Mining - capex cuts and what's priced in: Caterpillar, Rio Tinto, Potash Corp

Do you remember what Caterpillar said back in late October? As per this posting I noted that they described the current outlook for supplying the mining sector as implying:

'significant risks and uncertainties remain'

Now also factor in the thoughts of one of the world's leading mining companies Rio Tinto into this.  Amongst the talk of divestments and job cuts in a statement to the market, Rio's also notes that:

'Forecast 2013 total capital expenditure of less than $14 billion, a reduction of more than 20 per cent compared to 2012. Total capital expenditure is forecast to be reduced to US$11 billion in 2014 and to around US$8 billion in 2015, reflecting a 20 per cent reduction year-on-year'.
That's a pretty decent spending reduction and fully consistent with Caterpillar's caution.  And the reaction of the two shares today in a down 0.5% odd US market?

Rio Tinto +0.02%
Caterpillar -0.45%

Now this is only one day and you have to be careful not to read too much into it, but it feels to me as if much of the above is well-known and pretty much factored in. 

For CAT's share to get much worse and breakdown through US$80 to the levels last seen in October 2011, I think we will have to see a new growth disappointment in the world.  Now that is possible (Europe, potentially different priorities in China, perceived 'tapering' impacts in the US etc) but we are not there yet. 

Rio's (US quote) chart over the same period is also telling us to embrace volatility in the share.  Lower capex may be reflective of market conditions today, but it also tells us that the company is starting to shift its priorities and this, along with a current 3%+ yield, is lending some support.

The key chart from the presentation Rio Tinto gave to accompany the capex reduction announcement, to this end, is this one, which will give shareholders greater balance sheet/returns to them comfort. 

Another company who talked about cuts in the last 24 hours was one of the world's leading potash miners Potash Corp.  They announced an 18% reduction in their workforce due to weak demand conditions and promised that the current near 4.5% dividend would be "sacrosanct" and the company also sees no immediate change to its share buyback program.

As with Rio Tinto, Potash Corp shares traded slightly up in US trading despite the personal tragedy for the company's workforce that was afflicted by the announcement. 

The company made the bold prediction that post the implementation of the cost cutting  they would be the lowest cost potash producer.  This could well be true as I have noted previously the attractions of their long-life assets, especially in Canada. 

 

The big difference though between a company like Rio Tinto or Billiton claiming they are the lowest cost producer is that there are not so many other producers around...and certainly no-one as big.  Contrast that with Potash Corp and the potash industry, which has already had a highly volatile year due to the disputes in the Ukraine/Russia, which have not yet been fully resolved.  The amount of production from the 'Former Soviet Union' and 'other' makes a big swing potential. 

 

Embracing volatility is fine but, to me, that only starts at the 2013 low in the mid US$28s with Potash Corp, a level where the yield hits 5% too.  Inherently Potash Corp is higher risk than Rio Tinto or even CAT at prevailing prices.