Weir Group PLC (LSE:WEIR) could be one of the major beneficiaries from a projected 14% growth in mining capital expenditure (capex) in 2023, according to a research note from RBC Capital.
The forecast has been upgraded from RBC's previous estimate of a 10% expansion in January, bringing the cumulative 2019-2023 investment increase to 52%.
RBC believes that the consensus fails to reflect the opportunity this presents for mining equipment companies, particularly for the development of their aftermarket businesses.
Its updated proprietary mining capex database, which incorporates fourth-quarter earnings for the miners, indicates a larger revenue pool for equipment suppliers this year.
The bank expects mid-to-high single-digit growth in capex over the medium term, driven by strong mineral demand growth and increasingly tight supplies. This outlook is not reflected in consensus capex forecasts for the miners, which predict sharply declining investment beyond 2024, a scenario RBC finds implausible.
Moreover, RBC contends that the consensus is too conservative on the aftermarket growth outlook for equipment players, with the market projecting 4-5% average organic service growth. In contrast, RBC anticipates 5-6% per annum in a base-case scenario and up to 9% a year in a bull case.
High mineral prices, including iron ore, copper, and gold, which have risen by 13%, 8%, and 8% year-to-date, respectively, continue to support near-term demand for equipment and aftermarket services.
In Q4 2022, the equipment companies delivered average organic order growth of 4% year-over-year, with average operating margins the highest of the year.
RBC reiterated its 'outperform' ratings for FLSmidth, Metso Outotec, Weir, and Sandvik, with these companies currently trading at an average implied upside of 29%, up from 20% in January.
Weir's shares traded sideways on Friday at 1,860p.