors
150
4
SAG mill
Initial capital
Cone crushers
200
Figure
44:
Select
process
equipment:
maintenance labour costs vs initial capital costs
($m, LoM = 30 years)
Pumps
Figure
43:
Select
mining
equipment:
maintenance labour vs initial capital costs ($m,
LoM = 30 years)
LoM maintenance
Mining machinery
Capital Goods & Industrial Engineering
Assessing portfolio exposure
Weir
Outotec
Metso
FL Smidth
Joy Global
Atlas
Copco
Sandvik
20%
Sandvik
Atlas Copco
Weir
Metso
0%
Source: Company data
Minerals exposure (2012 revenues)
100%
80%
60%
40%
20%
0%
Coal
Copper
Iron
PMG
Base metals
Weir
even they have high concentrations (Atlas Copco has 31% of mining revenues exposed to
gold, for example)
40%
Outotec
 Weir, Atlas Copco and Metso probably have the broadest minerals exposure, though
60%
FL Smidth
Having broad exposure to an industry is critical for any portfolio in terms of
mitigating declines in any one area. Breadth of mineral exposure is likely to be
critical for the equipment suppliers.
80%
Metso
exposure to mining among the main equipment suppliers, while Joy Global is entirely
exposed to mining, much of it to coal
Mining revenue % of group sales (2012)
100%
Joy Global
 Atlas Copco (26% of sales), Sandvik (30%) and Metso (33%) have the lowest overall
Systems
Source: Company data
FL Smidth
Given both underlying demand and sentiment are against mining exposure at
present, a broader portfolio of businesses is likely to provide mitigation for
lower growth or declining mining business.
Aftermarket
Consumables
Atlas Copco
aftermarket and consumables exposure. Metso (32%) has the highest disclosed consumables
exposure. Weir, Joy and others do not explicitly disclose consumables exposure
Original equipment
Outotec
 Weir (60% of sales), Atlas Copco (54%) and Joy Global (52%) have the highest
100%
80%
60%
40%
20%
0%
Joy Global
High aftermarket and consumables content is favourable in the current
environment. Deriving considerable revenues from systems and original
equipment sales is likely to be at best margin-dilutive and at worst a
considerable drag on revenue growth in times of declining capex.
Mining revenue by type of business
Sandvik
High aftermarket content, balanced mineral exposure and
diversified portfolio are key to a robust mining business
Other
Source: Company data
High SIB ratio and process plant exposure most favourable
Using the SIB capex to initial capital required ratio (the SIB ratio) developed in the
previous section, we assess the mining (Figure 45) and process plant (Figure 46) product
portfolio exposure of the key equipment suppliers, and in particular the ones we have
under coverage. Our preference in terms of product portfolio exposure is for equipment
with high SIB ratios and exposure to the process plant.
Figure 45: Mining equipment, SIB ratio and
manufacturer (not exhaustive)
Figure 46: Process equipment, SIB ratio and
manufacturer (not exhaustive)
Ratio
Equipment
Ratio
SIB:initial
Equipment
Manufacturer
SIB:initial
Manufacturer
Underground loaders (LHDs)
14 :1
Atlas Copco, Sandvik, Caterpillar, GE, Joy
Grinding mill, rod & ball
35 :1
FLSmidth, Metso, Outotec
Shovels, hydraulic
11 :1
Caterpillar, Komatsu, Joy
Cone crushers
16 :1
FLSmidth, Metso, Weir
Continuous miners, u/ground
11 :1
Atlas Copco, Sandvik, Caterpillar, Joy
Mobile crushing plants
15 :1
Atlas Copco, Sandvik, Joy, Caterpillar, Metso
Roof bolters
11 :1
Atlas Copco, Sandvik, Furukawa, Joy
Gyratory crushers
13 :1
Sandvik, FLSmidth, Metso
Tunnel boring machines
11 :1
Atlas Copco, Sandvik, Caterpillar, Joy
Grinding mill, SAG
13 :1
FLSmidth, Metso, Outotec
Rotary blasthole drill rigs
10 :1
Atlas Copco, Sandvik, Caterpillar, Joy
Stackers, conveyor
5 :1
Sandvik, Caterpillar, FLSmidth, Metso
Continuous miners, surface
10 :1
Atlas Copco, Sandvik
Mill drives, gearless
5 :1
ABB, Siemens, FLSmidth, GE
Backhoes, hydraulic
9 :1
Caterpillar, Komatsu
Bucketwheel excavators
7 :1
Sandvik, Joy
Cyclones
39 :1
FLSmidth, Metso, Weir, KSB, Outotec
Wheel loaders
7 :1
Caterpillar, Komatsu, Joy
Slurry pumps
25 :1
FLSmidth, Metso, Weir, KSB
Shovels, cable
5 :1
Caterpillar, Komatsu, Joy
Electric motors
19 :1
ABB, Siemens, GE
Underground ore & coal haulers
5 :1
Sandvik, Joy
Screens
13 :1
Atlas Copco, Sandvik, Metso,
Draglines, crawler
4 :1
Caterpillar, Komatsu, Joy
Trucks, rear-dump (40t-400t)
4 :1
Caterpillar, Komatsu, Hitachi, Terex
Draglines, walking
2 :1
Caterpillar, Komatsu, Joy
Source: Berenberg equity research
Source: Berenberg equity research
While we do not know how many of each of these pieces of equipment the various
manufacturers sell, we note that those suppliers with the highest number of products
25
Mining machinery
Capital Goods & Industrial Engineering
with high SIB ratios and process plant exposure are Metso and Weir, while among the
more mining operations-focused suppliers, Atlas Copco and Sandvik products rank
most consistently with high SIB ratios. When translating this into the individual
company exposures, we find only Metso (32% of sales), Atlas Copco (23%) and Sandvik
(11%) break out explicitly the revenues they derive from consumables. The reality is that
Joy Global and Weir, Outotec and FLSmidth must generate revenue from consumables
and it could be quite a high proportion when one considers the portfolio exposure
(continuous miners at Joy, pumps and liners and Weir, grinding mills at Outotec and
FLSmidth).
