Canadian resource companies looking like winners – by Peter Koven (National Post – August 9, 2011)

The National Post is Canada’s second largest national paper. Peter Koven is their mining reporter.

During the last recession, Canadian resource companies got a painful reminder of the need to maintain healthy balance sheets. And their current prudence means their shares are unlikely to collapse to the extent they did in 2008 and 2009 if a new recession takes hold, experts say.

Canada’s mining and oil and gas firms have been virtual models of fiscal responsibility over the last two years. Despite an environment of sky-high commodity prices, they have mostly been content to accumulate cash and avoid the high-risk acquisitions that would put their balance sheets at risk.

“I can’t think of any established producer that’s cash-hungry right now in our space,” said David Garofalo, chief executive of HudBay Minerals Inc.

That risk-averse approach was far less common in the months and years leading up to the 2008 meltdown, when multi-billion dollar, all-cash deals were the norm in the resource sector. In fact, companies holding excess cash in those days, including HudBay, were often criticized for not putting it to work in acquisitions.
Attitudes quickly changed in the fall of 2008, when commodity prices and equity valuations collapsed during the financial crisis.

In any bear market, resource equities take an outsized beating because investors shift out of cyclical stocks and into less volatile securities. But the sell-off of 2008 was made far worse because of the state of some of the resources companies themselves. Any firms holding excess debt during that period became the targets of short sellers, and they could only watch as their market values were obliterated.

Most famously, shares of mining giant Teck Resources Ltd. plunged more than 90% because the company was holding too much debt after its ill-timed $14-billion takeover of Fording Canadian Coal Trust. Teck had a debt-to-equity ratio higher than 50% and looked like it could be heading towards insolvency.

Lundin Mining Corp., another big copper producer, needed a $136-million bailout from HudBay in late 2008 just to avoid a complete collapse.

The differences today are stark: After going through difficult restructurings to repair their balance sheets, Lundin has no long-term debt and more than US$300-million in cash, while Teck has both retired debt and extended repayments far into the future.

For the rest of this article, please go to the National Post/Financial Post website: