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If Seeking Opportunities in the Materials Carnage, Remember the Balance Sheet

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)




Franco-Nevada (TSX:FNV)




Silver Wheaton (TSX:SLW)




Capstone Mining (TSX:CS)




Pan American Silver   (TSX:PAA)




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.

The S&P/TSX Composite Index is loaded with resource and financial stocks.  Because of this, investors that rely on Canadian Index funds or ETFs severely lack diversification in their portfolio, opening them to undue risks.  We have created a special report that outlines an easy to implement strategy and 5 Canadian stocks that reduce the risks involved with passively investing in the Canadian market.  Click here now to receive “Buy These 5 Companies Instead of Following a Flawed Piece of Advice” – FREE!

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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.

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This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

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