Overall, the suppliers with the highest levels of aftermarket and consumables revenues
are Weir (60% of sales), Atlas Copco (54%) and Joy Global (52%), with Outotec (23%)
generating the lowest levels (Figure 47). The high process exposure at Weir should also
be of benefit given the more limited flexibility in that part of operations with respect to
operating budgets.
High levels of systems business (FLSmidth, 49%; Sandvik 20%) are a mixed blessing.
Long installation periods and considerable investment costs mean current projects are
unlikely to be significantly curtailed, though Barrick Gold’s recent actions highlight that
build schedules can still be changed. The turnkey nature of the systems business means
margins are generally lower than in the rest of the mining equipment portfolio. If the
balance of the business is in decline, the more stable, lower-margin systems business is
likely to be margin-dilutive.
Figure 47: Mining revenue by type – key equipment suppliers
100%
80%
60%
40%
20%
Original equipment
Aftermarket
Consumables
Weir
Outotec
FL Smidth
Metso
Joy Global
Atlas Copco
Sandvik
0%
Revenue from consumables and
aftermarket is critical to a robust
mining business in a declining
capex environment. Metso,
Atlas Copco and Sandvik have
the highest disclosed revenues
from consumables, but we suspect
the others derive similar levels of
revenue from this source
Systems
Source: Company data
Balanced portfolio exposure is key to a robust business
This is something of a truism and relevant for any business, industry or portfolio. In
mining, clearly companies with mining accounting for a lower proportion of their
overall sales will be better positioned with respect to both end market demand dynamics
and investor sentiment. Atlas Copco (26% of group sales), Sandvik (30%) and Metso
(33%) have the lowest overall exposure of the mining equipment suppliers we are
examining, while Joy Global has the highest (Figure 48).
Balanced mineral exposure should help mitigate the decline of one commodity in
particular. The suppliers with the most balanced exposures are Atlas Copco, Weir and
Metso, while Joy Global is clearly very dependent on coal (Figure 49). FLSmidth has
high exposure to fertilisers and aggregates, which is why the “other” component of its
revenue exposure is so large.
26
Mining machinery
Capital Goods & Industrial Engineering
Figure 48: Mining as a percentage of 2012 sales
Figure 49: Mining revenue mineral exposure
100%
Coal
Source: Company data
Copper
Iron
PMG
Base metals
Weir
Outotec
Atlas Copco
Sandvik
Metso
Weir
FL Smidth
Outotec
Joy Global
0%
FL Smidth
Sandvik
20%
Metso
40%
Joy Global
60%
Atlas Copco
100%
80%
60%
40%
20%
0%
80%
Other
Source: Company data
Note: PMG = precious metals group (gold, silver, platinum)
Sandvik and Metso have both disclosed the mineral exposure for the original
equipment, aftermarket and systems businesses. For Sandvik, the systems business is
concentrated in iron ore and the original equipment business has high concentration in
precious metals, particularly silver and gold (Figure 50). The latter is slightly worrying in
light of Barrick Gold’s plans, but we have yet to hear of significant delays to iron ore
projects currently underway. Metso also has exposure to precious metals, but the bulk of
it is in aftermarket. The highest original equipment exposure is also in iron (Figure 51).
Figure 50: Sandvik minerals exposure by type of
business (2012)
Figure 51: Metso minerals exposure by type of
business (2012)
70%
50%
60%
40%
50%
40%
30%
30%
20%
20%
10%
10%
0%
0%
Coal
Copper
OE & AM
Iron
PMG
Other
Copper
Systems
Iron
OE
Source: Company data
PMG
AM
Source: Company data
In light of the recent announcements from Barrick Gold and the steep fall in the gold
price (from over $1,700/lb to $1,200/lb), we highlight the gold exposure of the
equipment suppliers we cover – Atlas Copco has the highest overall exposure with 31%
of sales (Figure 52).
