Markets

4 Mining Stocks to Dump on Caterpillar's News

A generic image of a person with a pen in hand
Credit: Shutterstock photo

The world's largest maker of mining and construction equipment, Caterpillar Inc.CAT has further cut down its revenue outlook for 2015 citing continued weakness in the mining industry due to global slump in commodities. This paints a gloomy picture for the mining industry as Caterpillar is a global supplier of mining and construction equipment, and often considered a bellwether of economic activities.

Caterpillar's shares lost 6.27% of their value in a day after the company announced a trimmed revenue guidance of $48 billion yesterday, which is $1 billion lower than the previous expectation. To make matters worse, the company expects sales to decline further by 5% in 2016.

This, however, is not unexpected since Caterpillar's sales bore the brunt of weak mining in the last two years as its mining customers slashed capital spending in the middle of a capacity glut, and it also faced drop in prices for coal, iron ore and other metals as well as slower economic growth in China and other developing countries.

Nevertheless, this announcement sends out a red signal for the mining industry. In case Caterpillar's sales decline next year, in line with its guidance, the company's revenues would dip for four consecutive years for the first time in its history of 90 years.

Caterpillar's competitor, Joy Global Inc. JOY was also not spared from the impact of weak demand in the global mining market. The company recently reported a 32% drop in its adjusted third-quarter earnings and trimmed its earnings and revenue guidance for fiscal 2015. The company now expects fiscal 2015 revenues of $3.1 billion and adjusted earnings per share of $1.80.

To cope with the impact of weak mining demand on its revenues, Caterpillar has perked up its cost cutting initiatives by closing down plants, laying off workers and lowering Selling, General and Administrative (SG&A) costs.

The bearish phase of the mining market has dealt a blow to Caterpillar's long-term objective of becoming a dominant global player in the mining space. Previously, Caterpillar has been riding a wave of heightened construction and mining activity in developing markets, triggered by the demand for coal, copper and iron ore. The company also aggressively expanded in mining when the market was stronger.

In an attempt to be a leader among the global mining original equipment manufacturers, the company acquired Bucyrus in 2011 for $8.8 billion. The buyout resulted in the most expansive product offering in the mining equipment industry. However, the slowdown in China, the world's top metals consumer, has dragged down the industry as well as Caterpillar along with it.

Commodities are languishing at multi-year lows. The threat of oversupply looms large on the industry as inventory continues to pile up, while the once frenzied demand in China has fizzled out. Overall, metal prices will remain depressed until the supply glut is eased by production cuts. We expect slashing of capital expenditure, suspension of operations and cost saving initiatives to be in the cards.

In line with Caterpillar's poor outlook, which is a downer for the mining industry, we suggest mining stocks to steer clear from at the moment. We have screened mining stocks that have a Zacks Rank #5 (Strong Sell) and witnessed downward estimate revisions over the past few months.

Mining Stocks to Avoid

Thompson Creek Metals Company Inc.TC

Headquartered in Littleton, CO, Thompson Creek Metals Company Inc. engages in mining, milling, processing, and marketing of copper, gold and molybdenum products in the United States and Canada

Thompson Creek currently carries a Zacks Rank #5 (Sell) and has delivered a year-to-date return of -70.06%. The stock has failed to match the Zacks Consensus Estimate in 3 of the past 4 quarters, with an average negative earnings surprise of 167.71%. The company's earnings are expected to decline 176% in fiscal 2015. Moreover, estimates of this company have been undergone substantial negative revisions in the past 60 days.

Silver Standard Resources Inc.SSRI

Headquartered in Vancouver, Canada, Silver Standard Resources Inc. engages in the acquisition, exploration, development, and operation of precious metal mineral properties in the Americas.

Estimates of this Zacks Rank #5 (Strong Sell) stock have moved southward over the past 60 days. The stock has delivered an average negative earnings surprise of 238.29% in the past four quarters.

Randgold Resources LimitedGOLD

Based in St. Helier, the Channel Islands, Randgold Resources Limited explores and develops gold deposits in Sub-Saharan Africa. It holds interests in the Morila gold mine, the Loulo gold mine, and the Gounkoto gold mine, which are located in Mali, Western Africa; Tongon mine located within the Nielle exploitation permit in the north of Côte d'Ivoire; Kibali mine located in the Democratic Republic of Congo; and the Massawa project located in Senegal.

This Zacks Rank #5 stock has failed to match the Zacks Connsensus Estimate in three of the last four quarters, averaging -13.36%. Moreover, estimates have been revised downwards over the past 60 days. To top this, Randgold's fiscal 2015 earnings is projected to drop 21.20% year over year. The stock has a negative year-to-date return of 9.02%.

Sandstorm Gold Ltd.SAND

Headquartered in Vancouver, Canada, Sandstorm Gold, a resource-based company, focuses on acquiring gold and other precious metal purchase agreements and royalties from companies that have advanced stage development projects or operating mines.

This Zacks Rank #5 stock has delivered an average negative earnings surprise of 316.67% in the past four quarters. Moreover, estimates have been revised downwards over the past 60 days. Sandstorm Gold's fiscal 2015 earnings are projected to drop 156.25% year over year. The stock has a negative year-to-date return of 14.71%.

Bottom Line

Exiting certain underperformers at the right time helps maximize portfolio returns. With a bleak outlook for the mining industry as indicated by Caterpillar's guidance, we believe it will be a prudent move to get rid of these stocks at the moment.

Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days . Click to get this free report >>

Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report

CATERPILLAR INC (CAT): Free Stock Analysis Report

JOY GLOBAL INC (JOY): Free Stock Analysis Report

RANDGOLD RSRCS (GOLD): Free Stock Analysis Report

SILVER STD RES (SSRI): Free Stock Analysis Report

SANDSTORM GOLD (SAND): Free Stock Analysis Report

THOMPSON CREEK (TC): Free Stock Analysis Report

To read this article on Zacks.com click here.

Zacks Investment Research

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

In This Story

GOLD SAND CAT

Other Topics

Stocks

Latest Markets Videos

    Zacks

    Zacks is the leading investment research firm focusing on stock research, analysis and recommendations. In 1978, our founder discovered the power of earnings estimate revisions to enable profitable investment decisions. Today, that discovery is still the heart of the Zacks Rank. A wealth of resources for individual investors is available at www.zacks.com.

    Learn More