Bucyrus International (NASDAQ: BUCY) manufactures mining equipment used to extract coal, copper, iron ore and gold. As such, Commodities Prices directly affect demand from Bucyrus's customers. When prices are high, companies like BHP Billiton (BHP), Peabody Energy (BTU), and CONSOL Energy (CNX) expand operations by buying new equipment sold by Bucyrus. A commodity bull run has helped Bucyrus's surface mining division increase sales at an annual rate of 22.36% over the past five years.
In order to protect its revenue stream from the cyclicality of Commodities Prices and economic cycles, Bucyrus has expanded its "aftermarket sales" - service and support of existing equipment, including new parts - since re-emerging as a public company in 1996 (Bucyrus went bankrupt in 1994 due to rising debt interest payments and a slowdown in sales). These recurring revenue streams, often as part of a long-term contract, make swings in revenue less extreme..
Although the company is multinational, its portfolio is heavily concentrated in coal equipment. The large emphasis on coal, makes Bucyrus vulnerable to fluctuations in coal production. While high oil and natural gas prices have promoted the use of coal, a shift away from its consumption and towards cleaner energy sources will have significant impact on Bucyrus's profits.
Prior to acquiring DBT on May 4, 2007, Bucyrus only manufactured surface mining equipment and sold related aftermarket services. By purchasing DBT from RAG Coal International for $731 million, Bucyrus added manufacturing capabilities of producing underground mining equipment systems. In December 2009 Bucyrus International(BUCY) agreeded to acquire the mining equipment business of Terex Corporation for 1.3 billion US dollars. This transaction further diversified Bucyrus International's already extensive portfolio of mining equipment by adding the world's largest hydraulic excavators, off-the-road haul trucks, highwall mining systems, and additional drilling machines and conveyor belt systems.
The Surface Mining division of Bucyrus manufactures draglines, electric mining shovels, and rotary blasthole drills. This equipment is used for extraction of coal (53% of segment's revenue), copper (23%), oil sands (12%), gold (7%), iron ore (3%), and other minerals (2%). Of its customers, the largest, BHP Billiton (BHP), accounted for 9% of surface mining revenue, while the second through fifth largest customers were responsible for an additional 18%.
Using 27 sales and service centers, Bucyrus markets hydraulic roof supports, armored face conveyors, longwall shearers, and continuous miners to underground coal miners.
Bucyrus competes with other large international equipment manufacturers, such as Joy Global (JOYG), Terex (TEX), and Caterpillar (CAT). These companies compete for business not only on price, but on quality and reliability. Due to the large fixed cost of buying mining machinery (a dragline can cost $130 million), Bucyrus's customers will pay extra upfront to avoid costly downtime. Furthermore, these mining companies find local equipment service centers appealing, so that any necessary repairs can be made quickly. As a result, customers prefer to buy from equipment manufacturers with service centers not too distant from their mining operations. Bucyrus also helps customers avoid downtime by using a system of on-board monitoring controls that communicate with Bucyrus's service centers and help with troubleshooting.
In addition to competing with large global manufacturers, Bucyrus faces pressure from emerging local companies. The competitive pressure from small companies tends to be more for repair service and replacement units than new equipment. These companies, referred to as will-fitters, replicate Bucyrus's replacement products and sell them to mining companies at a discount. Bucyrus believes its superior quality, warranty agreements, and retention programs should maintain demand for its replacement equipment