Figure 52: Mining equipment suppliers’ exposure to gold (2012 revenues)
40%
30%
20%
10%
0%
Atlas Copco
Sandvik
Weir
Source: Company data
27
Metso
Other
Mining machinery
Capital Goods & Industrial Engineering
Figure 53: Mapping the equipment suppliers’ exposure to the mining processes and their key characteristics
Exploration
Development
Extraction
Materials Handling
Comminution
5% greenfield capital
65% greenfield capital
2% greenfield capital
10% greenfield capital
6% greenfield capital
6% sustaining capex
3% operating costs
Exploration for
mineral resources
- remote sensing
- geophysical test
- samples
- feasibility studies
Drilling & modelling
of the ore body
- selection of right
mining technique
- capital investment
in mine infrastructure
54% sustaining capex
Refining
6% greenfield capital
6% greenfield capital
40% sustaining capex
37% operating costs
Mining of the ore body
- rock breaking
- surface mining
- underground mining
Separation
40% operating costs
Mined minerals transport
to processing site
- loaders, trucks, trains
- conveyor systems
8% operating costs
Materials are crushed &
Flotation, leaching,
ground to achieve grades sedimentation, filtration
- grinders, rollers
- pumps, vortices, cyclones
Refining to increase
mineral concentration
Sandvik (Buy, SEK115)
Atlas Copco (Sell, SEK165)
Boart Longyear (n/r)
Furukawa (n/r)
Komatsu (n/r)
Joy Global (n/r)
Caterpillar (n/r)
Volvo (Buy, SEK116)
Metso (Buy, €38)
FL Smidth (n/r)
Outotec (n/r)
Citic Heavy (n/r)
Terex (n/r)
Weir (Hold, 2,515p)
KSB (Hold, €450)
Sigdo Koppers (n/r)
One Steel (n/r)
GE Mining (n/r)
ABB (drives, process automation, plant construction) (Hold, CHF20.8)
Siemens (drives) (Buy, €94.5)
SKF (bearings, condition monitoring) (Buy, SEK185)
85% availability
95% availability
80% utilisation
90% utilisation
Hourly operating cost components (ex operator costs)
MRO parts
MRO labour
Energy
Tyres
Wear parts
Source: Company data
28
Citic Heavy
Atlas Copco AB
Capital Goods & Industrial Engineering
Good aftermarket exposure, but fool’s gold?
 We reiterate our Sell recommendation on Atlas Copco, with a SEK165
target price. Our concern lies with the high gold exposure and the
investor perception that Atlas Copco’s consumables business (23% of
sales) represents a “safe haven” in times of declining capex. Drilling
and mining operations have greater flexibility with respect to cost
saving initiatives for the mine operator than the process plant,
potentially rendering the consumables business not as robust as
investors hope.
Sell
 Capex exposure generally positive: Despite greenfield capex cuts,
Atlas Copco’s mining operations and underground equipment
portfolio mean it should be better placed to cope with reduced
demand for original equipment – brownfield expansion generally
favours mining operations. Atlas’ high gold exposure (31% of mining
sales) may compound the decline in original equipment sales in the
near term.
Changes made in this note
Rating
Sell (no change)
Price target SEK 165.00 (no change)
 Operating budget exposure raises some questions: Our analysis
of the opex budgets of mining operations suggests there is greater
scope in manpower and fuel for cost saving initiatives than there is in
the process plant. This could involve slowing the mining rate (running
lower stockpiles of ore inventory for the plant) and lengthening
maintenance schedules. Consumables and spare part demand would
remain, but at potentially lower levels.
Shares outstanding (m)
Enterprise value (SEK m)
Daily trading volume
 Relatively favourable equipment characteristics: Atlas Copco’s
equipment exposure tends to exhibit relatively high (10-14x) ratios of
aftermarket revenue to initial capex. Although generally focused on
mining operations, Atlas also offers mobile crushing systems. These
offer considerable benefits to the processing operations, but are only
suitable for relatively static mining operations due to the expense
incurred in moving the complementary infrastructure.
Rating system
Relative
Current price
Price target
SEK 162.50
SEK 165.00
01/07/2013 Stockholm Close
Market cap SEK 196,717 m
Reuters
ATCOa.ST
Bloomberg
ATCOA SS
Chg
2013E
2014E
2015E
old Δ% old Δ% old Δ%
Sales 86,841 - 91,007 - 97,040 EBIT 18,695 - 20,068 - 21,947 11.59
12.53
13.71
EPS
Source: Berenberg estimates
Share data
1,213
199,098
4,751,987
Performance data
High 52 weeks (SEK)
Low 52 weeks (SEK)
Relative performance to SXXP
1 month
-2.3 %
3 months
-11.6 %
12 months
-5.8 %
189
143
SXNP
-2.9 %
-8.0 %
-10.9 %
Key data
Price/book value
Net gearing
CAGR sales 2012-2015
CAGR EPS 2012-2015
4.8
-1.0%
2.3%
4.8%
 Valuation remains expensive given uncertainties: Atlas is
currently trading on 13x 2014E P/E and 9x EV/EBIT, not
significantly out of line with historical levels (14x and 10x), suggesting
investors are not discounting significant declines in the mining
business. We regard this as complacent in the face of record quarters
last year in Q1 and Q2, a business that has only just started seeing a
meaningful organic revenue decline and the recent Boart Longyear
profit warning. We derive our price target from a blend of trading
multiples, sum-of-the-parts and DCF valuations.
