Talk about being kicked while you’re down! On the back of weaker than expected Chinese GDP growth, resource stocks are being pounded in today’s market.
Many will see this as an opportunity, and it very well might be. That’s certainly how I’m programmed to think. However, nobody knows how long this rout will last. Therefore, it’s important that we Fools keep the long-term in mind if considering putting new money into the resource space.
Financial Risk Kills
Avoiding the destruction of capital is one of the keys to long-term investing success. Steer clear of companies that could potentially be forced to severely dilute your ownership stake by issuing equity or worse, are at risk of insolvency because of too much debt. To evaluate both scenarios and gauge financial risk, focus on the balance sheet.
Tabled below are five companies that have net cash on their balance sheet. A good thing as it indicates very low financial risk. Net cash means that the company can pay down all current debt with cash on hand and still have some left over.
| Company Name |
Total Cash (MM) |
Total Debt (MM) |
Net Cash (MM) |
| HudBay Minerals (TSX: HBM) |
$1,337 |
$480 |
$858 |
| Franco-Nevada (TSX: FNV) |
$777 |
0 |
$777 |
| Silver Wheaton (TSX:SLW) |
$776 |
$50 |
$726 |
| Capstone Mining (TSX: CS) |
$498 |
0 |
$498 |
| Pan American Silver (TSX:PAA) |
$541 |
$98 |
$443 |
Source: Capital IQ
Foolish Takeaway
Companies that are financially strong at the beginning of a downturn stand to come out on the other side in even better shape. They are the ones that are positioned to capitalize on the misery of others by potentially adding to their business at discounted prices. And, even if they don’t add to their business, at the very least, you can sleep soundly knowing they will survive to see the recovery, whenever it may occur.
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Fool contributor Iain Butler is short $28 June 2013 put options on Silver Wheaton. The Motley Fool has no positions in the stocks mentioned above.
