Weir: mine, oil mine

There is a big difference between hearing and listening. The former is just capturing sounds; the latter involves interpretation. On Wednesday the market heard Weir, the UK-listed mining equipment and oil services company, report that business is not good and will not improve soon. The interpretation differed: Weir's shares bounced 6 per cent.

Hearing is believing, however - or should be. The worst has not passed for mining equipment, which represents about half of Weir's operating profits. Weir's orders (adjusting for its purchase of Trio last year) have fallen again, by 13 per cent.

So far, the high-margin replacement parts and service business has not suffered. Revenues there were up 3 per cent. That growth will probably not continue. As less equipment is ordered and put into use, the amount of maintenance needed will slip over time. So far, this lagged effect has yet to hit Weir. But it has enough other problems.

Its oil business, which sells equipment for fracking, has struggled as clients have chopped their own costs. They have demanded price cuts of up to 20 per cent, partly explaining the drop of 4 percentage points in Weir's operating margins. The bad news has only begun. Note that oil production in the key US shale zones, like North Dakota's Bakken, has yet to fall meaningfully, according to the US Energy Information Agency.

Weir might consider diversification away from commodities and into other types of industrial machinery (they already have an energy generation business). Atlas Copco, another equipment maker which announced its own order slowdown recently, has more diversification among its industrial client base. Only a quarter of its operating profits are derived from mining. That helps explains why Atlas trades at a 20 per cent premium to Weir's price-to-earnings multiple of 15.

Weir will not hear of diversifying its business. It should listen, though.

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