Y/E 31.12., SEK m
Sales
EBITDA
EBIT
Net profit
Y/E net debt (net cash)
EPS (reported)
EPS (recurring)
DPS
Gross margin
EBITDA margin
EBIT margin
Dividend yield
ROCE
EV/sales
EV/EBITDA
EV/EBIT
P/E
Source: Company data, Berenberg
2011
2012
2013E
2014E
2015E
81,203
19,595
17,560
13,173
12,946
10.82
10.75
5.00
38.4%
24.1%
21.6%
3.4%
34.3%
2.4
9.8
10.7
14.1
90,533
21,892
19,228
13,901
7,303
11.44
11.96
5.50
38.4%
24.2%
21.2%
3.5%
32.3%
2.2
9.2
10.0
13.7
86,841
21,406
18,695
13,445
-389
11.07
11.59
6.00
38.8%
24.6%
21.5%
3.7%
28.0%
2.3
9.3
10.2
14.0
91,007
22,975
20,068
14,586
-6,789
12.01
12.53
6.50
39.4%
25.2%
22.1%
4.0%
27.1%
2.1
8.4
9.2
12.9
97,040
25,055
21,947
16,016
-13,617
13.19
13.71
6.50
39.9%
25.8%
22.6%
4.0%
26.7%
1.9
7.4
8.2
11.8
29
2 July 2013
Alexander Virgo
Analyst
+44 20 3207 7856
[email protected]
Benjamin Glaeser
Analyst
+44 20 3207 7918
[email protected]
Metso Oyj
Capital Goods & Industrial Engineering
Grinding a strong position; diamond in the rough
 We reiterate our Buy recommendation on Metso, with a €38 target
price. Metso’s strong exposure to the process circuit, combining high
consumable requirements with long life and frequent scheduled
maintenance, means it should be best placed to weather the declining
capex environment. The ongoing demerger of Valmet offers potential
upside through valuation re-rating.
 Capex exposure mixed, but evidence of brownfield mill
investment: Although we favour mining equipment as the general
focus for brownfield investment, evidence from Vale suggests mill
circuits and process plants can still see orders. Maintenance capex
appears to favour Metso’s mill circuit exposure and the strong
aftermarket characteristics of the grinding mills and crushers.
 Opex budgets favour high consumables and spares exposure:
We have seen how opex budgets favour suppliers of equipment with
high consumables requirements and process plant exposure, both of
which play well to Metso’s portfolio. The negative aspect to the
portfolio exposure is the amount of power consumed by the crushing
and grinding circuits; however, the high fixed costs associated with the
process plant and the expense in stopping/starting suggest the plant is
generally operated at design capacity to minimise operating costs.
 Equipment characteristics well represented in Metso portfolio:
Metso has among the best exposure to equipment, with high levels of
consumables (32% of sales) and long aftermarket streams in crushers,
grinding mills and pumps. We forecast mining capital revenues will
decline 20% this year, with services growing 12%, and are 2% below
consensus overall. For 2014E, we estimate -15%/+10% respectively
and are 3% ahead.
 Valuation remains undemanding: Share price performance has
been weak this year (-18% ytd, -23% relative to SXNP), reflecting
investor concerns around mining and pulp and paper demand.
Estimates for mining are low and the stock is trading below 10x
2014E P/E – a 30% discount to its historical average. 7.3x 2014E
EV/EBITA is also a two-turn discount to historical trading multiples.
We derive our price target from a blend of trading multiples, sum-ofthe-parts and DCF valuations.
Y/E 31.12., EUR m
Sales
EBITDA
EBIT
Net profit
Y/E net debt (net cash)
EPS (reported)
EPS (recurring)
DPS
Gross margin
EBITDA margin
EBIT margin
Dividend yield
ROCE
EV/sales
EV/EBITDA
EV/EBIT
P/E
Source: Company data, Berenberg
2011
2012
2013E
2014E
2015E
6,646
751
572
356
437
2.38
2.38
1.70
25.1%
11.3%
8.6%
5.1%
17.8%
0.8
7.3
9.5
13.8
7,504
800
599
372
559
2.49
2.48
1.85
24.0%
10.7%
8.0%
6.2%
17.3%
0.7
6.3
8.5
11.4
7,259
771
607
388
402
2.59
2.59
1.85
25.3%
10.6%
8.4%
6.2%
16.1%
0.7
6.4
8.1
10.1
7,358
815
647
414
240
2.77
2.76
1.90
25.9%
11.1%
8.8%
6.3%
16.5%
0.6
5.8
7.3
9.5
7,605
869
699
461
29
3.08
3.08
1.95
25.7%
11.4%
9.2%
6.5%
17.1%
0.6
5.2
6.5
8.5
30
Buy
Rating system
Relative
Current price
Price target
EUR 26.09
EUR 38.00
01/07/2013 Helsinki Close
Market cap EUR 4,495 m
Reuters
MEO1V.HE
Bloomberg
MEO1V FH
Changes made in this note
Rating
Buy (no change)
Price target EUR 38.00 (no change)
Chg
2013E
2014E
2015E
old Δ% old Δ% old Δ%
7,259
7,358
7,605
Sales
607
647
699
EBIT
2.59
2.76
3.08
EPS
Source: Berenberg estimates
Share data
Shares outstanding (m)
Enterprise value (EUR m)
Daily trading volume
150
4,912
900,000
Performance data
High 52 weeks (EUR)
Low 52 weeks (EUR)
Relative performance to SXXP
1 month
-6.3 %
3 months
-20.5 %
12 months
-18.6 %
35
26
SXNP
-6.9 %
-16.8 %
-23.7 %
Key data
Price/book value
Net gearing
CAGR sales 2012-2015
CAGR EPS 2012-2015
15.5
35.6%
0.4%
7.4%
Business activities:
Metso is a global supplier of technology
and services to customers in the process
industries, including mining,
construction, pulp and paper, power, and
oil and gas. The company employs 30,000
people in over 50 countries
Non-institutional shareholders:
Solidium Oy 11.1%
2 July 2013
Alexander Virgo
Analyst
+44 20 3207 7856
[email protected]
Benjamin Glaeser
Analyst
+44 20 3207 7918
[email protected]
Sandvik AB
Capital Goods & Industrial Engineering
Underperformance belies breadth of portfolio
 We reiterate our Buy recommendation on Sandvik, with a SEK115
price target, driven by our view that the ytd underperformance
(relative to both the SXNP and its nearest peers) belies the benefits of
the breadth of its mining portfolio and the aftermarket revenue
streams of its products. Share price performance and valuation suggest
expectations are already low enough.
