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General Electric Company (GE - Analyst Report) is pursuing acquisitions to expand its underground mining equipment business. GE currently expects 8% annual growth for the global mining equipment industry through 2020.
First, GE has signed an agreement to acquire 100% of Australia-based Industrea Limited, a provider of safety and productivity-enhancing mining equipment and services. The transaction is valued at approximately A$700 million. The deal is expected to close by the end of fiscal 2012.
Second, the company also signed a binding Letter of Intent to acquire Fairchild International, an independently owned and operated underground mining equipment manufacturer based in Virginia. Terms of this deal were not disclosed; however, GE expects to close the deal by the end of the third quarter of 2012.
GE Transportation’s global mining business provides innovative services and equipment in critical areas such as power, water and productivity. The acquisitions will not only generate GE additional revenues, but also grow its manufacturing base both in the U.S. and Australia. They also further GE’s objective of expanding into other countries with high growth potential, such as China.
Further, the company can also expand and capture a major share of the $61 billion mining equipment industry, as on completion of these acquisitions GE’s products will be able to cater to about 35% of the requirements of the underground mining value chain.
During the latest reported quarter, GE Transportation’s overall segment revenue grew 41% year over year to $1.2 billion. The segment reported a 67% growth in orders, which totaled $1.6 billion and resulted in an equipment backlog worth $3.7 billion.
The major clients for GE for the mining equipment are mining majors such as BHP Billiton Ltd. (BHP - Analyst Report) and Rio Tinto plc. (RIO - Analyst Report).
According to an industry report on World Mining Equipment to 2015 by Freedonia, the global market for mining equipment is projected to grow 8.5% annually through 2015 to $92 billion, primarily driven by growth in the Asia Pacific markets.
Demand is expected to be driven by a major pickup in mining output growth as global manufacturing activity and construction expenditures accelerate in a generally favorable economic climate. Further, commodity prices are also expected to remain high by historical standards, contributing to a rise in resource exploration and development activity and associated mining machinery sales.
A report published by mineweb.com expects something similar. This report also mentions the Asia-Pacific region as the market with the strongest growth potential through 2015, driven by robust increases in mine production and related machinery sales in China, India and Indonesia. According to the source, China alone will account for 57% of all new mining equipment demand between 2010 and 2015, even though growth is expected to slow significantly.
Central and South America will post the second fastest gains, supported by a pickup in manufacturing and construction activity, leading to higher demand for mined materials.
Therefore, all the major mining equipment manufacturers are acquiring companies that have a strong presence in Asia, primarily China.
The above-mentioned acquisitions will put GE in direct competition with Caterpillar Inc. (CAT - Analyst Report), which manufactures power systems and purification equipment for the mining industry. In 2010, Caterpillar, which already had a significant share of the market, acquired Bucyrus International for $7.6 billion, to become the world’s leading supplier of large mining equipment.
In November last year, Caterpillar further solidified its position with the acquisition of ERA Mining Machinery, a Chinese manufacturer of underground coal-mining equipment for $886 million.
Another major operation in the mining equipment industry is Joy Global, Inc. (JOY - Analyst Report) which provides high-productivity mining solutions. The company manufactures and markets original equipment and aftermarket parts and services for both the underground and above-ground mining industries and certain industrial applications.
Joy Global's products and related services are used extensively for the mining of coal, copper, iron ore, oil sands, gold and other mineral resources. Joy had also acquired a China-based mining equipment manufacturer to further strengthen its presence in the country.
Therefore, the acquisitions of the above mentioned companies by GE come at an opportune time as global demand for mining equipment is expected to rise. With the growing resource activity, GE as a whole is expected to benefit, given its varied presence in the energy sector.
With the help of the expertise of Industrea and Fairchild, GE intends to accelerate technology development and expand its product and service offerings to bring efficient, highly productive and low emission equipment to the mining industry.
GE currently holds a Zacks Rank of #3, which implies a short term Hold rating on the stock.