 Balanced exposure to capex trends: Of the mining-exposed
suppliers we cover, Sandvik has the broadest portfolio. This should
offer some benefit in a declining capex environment, particularly as
original equipment sales are only 35% of revenue. Systems business
(20%) should be more stable (albeit margin-dilutive) and is most
exposed (60%) to iron ore. On the negative side, Sandvik has the
highest coal exposure (22% of sales) of our coverage universe.
 Opex budget exposure is generally favourable: Our preference for
process plant opex provides some benefit for Sandvik, with its
crushing and screening product offering, while the company’s
exposure in mining operations comprises relatively high levels of
aftermarket business. Similarly to Atlas, however, we have some
concerns over the robustness of the mining operations exposure, with
scope for consumables business to hold up less than expected.
 Strong mix of equipment offering: Sandvik equipment
demonstrates stay-in-business to initial capital ratios of between 1016x, suggesting strong aftermarket revenue streams. Aftermarket
(including consumables, 11%) accounts for 45% of mining revenue.
Investors are focused on Systems, though, as this turnkey business is
likely to hold up as the rest of the business declines, resulting in lower
margins.
Buy
Rating system
Relative
Current price
Price target
SEK 80.90
SEK 115.00
01/07/2013 Stockholm Close
Market cap SEK 99,917 m
Reuters
SAND.ST
Bloomberg
SAND SS
Changes made in this note
Rating
Buy (no change)
Price target SEK 115.00 (no change)
Chg
2013E
2014E
2015E
old Δ% old Δ% old Δ%
102,647
92,128
97,061
Sales
EBIT 14,014 - 16,201 - 18,000 7.07
8.51
9.65
EPS
Source: Berenberg estimates
Share data
Shares outstanding (m)
Enterprise value (SEK m)
Daily trading volume
1,246
120,765
5,710,970
Performance data
High 52 weeks (SEK)
Low 52 weeks (SEK)
Relative performance to SXXP
1 month
-8.4 %
3 months
-19.1 %
12 months
-24.1 %
108
80
SXNP
-8.9 %
-15.5 %
-29.3 %
 Valuation and performance reflect low expectations: Sandvik is
the worst-performing stock in our coverage universe (-23% ytd) and
expectations have fallen 20% since January (2013E EPS). Mining
equipment sales declines of over 30% are built into current consensus
expectations, suggesting, along with a 2014E P/E of <10x and
EV/EBIT of 7x, investors are discounting considerable declines in the
mining business. We derive our price target from a blend of trading
multiples, sum-of-the-parts and DCF valuations.
Y/E 31.12., SEK m
Sales
EBITDA
EBIT
Net profit
Y/E net debt (net cash)
EPS (reported)
EPS (recurring)
DPS
Gross margin
EBITDA margin
EBIT margin
Dividend yield
ROCE
EV/sales
EV/EBITDA
EV/EBIT
P/E
Source: Company data, Berenberg
2011
2012
2013E
2014E
2015E
94,083
18,073
13,410
7,988
25,217
4.63
6.73
3.25
34.4%
19.2%
14.3%
3.0%
22.4%
1.7
8.8
11.9
16.1
98,529
18,733
14,411
9,312
21,132
6.50
7.47
3.50
35.2%
19.0%
14.6%
3.4%
20.3%
1.5
7.7
10.0
12.9
92,128
18,725
14,014
8,802
13,806
6.87
7.07
4.00
36.0%
20.3%
15.2%
4.4%
18.6%
1.3
6.4
8.6
11.4
97,061
20,956
16,201
10,600
8,596
8.51
8.51
4.50
37.9%
21.6%
16.7%
5.0%
20.1%
1.2
5.5
7.1
9.4
102,647
22,802
18,000
12,025
3,308
9.65
9.65
4.50
38.7%
22.2%
17.5%
5.6%
20.6%
1.1
4.8
6.1
8.3
31
2 July 2013
Alexander Virgo
Analyst
+44 20 3207 7856
[email protected]
Benjamin Glaeser
Analyst
+44 20 3207 7918
[email protected]
Weir Group plc
Capital Goods & Industrial Engineering
Strongest aftermarket revenue exposure
 The Minerals division has taken up the baton of investor concerns
from Oil & Gas, but Weir’s Minerals product portfolio is one of the
most favourably positioned of our coverage universe, with 60% of the
business from aftermarket. High process plant exposure, high ratios of
aftersales revenues to initial capital costs and balanced mineral
exposure combine to support our Minerals forecasts. We reiterate our
Hold recommendation given that we see limited positive earnings
momentum in the near term (estimate changes due to FX only).
 Capex exposure driven by replacement cycles: Weir products
typically cost much less than $1m per unit, but high wear life and
critical nature mean they are a key component of stay-in-business
capex. Strong growth in the installed base is positive for aftermarket
revenue, though management acknowledged low levels of project
commissioning on the IMS call in May. The recent Barrick Gold
announcement for Pascua-Lama (a project on which Weir has $53m
revenue exposure to initial capex) shows that even projects as close to
production as H2 2014E can still be delayed if required.
Hold
Rating system
Relative
Current price
Price target
GBp 2,187
GBp 2,515
01/07/2013 London Close
Market cap GBP 3,726 m
Reuters
WEIR.L
Bloomberg
WEIR LN
Changes made in this note
Rating
Hold (no change)
Price target GBp 2,515 (no change)
Chg
2013E
2014E
2015E
old Δ% old Δ% old Δ%
2,685
-1
2,858
-1
3,055
-1
Sales
470
-1
508
0
557
0
EBIT
160.41 -0.40 174.64 -0.30 193.36 -0.40
EPS
Source: Berenberg estimates
Share data
Shares outstanding (m)
Enterprise value (GBP m)
Daily trading volume
 Opex budget exposure is key for Weir: Our preference for process
plant exposure due to high utilisation rates and availability
requirements is very favourable for Weir. Weir’s focus on wear life,
longevity of equipment, through-life costs and energy savings should
also appeal strongly to the end customer.
Performance data
 Very strong product portfolio: Weir’s average stay-in-business ratio
is in excess of 25:1, showing just how strong its portfolio is in terms
of high-margin aftersales revenue stream. High replacement rates for
pumps and cyclones especially, driven by high availability
requirements and wear rates, support a strong aftermarket business.
Price/book value
Net gearing
CAGR sales 2012-2015
CAGR EPS 2012-2015
 Valuation relatively undemanding, but near-term catalysts
limited: Although the stock has pulled back 10% from the ytd highs
in March and valuation is relatively undemanding (12x 2014E P/E; 7x
2014E EV/EBITA), we see limited scope for consensus expectations
to move up in the near term and prefer to wait for better visibility on
international shale development and mining project commissioning to
become more constructive on the stock. We value Weir on a blend of
trading multiples, sum-of-the-parts and DCF.
Y/E 31.12., GBP m
Sales
EBITDA
EBIT
Net profit
Y/E net debt (net cash)
EPS (reported)
EPS (recurring)
DPS
Gross margin
EBITDA margin
EBIT margin
Dividend yield
ROCE
EV/sales
EV/EBITDA
EV/EBIT
P/E
Source: Company data, Berenberg
2011
2012
2013E
2014E
2015E
2,292
450
409
279
673
130.83
132.29
33.04
34.8%
19.6%
17.0%
1.5%
19.3%
2.1
10.5
11.5
14.3
2,538
535
469
312
689
146.39
148.55
38.03
35.0%
21.1%
17.7%
1.9%
19.5%
1.8
8.4
9.3
11.9
2,665
571
468
309
571
144.61
159.80
43.74
39.5%
21.4%
17.6%
2.5%
20.0%
1.6
7.7
8.6
13.5
2,818
609
506
339
237
158.86
174.04
50.30
39.8%
21.6%
18.0%
2.9%
21.8%
1.4
6.7
7.4
12.4
3,013
661
555
379
-40
177.40
192.58
57.84
38.8%
21.9%
18.4%
3.3%
24.2%
1.3
5.7
6.3
11.2
32
High 52 weeks (GBp)
Low 52 weeks (GBp)
Relative performance to SXXP
1 month
-1.7 %
3 months
-4.1 %
12 months
25.7 %
211
4,390
1,065,112
2,474
1,491
SXNP
-2.2 %
-0.5 %
20.5 %
Key data
3.0
27.4%
5.9%
6.6%
Business activities:
Founded in 1871, Weir employs in the
region of 13,000 people globally. The
company manufactures and services
pumps, valves and rubber rollers &
screening machines for the Minerals, Oil
& Gas and Power end markets.
Non-institutional shareholders:
None with >3%
2 July 2013
Alexander Virgo
Analyst
+44 20 3207 7856
[email protected]
Benjamin Glaeser
Analyst
+44 20 3207 7918
[email protected]
Mining machinery
Capital Goods & Industrial Engineering
Please note that the use of this research report is subject to the conditions and restrictions set forth in the
“General investment-related disclosures” and the “Legal disclaimer” at the end of this document.
For analyst certification and remarks regarding foreign investors and country-specific disclosures, please
refer to the respective paragraph at the end of this document.
Disclosures in respect of section 34b of the German Securities Trading Act
(Wertpapierhandelsgesetz – WpHG)
Company
Atlas Copco AB
Metso Oyj
Sandvik AB
Weir Group plc
(1)
(2)
(3)
(4)
(5)
Disclosures
no disclosures
no disclosures
no disclosures
no disclosures
Joh. Berenberg, Gossler & Co. KG (hereinafter referred to as “the Bank”) and/or its affiliate(s) was Lead
Manager or Co-Lead Manager over the previous 12 months of a public offering of this company.
The Bank acts as Designated Sponsor for this company.
Over the previous 12 months, the Bank and/or its affiliate(s) has effected an agreement with this company
for investment banking services or received compensation or a promise to pay from this company for
investment banking services.
The Bank and/or its affiliate(s) holds 5% or more of the share capital of this company.
The Bank holds a trading position in shares of this company.
Historical price target and rating changes for Atlas Copco AB in the last 12 months (full coverage)
Date
12 July 12
01 August 12
26 October 12
08 January 13
01 May 13
Price target - SEK
145.00
151.00
161.00
185.00
165.00
Rating
Hold
Hold
Hold
Hold
Sell
Initiation of coverage
11 October 11
Historical price target and rating changes for Metso Oyj in the last 12 months (full coverage)
Date
14 September 12
06 November 12
08 January 13
Price target - EUR
38.00
35.00
38.00
Rating
Buy
Buy
Buy
Initiation of coverage
14 September 12
Historical price target and rating changes for Sandvik AB in the last 12 months (full coverage)
Date
16 July 12
31 July 12
23 November 12
28 November 12
08 January 13
01 May 13
Price target - SEK
100.00
102.00
114.00
117.00
118.00
115.00
Rating
Hold
Hold
Buy
Buy
Buy
Buy
Initiation of coverage
11 October 11
Historical price target and rating changes for Weir Group plc in the last 12 months (full coverage)
Date
08 August 12
08 January 13
18 March 13
01 May 13
Price target - GBp
2285.00
2380.00
2552.00
2515.00
Rating
Buy
Buy
Hold
Hold
33
Initiation of coverage
11 October 11
Mining machinery
Capital Goods & Industrial Engineering
Berenberg distribution of ratings and in proportion to investment banking services
Buy
Sell
Hold
41.43 %
19.27 %
39.31 %
50.00 %
8.82 %
41.18 %
Valuation basis/rating key
The recommendations for companies analysed by the Bank’s equity research department are either made on an
absolute basis (“absolute rating system”) or relative to the sector (“relative rating system“), which is clearly stated in
the financial analysis. For both absolute and relative rating system, the three-step rating key “Buy”, “Hold” and “Sell”
is applied. For a detailed explanation of our rating system, please refer to our website at
http://www.berenberg.de/research.html?&L=1
NB: During periods of high market, sector or stock volatility, or in special situations, the rating system criteria as
described on our website may be breached temporarily.
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General investment-related disclosures
Joh. Berenberg, Gossler & Co. KG (hereinafter referred to as „the Bank“) has made every effort to carefully research
all information contained in this financial analysis. The information on which the financial analysis is based has been
obtained from sources which we believe to be reliable such as, for example, Thomson Reuters, Bloomberg and the
relevant specialised press as well as the company which is the subject of this financial analysis.
Only that part of the research note is made available to the issuer (who is the subject of this analysis) which is
necessary to properly reconcile with the facts. Should this result in considerable changes a reference is made in the
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Opinions expressed in this financial analysis are our current opinions as of the issuing date indicated on this
document. The companies analysed by the Bank are divided into two groups: those under “full coverage” (regular
updates provided); and those under “screening coverage” (updates provided as and when required at irregular
intervals).
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Research Analyst” unless otherwise stated on the cover.
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http://www.berenberg.de/research.html?&L=1&no_cache=1
Legal disclaimer
This document has been prepared by Joh. Berenberg, Gossler & Co. KG (hereinafter referred to as „the Bank“). This
document does not claim completeness regarding all the information on the stocks, stock markets or developments
referred to in it.
On no account should the document be regarded as a substitute for the recipient procuring information for
himself/herself or exercising his/her own judgements.
The document has been produced for information purposes for institutional clients or market professionals.
Private customers, into whose possession this document comes, should discuss possible investment decisions with
their customer service officer as differing views and opinions may exist with regard to the stocks referred to in this
document.
34
Mining machinery
Capital Goods & Industrial Engineering
This document is not a solicitation or an offer to buy or sell the mentioned stock.
The document may include certain descriptions, statements, estimates, and conclusions underlining potential market
and company development. These reflect assumptions, which may turn out to be incorrect. The Bank and/or its
employees accept no liability whatsoever for any direct or consequential loss or damages of any kind arising out of the
use of this document or any part of its content.
The Bank and/or its employees may hold, buy or sell positions in any securities mentioned in this document,
derivatives thereon or related financial products. The Bank and/or its employees may underwrite issues for any
securities mentioned in this document, derivatives thereon or related financial products or seek to perform capital
market or underwriting services.
Analyst certification
I, Alexander Virgo, hereby certify that all of the views expressed in this report accurately reflect my personal views
about any and all of the subject securities or issuers discussed herein.
In addition, I hereby certify that no part of my compensation was, is, or will be, directly or indirectly related to the
specific recommendations or views expressed in this research report, nor is it tied to any specific investment
banking transaction performed by the Bank or its affiliates.
I, Benjamin Glaeser, hereby certify that all of the views expressed in this report accurately reflect my personal views
about any and all of the subject securities or issuers discussed herein.
In addition, I hereby certify that no part of my compensation was, is, or will be, directly or indirectly related to the
specific recommendations or views expressed in this research report, nor is it tied to any specific investment
banking transaction performed by the Bank or its affiliates.
Remarks regarding foreign investors
The preparation of this document is subject to regulation by German law. The distribution of this document in other
jurisdictions may be restricted by law, and persons into whose possession this document comes should inform
themselves about, and observe, any such restrictions.
United Kingdom
This document is meant exclusively for institutional investors and market professionals, but not for private customers.
It is not for distribution to or the use of private investors or private customers.
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the Bank and registered US broker-dealer, distributes this document to certain customers, Berenberg Capital Markets
LLC does not provide input into its contents, nor does this document constitute research of Berenberg Capital
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Third-party research disclosures
Company
Disclosures
Atlas Copco AB
Metso Oyj
Sandvik AB
Weir Group plc
no disclosures
no disclosures
no disclosures
no disclosures
(1)
(2)
(3)
Berenberg Capital Markets LLC owned 1% or more of the outstanding shares of any class of the subject
company by the end of the prior month.*
Over the previous 12 months, Berenberg Capital Markets LLC has managed or co-managed any public
offering for the subject company.*
Berenberg Capital Markets LLC is making a market in the subject securities at the time of the report.
35
Mining machinery
Capital Goods & Industrial Engineering
(4)
(5)
Berenberg Capital Markets LLC received compensation for investment banking services in the past 12 months,
or expects to receive such compensation in the next 3 months.*
There is another potential conflict of interest of the analyst or Berenberg Capital Markets LLC, of which the
analyst knows or has reason to know at the time of publication of this research report.
* For disclosures regarding affiliates of Berenberg Capital Markets LLC please refer to the ‘Disclosures in respect of
section 34b of the German Securities Trading Act (Wertpapierhandelsgesetz – WpHG)’ section above.
Copyright
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© May 2013 Joh. Berenberg, Gossler & Co. KG
36
Mining machinery
Capital Goods & Industrial Engineering
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+44 (0) 20 3465 2742
+44 (0) 20 3465 2628
+44 (0) 20 3207 7885
+44 (0) 20 3207 7804
+44 (0) 20 3207 7807
+44 (0) 20 3207 7850
+44 (0) 20 3207 7810
+44 (0) 20 3207 7825
+44 (0) 20 3207 7911
+44 (0) 20 3207 7855
+44 (0) 20 3465 2632
PARIS
Christophe Choquart
Dalila Farigoule
Clémence La Clavière-Peyraud
Olivier Thibert
+33 (0) 1 5844 9508
+33 (0) 1 5844 9510
+33 (0) 1 5844 9521
+33 (0) 1 5844 9512
ZURICH
Stephan Hofer
Carsten Kinder
Gianni Lavigna
Benjamin Stillfried
+41 (0) 44 283 2029
+41 (0) 44 283 2024
+41 (0) 44 283 2038
+41 (0) 44 283 2033
BENELUX
Miel Bakker
Susette Mantzel
Alexander Wace
(London)
(Hamburg)
(London)
+44 (0) 20 3207 7808
+49 (0) 40 350 60 694
+44 (0) 20 3465 2670
SCANDINAVIA
Ronald Bernette
(London)
Marco Weiss
(Hamburg)
+44 (0) 20 3207 7828
+49 (0) 40 350 60 719
+49 (0) 40 350 60 563
+49 (0) 40 350 60 359
+49 (0) 40 350 60 571
+49 (0) 40 350 60 798
+49 (0) 40 350 60 596
+49 (0) 40 350 60 450
+49 (0) 40 350 60 576
+49 (0) 40 350 60 415
+49 (0) 40 350 60 346
LONDON
Mike Berry
Stewart Cook
Simon Messman
Stephen O'Donohoe
+44 (0) 20 3465 2755
+44 (0) 20 3465 2752
+44 (0) 20 3465 2754
+44 (0) 20 3465 2753
PARIS
Sylvain Granjoux
+33 (0) 1 5844 9509
SOVEREIGN WEALTH FUNDS
Max von Doetinchem
+44 (0) 20 3207 7826
CORPORATE ACCESS
Patricia Nehring
+44 (0) 20 3207 7811
EVENTS
Natalie Meech
Charlotte Kilby
Charlotte Reeves
Hannah Whitehead
+44 (0) 20 3207 7831
+44 (0) 20 3207 7832
+44 (0) 20 3465 2671
+44 (0) 20 3207 7922
CRM
Greg Swallow
Laura Cooper
+44 (0) 20 3207 7833
+44 (0) 20 3207 7806
E-mail: [email protected]
US Sales
BERENBERG CAPITAL MARKETS LLC
Member FINRA & SIPC
Andrew Holder
+1 (617) 292 8222
Colin Andrade
+1 (617) 292 8230
Cathal Carroll
+1 (646) 445 7206
Sales Trading
HAMBURG
Paul Dontenwill
Alexander Heinz
Gregor Labahn
Chris McKeand
Fin Schaffer
Lars Schwartau
Marvin Schweden
Tim Storm
Philipp Wiechmann
Burr Clark
Julie Doherty
Kelleigh Faldi
+1 (617) 292 8282
+1 (617) 292 8228
+1 (617) 292 8288
37
Kieran O'Sullivan
Emily Mouret
Jonathan Saxon
+1 (617) 292 8292
+1 (646) 445 7204
+1 (646) 445 7202
38
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